April 5, 2023

The New Underused Housing Tax: Who must file and who must pay?

If you owned a residential property in Canada on December 31, 2022, you might have to pay an Underused Housing Tax (UHT) if it was vacant or underused. Even if you’re not subject to tax, you may be required to file an Underused Housing Tax return to claim an exemption. 

The UHT is an annual 1% tax on the value of underused or vacant residential property in Canada. The first return subject to UHT is due on May 1, 2023 (because April 30 falls on a Sunday).  

The introduction of the Underused Housing Tax

In 2021, the federal government announced its intention to implement a 1% tax on the value of underused or vacant residential real estate in Canada held by non-resident, non-Canadian owners (set to take effect in 2022). The property’s value is based on the greater of the assessed value or the most recent sale price on or before December 31 of that year.

The idea behind this new tax was to help cool the real estate market and curb speculation by non-residents. The UHT was modelled on the vacancy taxes that had been introduced for similar reasons in B.C. and Ontario in prior years.

When the UHT was first proposed, it was thought that this tax would only apply to non-resident/foreign owners of Canadian property. As it turns out, some Canadians will also be required to file a return (even if they don’t have to pay the UHT), otherwise they could face significant penalties. This is because the definition of “excluded owner” doesn’t include some typical ownership structures.

Here is a general overview of who has to file a return and what exemptions may be available.

Who has to file a return?

All registered owners, unless they are an excluded owner, are required to file a return (the new UHT-2900) along with a complete declaration of current use for each Canadian residential property they own.

An excluded owner includes:

  • A Canadian citizen or permanent resident.
  • A publicly traded Canadian corporation.
  • A trustee of a widely-held trust, mutual fund trust or real estate investment trust.
  • A registered charity, co-operative housing corporation, municipal organization, public institution or governing body.

This list has some notable exceptions; all private corporations, partnerships and trusts, as well as people who are not Canadian citizens or permanent residents are required to file a return and then determine whether they can claim an exemption to avoid paying the UHT. If a residential property has multiple owners, each owner must determine if they are required to file a return and qualify for an exemption.

If an owner does not file a UHT return, they will be subject to a minimum penalty of $5,000 per form if the owner is an individual, or $10,000 in all other cases.

Flow chart to help determine who must file an underused housing tax return.

Who must pay the tax?

Owners who have to file a return can claim an exemption for a residential property (including a detached house, semi-detached house, rowhouse or condo unit) that is one of the following:

  • A primary place of residence for the owner, owner’s spouse, common-law partner or child.
  • A rental property occupied at least 180 days of the year.
  • Not accessible or suitable to be lived in year-round or seasonably inaccessible.
  • Uninhabitable for a certain number of days due to a disaster, hazardous conditions or renovations.
  • Newly constructed and not substantially completed before April of the calendar year.
  • A vacation property in an eligible part of Canada, used for at least 28 days in a calendar year.

The UHT is also not payable by an owner:

  • Who died during the year.
  • That is a Canadian corporation with less than 10% foreign ownership.
  • That is a partnership where all members are either excluded owners or Canadian corporations with less than 10% foreign ownership.
  • That is a trust where all beneficiaries are either excluded owners or Canadian corporations with less than 10% of foreign ownership.

However, these owners would still need to file a return to claim an exemption.

Below are some examples that will illustrate some of the complexities of the new UHT:

  • American residents who own Canadian vacation property would be required to file a UHT tax return and claim an exemption to avoid paying UHT, unless they were Canadian citizens, in which case they wouldn’t have to file a return.
  • Canadian residents who personally own a residential property that is rented out or used personally throughout the year do not need to file a UHT return. However, if they owned that same residential property through a trust or a corporation, that trust or corporation would be required to file a return and claim an exemption to avoid paying UHT.
  • Even if a private Canadian corporation has an off-calendar year end, if it owned a residential property on December 31, it would need to file a return by April 30. If the corporation owns multiple properties, it would need to file a return for each property, even if it can claim an exemption.

We expect the CRA to continue issuing clarifications around these new rules. In March 2023, the CRA announced transitional relief for the first year that the UHT is administered. It will waive the penalties and interest for any late-filed returns or late UHT paid, provided the return is filed and UHT is paid by October 31, 2023.

If in doubt, ask for advice

If you owned a residential property (especially if you owned that property in a corporation, partnership or trust) on December 31, we encourage you to speak to your accountant to find out if you need to file a return and whether you can take advantage of one of the exemptions available.  

 

Written and published by IG Wealth Management as a general source of information only. Not intended as a solicitation to buy or sell specific investments, or to provide tax, legal or investment advice. Seek advice on your specific circumstances from an IG Wealth Management Consultant.