Effective January 01, 2022, there is a new ‘Underused Housing Tax’ (UHT) imposed on specific taxpayers, known as “affected owners”. UHT is a tax levied on properties that are deemed to be underutilized or not being fully utilized.
The purpose of the tax is to encourage property owners to put their properties to more productive use and curb the speculation in the housing market to control housing costs.
Please note that this post is not any advice and the affected owners must consult a tax professional in Canada to determine the full extent of their compliance requirements. Further, this post may go through future updates.
UHT is a federal tax imposed under the Underused Housing Tax Act (UHTA). It is not the same as the vacancy tax often imposed by different municipalities and jurisdictions in Canada.
Who files and pays?
All the affected owners!
Excluded owners do not have any obligations under the UHTA and hence are not subject to reporting or payment.
Excluded owners under UHTA include (not a conclusive list):
- Individual: Canadian citizen or permanent resident unless specifically included in affected owners list.
- Any person holding the title of the property as a trustee for mutual funds, REIT, or SIFT
- Publicly listed corporations
- Registered charity
- Cooperative housing corporation
- Municipal organizations, public institutions, and governments
- Indigenous governing bodies and/or corporations wholly owned by it
Affected owners are all the owners of residential properties other than ‘excluded owners’.
- Individual: who is not a Canadian citizen or a permanent resident
- A private corporation incorporated in Canada
- Non-resident and foreign corporations owning residential property in Canada
- A Canadian corporation without share capital
If the affected owner owns a property on December 31, a return must be filed. There are some exemptions available for affected owners. Affected owners must report by filing an Underused Housing Tax Return for each residential property even if they meet an exemption.
Who is the owner?
The land registration system provides information on the owner of a residential property. You are also an owner if you hold a life interest or long-term lease, 20 years or more, in the residential property or the land where the residential property is.
What is a residential property?
Residential properties refer to dwelling units that are intended to be used as a place of residence. The specific characteristics of a residential property such as the size, location, and type of dwelling vary depending on the region, with factors such as population growth, job market, and local economic conditions. The residential property is subject to taxes if:
- It is a detached house or a building that contains a maximum of 3 dwelling units, along with any extras and the related land.
- It is a semi-detached house, residential condominium unit, rowhouse unit, or any other similar property along with any common areas, sites, and related land.
A dwelling unit refers to a self-contained living space that is intended for occupancy by one or more persons as a place of residence but in general, it refers to a space that is designed for occupancy as a single and self-contained living unit. It contains:
- Private living area
Examples of residential properties:
Following are the examples of residential properties of the underused housing tax for underused tax purposes:
- Detached houses.
- Duplexes and triplexes
- laneway houses and coach houses
- cottages, cabins, and chalets that are not commercial cottages, cabins, and chalets.
- semi-detached houses
- residential condominium units
- rowhouse units or townhouses
If you are not an excluded owner, you may qualify for some exemptions based on the use and the character of the residential property under your ownership.
If you are an affected owner and own a residential property in Canada, but use the property as the primary place of residence for the owner, spouse, common-law partner, or a child who is living there with the purpose of the study.
An individual, not a Canadian citizen or permanent resident (PR), owning multiple residential properties, either wholly or jointly with her non-Canadian and non-PR spouse, must file an election to designate one property as a principal place of residence. Both owners need to make a joint election in this case.
Qualifying Occupancy Period with Certain Occupants
A qualified occupancy period is at least one month in a Calendar year. Multiple qualified occupancy periods (one month each) with a total of a minimum of 180 days in a Calendar year can provide you with an exemption.
For example, if a qualified occupant (discussed later) lives in a residential property for at least 180 days in a year, with each stay of a minimum of one month.
An occupant for this purpose is:
- An individual dealing at arm’s length with the owner or spouse and have a written agreement.
- A non-arm’s length individual, with a written agreement, continuous occupancy, and pays rent equal to or more than the fair rent of that property
- If the owner, or spouse of the owner, is in Canada on a work permit and living in that property for the same purpose.
- A spouse, common-law partner, parent, or child of the owner who is a Canadian citizen or permanent resident.
Fair rent mentioned previously is generally 5% of the taxable value of the property. More details are not yet issued.
You cannot use the primary place of residence and qualifying occupancy together.
Renovation and construction
A renovation or construction exemption is available in cases, where:
- The property is uninhabitable for at least 120 consecutive days in a calendar year due to construction or renovation; and
- the same property was not given an exemption in the past 9 years
Another exemption is if the 90% or more (substantial) construction was not completed by the March of a calendar year, offered for sale to the public in the same year, and has never been occupied by an individual.
Seasonal access limitations
If the property is not suitable for year-round access due to seasonal limitations, UHT is not accessible. Common examples are properties that are not accessible or inhabitable in winter. The exemption is also available for properties that do not have access in the winter season.
Year of acquisition
If you acquire your residential property during that calendar year and did not own the same property for the previous 9 years, you can claim an exemption. This exemption is applicable if the residential property is acquired by sale or other forms of disposition such as trusts or estate transfers (more clarity to come soon).
Death of the owner
In case of the death of the owner of the property, there is an exemption for two years, i.e. the first year of death, and the next is following year. The exemption also applies to the personal representatives of the deceased and the surviving owners if the deceased owner owned at least 25 percent.
Disaster or Hazardous condition
In case of a disaster and hazardous conditions beyond the reasonable control of the owner, if the property is uninhabitable for 60 consecutive days in a tax year, there is no UHT payable for that year. The exemption must not have been granted for the same disaster for more than one prior year.
Specified Canadian Corporations, partnerships, and trusts
If a corporation is incorporated in Canada, it does not have to pay UHT unless it falls into one or more below categories:
- If the corporation is owned or controlled (by both vote and value) by 10% or more, by Non-Canadian citizens or permanent residents
- If the corporation is not incorporated under the laws of Canada or has continued outside of Canada
If the corporation does not have a share capital, if the chairperson or presiding officer is non-Canadian or PR; or if 10% or more directors are non-Canadians or PR.
Partners of specified Canadian partnerships and trustees of specified Canadian trusts do not have to pay UHT if they meet certain criteria.
Prescribed area and condition
There will be no UHT payable if the property is located in a prescribed area and used personally by the owner or spouse for at least 28 days during the year. Its majorly for recreational purposes, however, the area must be located outside the census metropolitan area, in a less densely populated area. It is quite possible that a property may qualify for one year and not for another due to changing demographics.
Underused Housing Tax (UHT) Calculation
UHT calculation seems simple!
UHT = [1% x value of property] x ownership percentage
The value of the property can be derived using either Taxable Value or Fair Market Value:
The Taxable value of the property is greater of,
- the property tax assessed value for the calendar year, or
- the most recent sale price during the year.
Fair Market Value requires an appraisal of the property. The appraisal can be done at any time within the same calendar year or before April 30th of the following calendar year. An election must be filed before the April 30th of the following calendar year (due date for UHT return)
All the affected owners must file UHT Return on UHT-2900 no later than April 30th of the following calendar year, even if they meet an exemption. The filing requirement is for each owner, not each property. If there are more than affected owners, all of them must file UHT-2900.
If you do not have a Canadian Social Insurance Number (SIN), an Individual Tax Number (ITN) is required. In the case of a business, a Business Number (BN) with an RU Program account is required.
Penalties for late filing or no filing
- $5,000 late filing penalty (10,000 for non-individual owners), plus
- [5% x UHT owing] + [3% x UHT owing x no. of months tax owing was outstanding after due date]
A delay of UHT return beyond December 31st of next year, can cause a loss of exemptions
Based on the facts, another potential penalty for gross negligence can hit that is 25% of tax avoidance due to false statements or omissions.
The normal limitations of reassessment periods are not applicable in this case. If a return is not filed for a particular year, that year does not become statute-barred.
Disposition of properties – Section 116
Non-residents of Canada require a certificate of compliance at the time of disposition of real property in Canada. If the UHT returns are not filed for the residential properties, CRA may decline your request for a certificate of compliance.