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New Tax Filing Forms for April 30, 2023 Deadlines: Federal Underused Housing Tax Return Requirements
First announced in Budget 2021, enacted June 9, 2022, and effective retroactive to January 1, 2022, the federal Underused Housing Tax Act mandates a filing requirement and potential 1% tax on the assessed value of vacant or underused housing in Canada (“UHT”). The UHT implements a tax aimed to deter non-Canadian ownership of residential properties from standing vacant. In our view, while the policy intent of the UHT is perhaps well-intentioned, its implementation includes onerous filing obligations on certain owners that are not within the scope or intended to be subject to the UHT. Additionally, a 1% tax on the targeted non-resident ownership may not be a materially significant deterrent.
The return and any applicable UHT payable must be filed and paid by April 30 of the following calendar year (the first deadline for the new UHT will be May 1, 2023, as April 30, 2023 is a Sunday).
“Excluded owners” (discussed further below) are not required to make any UHT filings. Excluded owners include Canadian citizens or permanent residents (except certain trustees and partners of a partnership). Excluded owners do not include Canadian private corporations, Canadian partners in a partnership, and certain Canadian trustees holding Canadian residential property as of December 31, 2022. These types of owners should be exempt from the 1% tax (discussed below); however, they are still required to file a return for each residential property. Failure to file for “each” residential property by April 30 following the calendar year will result in penalties equal to the greater of (i) $5,000 if the person is an individual or $10,000 if the person is not an individual, and (ii) the total amount of 5% of the tax calculated as well as 3% of the calculated tax multiplied by the number of months the return was required to be filed. Accordingly, we strongly encourage Canadians (and their advisors) to review the ownership of their residential property and be prepared to file UHT returns by April 30 to ensure the significant penalties are not applicable.
The filing requirements for the UHT are extremely broad as highlighted above. With that said, if the ultimate ownership is held by a Canadian citizen or permanent resident, the property should not be subject to the UHT. Even if ownership is held a non-Canadian, UHT may not apply (discussed further below), as there are several exceptions. One of the highlight exceptions, is the 180-day rental exception (again, discussed further below). The 180-day rental exception supports the core objective of the UHT to provide more housing for Canadians rather than housing that sits vacant.
The UHT will be administered by the Canada Revenue Agency (“CRA”). The CRA has just released the prescribed form, UHT-2900 Underused Housing Tax Return and Election Form, this week available via a link on the CRA Webpage.
Certain Canadian cities (Vancouver and Toronto) have implemented their own vacancy taxes for underused residential property. The Federal UHT applies in addition to these local tax measures and is more far-reaching in its application.
Who does the filing requirement apply to?
As mentioned above, effective January 1, 2022, the filing requirement applies not just to non-residents and non-Canadian individuals and corporations who hold residential property in Canada, but extends to certain Canadian taxpayers as well, including private Canadian corporations, Canadian partners of a partnership, and Canadian trustees of a trust that hold residential properties on December 31 of a calendar year.
A person is considered an “owner” of a residential property that is required to file if they are identified as an owner of the property in the land registration system where the property is located, a life tenant under a life estate, a life lease holder, or a lessee of a long-term lease having continuous possession of the land on which the property is situated (i.e., filing requirements are based on legal ownership and not beneficial ownership).
Exemptions to filing requirement
The Underused Housing Tax Act provides for three scenarios where the filing obligation is exempted: the person is an “excluded owner”, the person is a “prescribed person” or the residential property is a “prescribed property”.
A person is an “excluded owner” if on December 31 of the calendar year, they are:
a) the federal or provincial government or agent thereof;
b) an individual that is a Canadian citizen or permanent resident or personal representative in respect of a deceased individual (note that generally trustees and partners of a partnership are not excluded);
c) a Canadian public corporation;
d) trustees of certain widely held trusts (e.g., REITs, mutual fund trusts, etc.);
e) a registered charity;
f) a cooperative housing corporation, hospital authority, municipality, public college, school authority or university as those terms are defined in the Excise Tax Act;
g) Indigenous governing body as defined in the Department of Indigenous Services Act; or
h) a “prescribed person”
The Regulations currently have not provided any definition of a “prescribed person” or “prescribed property”.
The UHT also contains a general anti-avoidance provision that would deny a tax benefit resulting from a transaction or series of transactions that is an avoidance transaction. An avoidance transaction is defined in the UHT to be a transaction, or series of transactions that, would but for the section, result directly or indirectly in a tax benefit unless the transaction may have reasonably been taken primarily for bona fide purposes other to obtain the tax benefit. Could certain transactions to remove a person otherwise considered an “owner” from title be potentially caught? It seems there will need to be a bona fide commercial purpose for transfers from a corporation to an individual where this tax applies.
A residential property under the UHT legislation includes “a detached house or similar building containing not more than three dwelling units…or a part of a building that is a semi-detached house, rowhouse unit, residential condominium unit or other similar premises that is, or is intended to be, a separate parcel or other division of real or immovable property owned…” A dwelling unit under the UHT means a residential unit that contains private kitchen facilities, a private bath, and a private living area. This would include “condominiumized” or a stratified buildings to be caught. Furthermore, a detached laneway house or coach house are considered separate residential properties which would require a separate return.
Another uncertainty in the application of the UHT is with respect to mixed use properties. In the case of an apartment building with first-floor retail shops, will the return only be applicable for those residential dwelling areas (presumably yes, as the intention of the UHT is increase residential supply)? If real property is used partly for commercial purposes and partly for residential purposes, it seems the return, where applicable, will only apply for the residential portion of the property. This would be consistent with CRA’s GST/HST position with respect to separate properties.
However, the filing of the return will be onerous for owners of multiple residential properties which have multiple dwelling units.
How to file if it applies
The prescribed form, UHT-2900, is required to be filed for each residential property for which the filling requirements apply – even if the tax is not applicable. The UHT-2900 has been provided as of January 31, 2023, available via a link on the CRA webpage.
Who needs to pay the 1% tax?
Every person that is an owner, other than excluded owner, must pay the tax determined by the following formula:
1% of the assessed value (or fair market value if so elected under subsection 6(4)) of the residential property) multiplied by the ownership percentage for the calendar year.
Exemptions to 1% tax
The UHT provides numerous exemptions from the tax. For instance, the tax is not applicable if, among other exemptions:
a) a trustee of a trust which all of the beneficiaries are excluded owner;
b) a partners of a partnership all members of which are excluded owners;
c) a corporation with less than 10% non-Canadian ownership;
d) the dwelling unit is the primary place of residence of the individual or the individuals’ spouse or common-law partner or child;
e) for at least 180 days (in 30 day minimum terms), there is a written rental agreement with an arm’s length person, or if rented by a non-arm’s length person, fair market rent is charged to the non-arm’s length person at 5% of the taxable value pro-rata per rental period;
f) the ownership of the residential property is exempt from the tax for the calendar year (excluded owner);
g) if the residential property is not suitable for year-round use as a place of residence;
h) the construction of the residential property is not substantially completed before April of the calendar year;
i) the residential property is seasonably inaccessible because public access is not maintained year-round;
j) the person becomes an owner of the residential property in the calendar year and was never an owner of the residential property in the past nine years, the person died during the year or the prior year, an individual who died held an ownership percentage at the time of death of at least 25% in the residential property; or
k) the person is the personal representative in respect to the deceased individual who was an owner, or the residential property is located in prescribed area and prescribed conditions, if any, are met.
Additionally, the UHT provides an exemption for “prescribed areas” (i.e., the “Vacation Home” exemption). Specifically, the regulations define a “prescribed area” to be an area that is, as determined in the last census published by Statistics Canada before the calendar year:
a) neither within a census metropolitan area (population of at least 100,000) nor within a specified census agglomeration (population of at least 30,000); or
b) an area within a census metropolitan area or specified census agglomeration, and but not within a population centre (a population of at least 1,000 and population density of 400 persons or more per square kilometer).
Furthermore, prescribed conditions must be met which provide that the individual or spouse or common-law partner, must personally use the property as a place of residence of lodging for at least 28 days in the calendar year. CRA provides a web tool to help individuals determine whether their resident is located in a prescribed area for the exemption.
This excludes from the exemption, certain properties in popular vacation locals around Canada that are not personally held by an individual owner. This could be especially problematic for finished summer cottages or second homes held in a trust or corporation with high fair market value that do not have a tenant living in the property for at least 180 days. It should also be noted that in order to qualify for the “tenant” exemption, only “long-term” (i.e., 30 days or more) tenancy agreements count toward the 180 days (in other words, foreign owners cannot “AirBnB” their vacation properties and qualify for the exemption.
While unlikely to address the root cause of perceived housing issues in Canada, the UHT does impose onerous filing reporting on Canadian owners and their advisors. Don’t let the rules catch you off guard!
Further technical updates to be provided by the CRA at: https://www.canada.ca/en/services/taxes/excise-taxes-duties-and-levies/underused-housing-tax/underused-housing-tax-technical-information.html
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