November 14, 2023

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

If you own a residential property in Canada, 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 deadline for the first ever UHT returns (for persons who owned property on December 31, 2022) was extended to April 30, 2024, but subsequent returns will be due on April 30 of the following year.  For example, 2023 returns will be due April 30, 2024, 2024 returns will be due April 30, 2025, and so on. 

The introduction of the Underused Housing Tax

The federal Underused Housing Tax Act came into force as of January 1, 2022, and applies a 1% tax on the value of underused or vacant residential real estate in Canada held by non-resident, non-Canadian owners. 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.

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, except to the extent that the individual is an owner of the residential property in their capacity as a trustee of a trust (other than a personal representative in respect of a deceased individual) or as a partner of a partnership.
  • 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 as a partner, through a trust or a corporation, the partners, trustees 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.

Jointly owning a home with your parent or child could trigger an obligation to file a UHT return

If you jointly own Canadian residential real estate with your parent or child, then one or both of you may have an obligation to file an annual return under the federal Underused Housing Tax Act (UTHA).  

The CRA has recently confirmed (see 1.17.1 & 1.17.2) that in two common scenarios involving jointly owned real estate between a parent and child, where one joint owner is considered to hold their interest in the property in their capacity as trustee for the other, the “trustee” has an obligation to file, even if there may be no need to actually pay a tax.  This filing obligation applies in these cases:

(a) Parent gratuitously adds an adult child as joint owner to the parent’s home "to avoid probate" in future.  In most cases, the child is considered a “trustee” and has an obligation to file.

(b) An adult child and their parent become joint owners to the child’s home, but the parent is only on title "for financing purposes”. In most cases, the parent is considered a “trustee” and has an obligation to file.

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.