Owners, except for Excluded Owners (see below), of residential property in Canada will now have to file an annual Underused Housing Tax return to determine if they are subject to this new tax. This is separate from and in addition to residential property owners in Toronto that must file a declaration relating to the Vacant Home Tax (VHT). See our previous article on the VHT.
What is it?
Effective January 1, 2022, the Underused Housing Tax (UHT) is a 1% annual tax that applies to vacant or underused residential properties in Canada. This tax is an attempt by the Federal government to reduce escalating home and rental prices under the assumption that there will be more housing supply if foreign and other residential property owners are encouraged to rent their properties when they are otherwise vacant. An annual return must be filed with the Canada Revenue Agency by April 30 of the following calendar year and any UHT must be paid by this date.
Who must file?
Every owner of a residential property in Canada must file this annual return unless they are an Excluded Owner. This filing requirement applies even if there is no tax owing.
Persons meeting one of the following specific requirements at December 31 of the calendar year, are excluded from the annual filing requirement and the tax liability under the UHT:
- An individual who is a Canadian citizen or permanent resident of Canada and does not own the property as a trustee or as a partner of a partnership
- A publicly traded Canadian corporation
- A person with title to a property in their capacity as a trustee of various widely held trusts
- A registered charity
- A cooperative housing corporation
- A municipality or other public institutions and government bodies
- An Indigenous governing body or a corporation wholly owned by an Indigenous governing body
Canadian citizens and permanent residents must still file this return if their ownership interest is through a partnership or if they hold title to the property as a trustee. Personal representatives of a deceased individual are excluded from this filing requirement.
How is the tax calculated?
Unless an exemption is available, the tax rate is 1% of the greater of (a) the property’s assessed value for property tax purposes and (b) the property’s most recent sale price before December 31 of the calendar year. An election can be made to use a different value that represents fair market value if this election is filed with the Minister on or before April 30th of the following calendar year. Use of this election will generally require that an appraisal be obtained. Owners who fail to file an annual return may be subject to a penalty equal to the greater of (a) $5,000 for individuals or $10,000 if not an individual and (b) the amount that is the total of 5% of the tax payable for the calendar year and 3% of the tax for each complete calendar month the return is late. A return must be filed even if exemptions apply and there is no tax payable. Other penalties may apply where the owner failed to provide the required information or where gross negligence applies.
Exemptions from the UHT
Even though a UHT return is required to be filed, certain characteristics of the property or owner may exempt the property from UHT for a given calendar year. The following are some of the exemptions from the tax:
- The property is the principal residence of the owner, the owner’s spouse or common-law partner or the child of the owner or owner’s spouse or common-law partner occupies the property for purposes of authorized study at an institution designated to host international students.
- Where such an individual owns multiple properties, an election can be filed by April 30 of the following calendar year to designate which property is the primary place of residence for that year. If the property is jointly held, the election must be made jointly by the owners.
- If the property is occupied by one or more qualifying occupants in relation to the owner for at least 180 days of the year. A qualifying occupant includes the following:
- An individual who deals at arm’s length with the owner and any spouse or common-law partner of the owner, under an agreement evidenced in writing;
- An individual who does not deal at arm’s length with the owner or any spouse or common-law partner of the owner, and who is given continuous occupancy of the dwelling unit under an agreement in writing, and for consideration that is not below the fair market rent for the property;
- An individual who is the owner or the owner’s spouse or common-law partner, who is in Canada for the purpose of pursuing authorized work under a Canadian work permit, and who occupies the dwelling unit in relation to that purpose; or
- An individual who is a spouse, common-law partner, parent or child of the owner and who is a citizen or a permanent resident.
- The owner is a Specified Canadian Corporation, which is a corporation incorporated under federal or provincial laws of Canada but does not include a corporation that on December 31 of the calendar year where:
- 10% or more of the equity or voting rights in the corporation is held by foreign corporations or by individuals who are neither Canadian citizens nor permanent residents of Canada
- In the case of a corporation without share capital, the chairperson or other presiding officer or 10% or more of the directors or other similar officers, are individuals who are neither Canadian citizens nor permanent residents of Canada.
- The owner is a person who owns residential property in their capacity as a partner of a Specified Canadian partnership, which is a partnership where each member is, on December 31, an Excluded Owner or a Specified Canadian Corporation
- The owner is a person who owns residential property in their capacity as a trustee of a Specified Canadian Trust, which is a trust where each beneficiary with an interest in the residential property owned by the trust is, on December 31, an Excluded Owner or a Specified Canadian Corporation
- The residential property is not suitable for year-round use as a place of residence.
- The residential property is seasonally inaccessible because public access is not maintained year-round.
- The residential property is uninhabitable for a period of at least 60 consecutive days in the calendar year due to disaster or hazardous conditions caused by circumstances beyond the reasonable control by an owner, provided the exemption was not already granted for the same disaster for more than one prior calendar year.
- Also applies to residential properties where the construction is not substantially complete (90% or more) before April of the calendar year.
- The residential property is uninhabitable for at least 120 consecutive days in the calendar year as a result of a renovation, carried on without reasonable delay, provided the exemption was not granted in respect of the property for any of the nine prior calendar years.
- The owner first acquired the residential property during the year and did not own the same property in the prior nine calendar years.
- The owner died during the calendar year or the prior calendar year.
- This exemption also extends to the personal representative of a deceased individual.
- The residential property is located in a prescribed area and prescribed conditions, if any, are met
- These regulations are still in draft format
Although the legislation is in force, the required form and annual filing process has not yet been made available at the time of writing this article. An owner will, however, have to file a return for each residential property. Despite the absence of this information, many individuals who are not Canadian citizens owning Canadian residential properties, as well as private corporations, trusts and partnerships will be affected by this new tax and reporting requirements.
If you need assistance determining whether you have a filing requirement for the Underused Housing Tax or if you need assistance preparing the annual return, please contact Lott & Company.