Underused Housing Tax

As a part of the 2021 Federal Budget, the Government of Canada announced its intention to implement a national one percent annual tax on the value of residential real estate owned by any non-resident, non-Canadian that is considered vacant or underused.

Under these new rules, every person that is, on December 31, an owner (other than an excluded owner; definition follows below) of a residential property located in Canada will be required to file an annual return with the Canada Revenue Agency (CRA) and pay a one percent Underused Housing Tax (UHT) on that property for the year, based on the value of the property and the owner’s proportionate interest in the property. The return must be filed by April 30 of the following calendar year, and any UHT is also required to be paid to the CRA by this same date.

Which Owners are Excluded from the UHT?

Only persons who meet the definition of an excluded owner are exempt from the annual filing under the UHT.

An excluded owner is, on December 31 of a calendar year, one of the following:

• An individual Canadian citizen or permanent resident of Canada
• A publicly traded Canadian corporation
• A person with title to property in their capacity of trustees of various widely held trusts
• A registered charity
• A cooperative housing corporation
• A municipal organization or other public institutions and government bodies.

Therefore, all other owners will be required to file an annual return unless they meet an available exemption. A return must be filed, even if there is no tax calculated. Specifically, all private corporations, partnerships and trusts which own residential property in Canada will be required to file an annual return, as well as individuals who are neither a Canadian citizen nor a permanent resident.

Which properties will be subject to UHT?

Unless an exemption is available, the UHT applies to residential properties located in Canada. A residential property includes a detached house, containing no more than three dwelling units, and including the land subjacent that is reasonably necessary for its use and enjoyment. A dwelling unit generally refers to a single unit within a residential property that contains its own kitchen, bath and living area (i.e. duplex, triplex). The UHT will also apply to residential properties that are semi-detached houses, rowhouse units, residential condominium units, or any other similar premises intended to be owned as a separate unit or parcel and including the associated common areas and land subjacent to the building.

What are the available exemptions?

Where an owner does not qualify as an excluded owner, certain characteristics or use of the property may exempt the residential property from UHT for a given calendar year.

Primary place of residence
No tax is payable for a calendar year if a dwelling unit forming part of the residential property is the primary place of residence of:

• The owner, or the owner’s spouse or common-law partner; or
• A child of the owner or the owner’s spouse or common-law partner, who occupies the residential property for the purpose of authorized study at an institution designated to host international students.

Qualifying occupancy
No tax is payable for a calendar year if the owner of the property satisfies a qualifying occupancy test. Specifically, the property needs to be occupied by a qualifying individual (described below), in periods of at least one month and that total at least six months (180 days) of the year.

To meet the qualifying occupancy test, one of the following individuals must occupy a dwelling unit that is part of a residential property during the relevant period:

• 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 with any spouse or common-law partner, and who is given continuous occupancy of the dwelling unit under an agreement in writing, and for consideration that is not below the fair rent for the residential 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 citizen or permanent resident.

In order to count any given month towards the qualifying occupancy test, the individual owner, spouse, common-law partner, parent or child, as the case may be, must primarily reside at the particular residential property for the month (i.e., in terms of the number of days in the period).

Limited seasonal access
No tax will be payable on residential properties not suitable for year-round use as a place of residence. For example, properties which are not winterized would meet this condition. In addition, an exemption is available for residential properties inaccessible during part of the year. This would be the case if public access is not maintained year-round (i.e. through the winter).

Disaster or hazardous condition
No tax will be payable on residential properties which are uninhabitable for a period of at least 60 consecutive days in the calendar year due to disaster or hazardous condition caused by circumstances beyond the reasonable control of an owner, provided the exemption was not already granted for the same disaster for more than one prior calendar year.

Renovation or construction
No tax will be payable on residential properties which are uninhabitable for a period of at least 120 consecutive days in the calendar year as a result of a renovation, carried on without unreasonable delay, provided the exemption was not granted in respect to the property for any of the nine prior calendar years.

Also, no tax will be payable where construction of a residential property is not substantially completed (generally meaning 90 percent or more) before April of the calendar year. If construction of a residential property is substantially completed after March of the calendar year, an exemption will be available provided the property is offered for sale to the public during the year and has never been occupied by an individual.

Year of acquisition
No tax is payable for a calendar year if the owner first acquired the residential property during the year and did not own the same property at any time during the nine prior years. This exemption will apply to acquisitions by sale and is expected to also apply to other transfers of ownership such as distributions by an estate or other trust.

On death of owner
No tax is payable for a calendar year by an owner in the year of the owner’s death or the following year. This exemption extends to the personal representative of a deceased individual. In other words, an exemption is available for two calendar years while an estate is under administration – December 31 of the year of death, and the following calendar year.

In addition, this exemption will be available to the surviving owners of a residential property, where the deceased owner’s interest in the property was at least 25 percent.

Specified Canadian corporation
No tax is payable for a calendar year by a specified Canadian corporation, which is a corporation incorporated under the laws of Canada, except where:

The following persons have ownership and control of 10 percent or more of the shares of the corporation representing both value and voting rights under all circumstances:
   (a) An individual who is neither a citizen nor a permanent resident
   (b) A corporation that is incorporated or continued outside of Canada
Any combination of (a) and (b)

In the case of corporation without share capital:
A chairperson or other presiding officer who is neither a citizen nor a permanent resident, or
10 percent or more of its directors are neither citizens nor permanent residents.

Partner of specified Canadian partnership
No tax is payable for a calendar year by a person who owns residential property solely 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 specified Canadian corporation.

Trustee of specified Canadian trust
No tax is payable for a calendar year by a person who owns residential property solely 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 specified Canadian corporation.

Prescribed area and condition
Draft regulations have been released to exempt recreational properties in less densely populated area. Specifically, no tax would be payable by an owner of a residential property that is both:
Located in a prescribed area and used personally by the owner (or the owner’s spouse or common-law partner) for at least 28 days during the calendar year.

A prescribed area will include both:

• An area that is not within a census metropolitan area or census agglomeration with a population more than 30,000; and
• An area that is within a census metropolitan area or a census agglomeration with population of more than 30,000 but is not within a population centre.

What happens on failure to file the annual return?

An annual return must be filed by every owner (other than an excluded owner) with the CRA for each residential property owned on December 31 of a calendar year. The return must be filed by April 30 of the following calendar year. Any UHT is also required to be paid to the CRA by this same date, subject to an exemption being available.

Given that the UHT is effective 2022, the first annual filing and payment due date will be required by April 30, 2023, for applicable residential properties owned by non-citizen, non-residents on December 31, 2022.

Loss of exemptions
Available exemption and certain elections must be made on filing the annual return. In other words, if the annual return is not filed by the April 30 deadline, it appears that an owner could no longer be able to access an available exemption on a particular property in respect of the year, causing UHT to be levied on the property.

Interest
Interest is required to be paid on unpaid amounts at the prescribed rate and is compounded daily. An extension for time for filing and payment may be made in writing by the Minister. If such an extension is granted, interest and penalties (discussed below) will be deferred to the extended filing and payment date.

Penalties
Every person who fails to file a return, as required under the Act, is liable to a penalty equal to the greater of:

1. $5,000 for individuals, or $10,000 if not an individual and
2. The amount that is the total of
   1. Five percent of the tax payable by the person in respect of the residential property for the calendar year and
   2. The product obtained when three percent of the tax owing is multiplied by the number of complete months from the due date of the required return that the balance remains outstanding.

Where a return is not filed by December 31 of the following calendar year, the penalty is determined as if several exemptions were not available. Specifically, those exemptions generally available for primary residences, qualifying occupancy, uninhabitable properties due to disaster, renovation, or limited seasonal access, are ignored and the failure to file penalty will be determined under paragraph (b) as if a tax amount was payable in respect of the property.

Other minor penalties may be assessed in circumstances where the owner failed to provide required information or failed to file a return when demand. However, an owner may also be assessed a more onerous where gross negligence is involved. That penalty is 25 percent of the tax avoided, where an owner has made false statements or omissions that were found to be grossly negligent that resulted in an adjustment to the UHT owing for the year.

Other consequences
Where no return is filed for a calendar year, that year will not become statute barred. Therefore, the CRA may assess tax, interest, and penalties at any time after the calendar year for delinquent returns and tax payments.

Contact Us

April 30, 2023 marks the first filing deadline for the UHT. If you require further clarification on this new and evolving issue, please contact your trusted Craig & Ross advisor for the latest updates.