If you own residential property in Canada, you may be required to pay the new Underused Housing Tax (UHT) and file an annual return by April 30th or face minimum penalties of $5,000 for individuals and $10,000 for Corporations (as a temporary relief measure, no penalties and/or interest will be applied if the return and UHT is filed/paid by October 31, 2023).
Effective January 01, 2022, the Government of Canada had introduced an Underused Housing Tax[1] on the ownership of vacant or underused housing in Canada. While the tax primarily applies to non-resident non-Canadian owners, in some situations, it may apply to Canadian owners as well.
UHT return filing requirements
Unless a person is an “excluded owner”, they are required to file an annual UHT return for each residential property that they owned as at December 31 of the previous calendar year.
An “excluded owner” includes:
- An individual who is a citizen or permanent resident of Canada; or
- Canadian corporation with shares listed on a designated stock exchange.
It is important to note that the return filing requirement may apply even if no UHT is payable due to the availability of a statutory exemption.
Residential properties include, but are not limited to, detached houses, semi-detached houses, rowhouse units, condominium units situated in Canada. Further, some properties that do not qualify as residential properties include quadruplexes, high-rise apartment buildings, commercial cottages, hotels, motels, etc.
“Owner” of residential property
The owner of a residential property for purposes of UHT, is the registered owner of the property (as opposed to the beneficial owner).
Further, the definition of owner has been expanded to also include a person who is a life tenant under a life estate, a person who is a life lease holder and a person who has, under a long-term lease (i.e., a lease for a period of at least 20 years), continuous possession of the land on which the property is situated.
Who doesn’t file a UHT return
An “excluded owner” is not required to file a UHT return and is not liable to pay UHT. An excluded owner includes Canadian citizens and permanent residents (except where the property is held by a Canadian individual as a trustee of a trust or as a partner of a partnership), publicly traded Canadian corporations (i.e., private corporations are not excluded owners), a trustee of a mutual fund trust, real estate investment trust or SIFT trust, registered charities, universities, hospitals and Indigenous governing bodies.
Exemptions from paying UHT
Although a person may need to file a UHT return, the person may be exempted from paying the UHT. The exemptions may apply depending on the type of owner, the occupant of the property, the availability of the property, or the location and use of the property. We have provided below a few examples under each of these categories.
Owner type
In addition to “excluded owners” (discussed above), UHT is also not payable by:
- Specified Canadian corporations – Canadian corporations where less than 10% of the voting shares and equity value are owned by non-Canadian individuals or corporations.
- A person who owns the property solely in their capacity as a partner of a “specified Canadian partnership,” meaning a partnership each member of which is an “excluded owner” (as discussed above) or a specified Canadian corporation (refer to the above paragraph).
- The UHT is also not payable by an individual who died during the calendar year or the previous year (or by their personal representative) and who was an owner on the day of death holding 25% or more equity in the property.
Property occupant
The UHT is not payable where the property is the primary place of residence of the individual owner, their spouse or common-law partner, or their child while the child is a student. It is also not payable where the property is occupied for a period of at least 180 days in the calendar year by an arm’s length individual under a lease, a non arm’s length individual under a lease who pays fair rent, an individual who is the owner or the owner’s spouse or common-law partner who has a Canadian work permit, or a Canadian citizen or permanent resident who is the spouse, common-law partner, parent or child of the owner.
Property availability
The UHT is not payable if the property is not suitable for year-round use as a place of residence or where it is seasonably inaccessible because public access is not maintained year-round. It is also not payable where the property is under renovations for a period of at least 120 consecutive days in the calendar year, or where a natural disaster or hazardous condition renders the property uninhabitable for a period of at least 60 consecutive days in the calendar year.
In the case of newly constructed properties, the UHT is not payable if construction of the property is not substantially completed before April of the calendar year, or if the property is constructed in the first quarter of the year and offered for sale to the public during the year.
Location and use of the property
The UHT is not payable if the property is in certain prescribed areas[2] of Canada and is used as a place of residence or lodging by the owner or the owner’s spouse or common-law partner for at least 28 days during the calendar year.
Filing the UHT return
The UHT return can be filed either online[3] or by mailing a paper return[4].
Individuals will need their Canadian Social Insurance Number (SIN) or an individual tax number (ITN) to be able to file their returns.
Businesses will need a business number and an underused housing tax (RU) program account to be able to file their returns and make tax payments.
Obtaining these registration numbers may take several weeks. Accordingly, it is critical that if applicable, these registrations are applied for immediately.
Calculating UHT
The UHT is calculated at the rate of 1% on the “taxable value” of the property, which is generally the greater of (a) its value as assessed by a government agency (such as the Municipal Property Assessment Corporation in Ontario); and (b) the property’s most recent sale price on or before December 31 of the calendar year. Alternately, a person may elect to use the fair market value of the property at any time on or after January 1 of the calendar year and on or before April 30 of the following calendar year provided the valuation is supported by an appraisal.
Penalties
Failure to file the UHT Return is subject to a minimum penalty of CA$5,000 for individuals or CA$10,000 in other cases, and a maximum penalty equal to the total of 5% of the UHT payable plus 3% of the UHT payable for each complete month that the UHT Return is not filed.
Please refer the attached decision tree[5] to get a high-level understanding of how the UHT may impact you.
For any questions, please contact your Schwartz Levitsky Feldman llp advisor.
[1] https://www.canada.ca/en/services/taxes/excise-taxes-duties-and-levies/underused-housing-tax.html
[2] https://apps.cra-arc.gc.ca/ebci/sres/ext/pub/ntrUhtExpnTl?request_locale=en_CA
[3] https://apps.cra-arc.gc.ca/ebci/sres/ext/pub/ntrUhtFlng?request_locale=en_CA
[4] https://www.canada.ca/en/revenue-agency/services/forms-publications/forms/uht-2900.html
[5] This is only for reference purpose, and we cannot guarantee the accuracy of its results. For an accurate determination of your obligations, please contact your Schwartz Levitsky Feldman llp advisor.
