Underused Housing Tax - Introduction
The Underused Housing Tax Act (UHT Act) came into effect on January 1, 2022.
It requires non-Canadian owners of residential properties in Canada to file an annual return and pay a 1% tax on the property's value.
In some cases, Canadian owners will also have obligations under the new rules.
With the deadline for 2022 approaching on April 30, 2023, residential property owners should be aware of their filing requirements and potential tax liability.
UHT Return Filing Requirements
Owners of residential properties in Canada, excluding certain “excluded owners,” must file a UHT Return for each property annually, regardless of whether the UHT is payable.
Residential properties include detached houses, semi-detached houses, rowhouses, and condominium units located in Canada.
The UHT Return must be filed by April 30 of the following year, providing information on the property, ownership, and any applicable statutory exemptions.
Under the UHT Act The UHT Act defines an owner as the registered owner, not the beneficial owner, of a residential property.
This includes nominee or bare trustee corporations holding legal title for others.
Owners also include life tenants, life lease holders, and those with continuous possession of land for at least 20 years under a long-term lease.
Excluded Owners and UHT Exemptions
Excluded owners, such as Canadian citizens and permanent residents (with some exceptions), publicly-traded Canadian corporations, and certain trusts, charities, and institutions, do not have to file a UHT Return or pay the UHT.
Additionally, statutory exemptions may apply based on the type of owner, occupant, availability, and location and use of the property, rendering the UHT non-payable.
Type of Owner Exemptions
Exemptions are potentially available including:
- Specified Canadian corporations,
- specified Canadian partnerships, and
- specified Canadian trusts,
Individuals who died in the current or previous year, co-owners with a deceased owner, and those acquiring property ownership for the first time in the last nine years are also exempt, though they still need to file a UHT Return.
The UHT is not payable if the property is the primary residence of the owner, their family, or a tenant for at least 180 days in a calendar year.
Non-Canadian owners with multiple residential properties may be exempt for one designated property.
Properties unsuitable for year-round residence, inaccessible due to seasonal conditions, undergoing renovations for at least 120 consecutive days, or rendered uninhabitable due to natural disasters or hazardous conditions for at least 60 consecutive days may be exempt from the UHT.
Newly constructed properties may also be exempt under certain conditions.
Location and Use Exemptions
Properties located in certain prescribed areas of Canada and used as a residence or lodging for at least 28 days during the calendar year may be exempt from the UHT.
Calculating the Underused Housing Tax
The UHT is calculated as 1% of the taxable value of the property, which is the greater of the assessed value or the most recent sale price before December 31.
Alternatively, a person may elect to use the property's fair market value, supported by a written appraisal.
Penalties for Non-Compliance
Failure to file the UHT Return can result in penalties ranging from CA$5,000 to CA$10,000 and additional amounts based on the UHT payable and the duration of non-compliance.
Preventing Underused Housing Tax Avoidance
The UHT Act includes an anti-avoidance rule to prevent people from exploiting the law to gain tax benefits, such as reducing, avoiding, or deferring the UHT.
This rule applies if a transaction is deemed a misuse or abuse of the UHT Act.
Generally, an avoidance transaction is one that results in a tax benefit but is not primarily carried out for genuine reasons other than obtaining the tax benefit.
Quebec Private Law and Bijuralism Considerations
The UHT Act takes into account specific aspects of Quebec private law, such as rent, ownership, and property.
It is essential to be aware that the terminology and meaning of some Quebec property and civil rights rules in the Civil Code of Quebec may differ from common law.
In these cases, it may be necessary to refer to Quebec provincial rules and concepts related to property and civil rights.
Underused Housing Tax - Conclusion
The deadline for 2022 reporting, on April 30 2023, is fast approaching.
As such, residential property owners should make sure they are fully aware of their own filing requirements under the new rules and any potential tax liability.
If you have any queries about the Underused Housing Act or other Canadian tax matters then please do not hesitate to get in touch.
The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article.