UNDERUSED HOUSING TAX CANADA
The Government of Canada has declared its plan to enforce a nationwide annual tax of one percent on the value of residential real estate possessed by non-Canadian, non-resident individuals or Canadian Control Private Corporations, provided the properties are deemed vacant or underutilized. Regulations for the Underused Housing Tax (UHT) were established and enforced for residential holdings acquired on or after December 31, 2022. It is important to note that this tax is in addition to the BC speculation tax.
Overview of the Underused Housing Tax Canada
Generally, the underused housing tax is payable by non-resident non-Canadian owners of vacant or underused housing in Canada. The vast majority of Canadian owners of residential property are excluded owners and, therefore, do not have any obligations and liabilities under the Underused Housing Tax Canada. The Underused Housing Tax Canada is intended to apply to underused housing in Canada owned directly or indirectly and wholly or partly by non-resident, non-Canadians. Underused Housing Tax Canada obligations apply for calendar years (beginning with 2022) to affected owners of residential property in Canada on December 31 of the relevant year.
The UTH rules have two requirements: an annual reporting requirement and, for some of these filers, a tax liability for Underused Housing Tax Canada. The tax is calculated by multiplying the residential property’s value by the 1 percent tax rate. It must be paid to the CRA by April 30 of the following calendar year, when the annual return is also due.
The Underused Housing Tax Canada rules categorize owners of residential property into three broad groups:
- owners with no Underused Housing Tax Canada reporting or tax obligation (referred to in the Underused Housing Tax Canada legislation as “excluded owners”)
- owners required file the Underused Housing Tax Canada return and pay tax (referred to by the CRA in their guidance as “affected owners”)
- owners required to file the Underused Housing Tax Canada return but with no tax payable (also “affected owners”
Which owners are excluded from the Underused Housing Tax Canada?
Excluded owners who are exempt from any Underused Housing Tax Canada obligations include (as of December 31 of a calendar year):
- individual Canadian citizens or permanent residents2 of Canada (“Canadian individuals”), unless they would be exempt as an owner in their capacity as a trustee or partner (excluding personal representatives of a deceased individual)
- publicly traded Canadian corporations
- persons with title to property in their capacity as a trustee of a mutual fund trust, real estate investment trust or specified investment flow-through trust (SIFT)
- registered charities
- cooperative housing corporations
- municipal organizations and other public institutions and government bodies
- an Indigenous governing body or a corporation
- “prescribed persons” (not yet defined by regulation)
Which owners must file the Underused Housing Tax Canada return and pay the tax?
Affected owners of residential property who must file a return and pay the tax include:
- individuals who are not Canadian citizens or permanent residents who do not qualify for an exemption
- private corporations, including Canadian-controlled private corporations (CCPC), partnerships, and trusts (other than estates) that own residential property in Canada and are not eligible for an exemption.
Conditions for paying the underused housing tax
You have to pay the underused housing tax for each of your properties in Canada for which all of the following conditions are met on December 31 of a calendar year:
- the property is a residential property
- you are an owner of the residential property
- you are not an excluded owner of the residential property
- your ownership of the residential property is not exempt from the underused housing tax for the calendar year
In other words, if you are an affected owner of a residential property on December 31 of a calendar year, you have to pay the underused housing tax for the residential property for the calendar year, unless your ownership of the residential property is exempt from the tax for the calendar year.
Even if your ownership of a residential property is exempt from the underused housing tax for a calendar year, as an affected owner, you still have to file a return for the residential property.
Where certain conditions are met, your ownership of a residential property may be exempt from the underused housing tax if the property is any of the following:
- a vacation property that is located in an eligible area of Canada
- used as a primary place of residence or for qualifying occupancy
- not suitable for year-round use
- seasonally inaccessible
- uninhabitable during the calendar year
- newly constructed
Your ownership of a residential property may also be exempt if you are any of the following:
- a partner of a specified Canadian partnership, a trustee of a specified Canadian trust
- a new owner
- a deceased individual, or their personal representative or co-owner
Multiple residential properties
If either (or both) the owner and their spouse own multiple residential properties, their ownership may not qualify for the exemptions for either primary place of residence or qualifying occupancy unless they file an election with the CRA to designate only one property to qualify for the primary residence exemption or to be considered for the qualifying occupancy exemption. The election is included in Section 3 of the Underused Housing Tax Canada return and must be filed by April 30 of the following year. Where the owners own the property jointly, they must also make the election jointly. Only one election for a calendar year can be made by the owner and their spouse, and they can only designate one residential property in the election. An owner and their spouse cannot designate different residential properties for the two exemptions.
Where an owner or their spouse elect to designate one of the multiple properties as a primary residence, they cannot be qualifying occupants of any other properties they may own.
Private corporations owning residential property
Private corporations, including Canadian-controlled private corporations (CCPCs), are affected owners that are required to file the annual UHT return.
Affected corporations should also keep in mind that the UHT return and liability are due on April 30. If this is out of line with the corporation’s corporate tax filing deadlines, a separate process should be implemented to ensure the UHT requirements are met.
Non-resident owners who own Canadian residential rental property
Non-resident owners who receive rental income from residential property in Canada are affected owners who will have to file the UHT return and potentially pay UHT (depending on whether they qualify for an exemption).
Affected owners who have elected (under section 216 of the Income Tax Act) to file a Canadian tax return should keep the different filing deadlines in mind – that is, UHT returns and payments are due on April 30 of each year while section 216 tax returns may be due on June 30. We have suggested to the CRA that consolidating these filing requirements could reduce compliance costs.
What happens if an affected owner does not file the annual return?
Failure to file each annual Underused Housing Tax Canada return can result in significant penalties:
- $5,000 for individuals
- $10,000 for owners that are not individuals
Additional penalties and interest apply on outstanding taxes that are not paid by April 30 following the reporting year.
In addition to penalties and interest, failure to file the annual return can result in certain exemptions no longer being available to the owner for that year, resulting in taxes payable. Other penalties may be assessed for failure to provide required information, false statements or omissions, or failure to file under gross negligence.
FOR MORE DETAILS REVIEW CRA WEBSITE: Underused Housing Tax – Canada.ca
What else do affected owners need to know?
A sale or transfer by a non-resident person of property located in Canada gives rise to specific tax and reporting requirements, including requesting a certificate of compliance from the CRA under section 116 of the Income Tax Act. Under the new rules, the CRA can decline a request for this certificate where a non-resident vendor has not met its Underused Housing Tax Canada tax and reporting obligations prior to the sale.
CNC can help in determining if you are affected owners or not. Also, we can help you to file the tax return.
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Disclaimer: The information provided in this article and other blogs on the website is intended for general informational purposes only and should not be construed as professional financial advice. Individual financial situations vary, and it is recommended that you consult with a qualified professional accountant to address your specific financial needs and circumstances. Always seek the guidance of a professional before making any financial decisions.