The Underused Housing Tax Act is federal legislation which was enacted on June 9th, 2022 and applies to all residential properties owned on December 31st, 2022. Every person that is an owner of a residential property located in Canada, barring some exceptions, will be required to file an annual return with the Canadian Revenue Agency (CRA) and pay a 1% Underused Housing Tax on that property for the year, based on the value of the property and the owner’s proportionate interest in the property.
For 2023, the return must be filed by April 30th and any tax is also required to be paid to the CRA by the same date. (See Update at the end of this article)
Properties Subject to the Tax
The Underused Housing Tax (“UHT”) applies to all residential properties located in Canada. Types of residential properties include:
- A detached house (containing up to three dwelling units)
- A semi-detached house
- A rowhouse
- A residential condominium unit, or
- Any premise intended to be owned as a separate unit or parcel, as well as the associated common areas and land subjacent to the building.
A dwelling unit is a residential unit that contains:
- Private kitchen facilities
- A private bath
- A private living area
“Excluded owners” are not subject to the UHT and are not required to file the annual return with the CRA. To meet the definition of an excluded owner, you must be one of the following on December 31st:
- An individual Canadian citizen or permanent resident of Canada
- A publicly traded Canadian corporation
- A registered Canadian charity
- A cooperative housing corporation
- A municipal organization or other public institution and government body
- An Indigenous governing body
- And any person that owns residential property in their capacity as a trustee of any of the following:
- A mutual fund trust
- A real estate investment trust
- A specified investment flow-through trust, or
- A personal representative of a deceased individual
All owners except the ones mentioned above must file an annual return, examples include:
- Private corporations
- A trustee of a trust (except any of the above-mentioned trusts)
- Individuals who are not Canadian Citizens or permanent residents of Canada and own residential property
The owner of the property will be the party or parties registered on title at December 31st, as well as persons with a life interest or a long-term lease on the property, which is considered 20 years or more.
Where an owner does not qualify as an excluded owner, there are certain properties that are exempt from the tax:
- Primary place of residence which is a property, or dwelling unit, that is being used as a primary place of residence of the owner, or the owner’s spouse or common-law partner, or a child of the owner or owner’s spouse who occupies the property for the purpose of authorized study at a certain learning institutions.
- Qualifying occupancy – the property is exempt if one of the following individuals occupies it for at least 180 days:
- An individual who deals at arm’s length with the owner, or partner of the owner, with a written agreement;
- A non-arm’s length individual who is given continuous occupancy of the dwelling unit with a written agreement, and for rent that is not below fair market value;
- An individual who is the owner or spouse of the owner who is in Canada under an authorized work permit and resides in the unit for that purpose;
- And any individual who is the spouse/common-law partner, child, or parent of the owner who is also a Canadian citizen or permanent resident.
- A property that cannot be used year-round.
- If the property is uninhabitable for at least 60 consecutive days due to hazard, or if the property is uninhabitable for at least 120 consecutive days because of renovations.
- New owners where the owner first acquired the residential property during the year and did not own the same property in the previous nine years.
- If the owner dies, the property is exempt for the current calendar year and the following year, effectively 2 years, and this extends to personal representatives of the deceased and surviving owners where the deceased has at least 25% ownership.
- No tax is payable by a corporation incorporated in Canada unless at least 10% of the shares of the corporation are owned by an individual who is neither a citizen or a permanent resident, or a corporation that is incorporated outside of Canada, or a combination of the two. If the corporation doesn’t have share capital, tax is payable if the chairperson or presiding officer is not a citizen or permanent resident, or 10% or more of the directors are neither citizens or permanent residents.
- A property owned by a person solely in their capacity as a partner of a specified Canadian partnership, which is a partnership where each member is an excluded owner or a specified Canadian Corp.
- The same exemption above applies to properties owned by persons solely in their capacity as a trustee of a specified Canadian trust, which is a trust where each beneficiary with an interest in the property is an excluded owner or a specified Canadian Corp.
How is the UHT Calculated?
The formula used to calculate the Underused Housing Tax is one percent of the value of the property multiplied by the ownership percentage of the person. For the value of the property, there’s two ways to determine that:
- The first is taxable value, which uses the greater of either the assessed tax value for the year or the most recent sale price during the year.
- The second way allows an owner to make an election for the value of the property, which usually means the owner must obtain an appraisal.
Every owner other than an excluded owner must file an annual return with the CRA for each residential property owned on December 31st of each year. The return must be filed by April 30th of the following year and any tax is also required to be paid by April 30th.
Update: The CRA announced that while the deadline for filing remains April 30th, there will be a transitional period where affected owners can file and pay owing tax without penalty or applied interest until October 31st.
There are of course consequences to not filing. If the property is exempt that needs to be filed by the deadline or the exemption status is lost and the tax is levied on the property. Furthermore, interest is compounded daily on any unpaid amounts. Lastly, failing to file a return can result in a penalty as well, which is the greater of either $5,000 for individuals and $10,000 for non-individuals, or 5% of the tax payable by the person in the year plus 3% for every month that passes from the date that the return was supposed to be filed.
Residential property owners that are not excluded owners must fill out Form UHT-2900 and file it with the CRA in order to keep their exemption status or avoid fines.
For more information on the Underused Housing Tax Act, please contact Raymond Guy Miki, K.C.