Are you a residential property owner in Canada? If so, it’s important to understand the Underused Housing Tax (UHT) and how it applies to your situation. The UHT applies to residential properties that are “underused” based on certain criteria. In this blog post, we will explore who is eligible for exemptions from the UHT, how to calculate your tax liability if applicable, and where to file your return and pay any taxes owed.
What is the UHT?
The Underused Housing Tax (UHT) is an important tax measure in Canada designed to help reduce the amount of vacant or underutilized residential properties. The UHT is an annual 1% tax on the ownership of vacant or underused housing in Canada. It took effect on January 1, 2022, and applies to non-resident Canadians, non-Canadian owners, as well as Canadian owners in some cases.
The UHT is intended to help reduce speculation in Canada’s housing market by discouraging people from buying properties and leaving them underutilized or unoccupied. It also aims to increase rental availability for Canadian residents who may not be able to purchase their own homes. While the primary focus of this new tax is on foreign buyers, some Canadians – such as private corporations owning residential properties – may still need to file a tax return even though they may not have any taxes to pay.
Who do the rules apply to?
In general, to determine the taxpayers subject to the UHT rules, it is important to first clarify those who are generally excluded from fulfilling any obligations under the UHT Act. The UHT Act releases excluded owners from any obligations under the Act. However, affected owners must file a UHT return, even if they qualify for an exemption from paying the tax.
Tax trap #1: You may need to file a UHT return to dodge a $5,000 or $10,000 penalty, even if you qualify for an exemption from the requirement to pay the UHT tax.
Excluded owners
Who is considered an excluded owner? This coveted list includes:
- an individual who is a Canadian citizen or permanent resident – unless included in the list of affected owners;
- any person – including an individual who is a Canadian citizen or permanent resident – that owns a residential property as a trustee of a mutual fund trust, real estate investment trust, or specified investment flow-through trust (SIFT) for Canadian income tax purposes;
- a Canadian corporation whose shares are listed on a Canadian stock exchange designated for Canadian income tax purposes;
- a registered charity for Canadian income tax purposes;
- a cooperative housing corporation for Canadian GST/HST purposes; and
- an Indigenous governing body or a corporation wholly owned by an Indigenous governing body.
Affected owners
Notably, if you are not an excluded owner, then you are considered an affected owner and have obligations under the UHT Act for your residential property in Canada. An affected owner includes, but is not limited to:
- an individual who is not a Canadian citizen or permanent resident;
- an individual who is a Canadian citizen or permanent resident and who owns a residential property as a trustee of a trust (other than as a personal representative of a deceased individual and other than as a trustee of a mutual fund trust, real estate investment trust or SIFT trust for Canadian income tax purposes);
- any person – including an individual who is a Canadian citizen or permanent resident – that owns a residential property as a partner of a partnership;
- a corporation that is incorporated outside Canada;
- a Canadian corporation whose shares are not listed on a Canadian stock exchange designated for Canadian income tax purposes; and
- a Canadian corporation without share capital.
Who needs to file a UHT return?
A UHT return should be filed by any person who is an owner of one or more residential properties on December 31 of a calendar year unless they are an excluded owner. Everyone who is mandated to file must submit a separate return for each property. Joint filings are not allowed for jointly owned properties.
Who is an owner?
For this purpose, an owner of a residential property is a person officially recognized as the owner through the land registration or a similar system in place at the property’s location. It could also include someone who can be reasonably recognized as the owner based on such a system. You are an owner if you are:
- identified as an owner of the residential property in the land registration system where the residential property is located;
- considered an owner of the residential property based on such a land registration system;
- a life tenant under a life estate in the residential property;
- a life lease holder of the residential property; or
- a lessee who has continuous possession of the land, on which the residential property is situated, under a long-term lease.
What are residential properties?
Now, to be responsible for the Underused Housing Tax, you must own a “residential property” located in Canada. According to UHT regulations, residential property can be defined as a property in Canada that is:
- a detached house or similar building that contains not more than three dwelling units, along with any appurtenances and the related land; or
- a semi-detached house, rowhouse unit, residential condominium unit or other similar premises, along with any common areas, appurtenances and the related land.
This includes 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 and rowhouse units or townhouses.
Key considerations for partners in partnerships and trustees of trusts
While individual owners may be considering these rules, trustees of trusts and partners in partnership also want to be prepared, not caught off guard. If the Property is owned through a Trust or a Partnership, the legal owners are typically the trustees or partners. It’s important to note that unlike corporations, trusts and partnerships are not considered separate legal entities. Therefore, it is the responsibility of the trustees and partners to file the tax return and ensure payment of the applicable taxes. As a result, the trustees and partners are required to submit the UHT Return and Election Form for every real property owned through a trust or partnership, where this filing is applicable.
Tax trap # 2 – Some Canadian residents who are trustees or partners may be affected owners and need to file a UHT return
Potential exemptions from UHT for your residential property
Owners who meet certain requirements may be granted an exemption from the UHT for the duration of a calendar year. The determining factors include:
- ownership status;
- availability of the residential property;
- location and purpose of the property; or
- occupancy status.
A taxpayer with one of the following ownership statuses may be eligible for an exemption
- a specified Canadian corporation;
- a partner of a specified Canadian partnership, or a trustee of a specified Canadian trust;
- a new owner in the calendar year; or
- a deceased owner, or a co-owner or personal representative of a deceased owner.
Availability of the residential property exemptions
You may be eligible for a UHT exemption if the residential property is:
- newly constructed;
- not suitable to be lived in year-round, or seasonally inaccessible; or
- uninhabitable for a certain number of days because of:
- a disaster or hazardous conditions; or
- renovations.
Location and purpose of the property exemptions
You may be eligible for a UHT exemption if the residential property is a vacation property located in an eligible area of Canada and used by you or your spouse or common-law partner for at least 28 days in the calendar year.
Refer to the Underused housing tax vacation property designation tool to determine if your residential property is located in an eligible area of Canada for the purposes of this exemption.
Occupancy status exemptions
You may be eligible for a UHT exemption in the following situations:
Your ownership of a residential property may be exempt for a calendar year in either of the following situations:
- it is the primary place of residence for you or your spouse or common-law partner, or for your child who is attending a designated learning institution; or
- at least 180 days in the calendar year are included in one or more qualifying occupancy periods for your ownership of the residential property.
A qualifying occupancy period is at least one month in a calendar year during which one of the following qualifying occupants has continuous occupancy of the residential property:
- an individual with a written contract who deals at arm’s length with you and your spouse or common-law partner;
- an individual with a written contract who does not deal at arm’s length with you or your spouse or common-law partner, and who pays at least fair rent for the property;
- you, or your spouse or common-law partner, who has a Canadian work permit; or
- your spouse or common-law partner, parent, or child who is a Canadian citizen or permanent resident.
The Fair Market Value Election
To determine the amount of underused housing tax, residential property owners need to multiply the 1% tax rate by the taxable value of their property, adjusted according to their ownership percentage.
The “taxable value” of your residential property in Canada is determined by taking the higher value between the assessed value and the most recent sale price.
A filer has the option of using the fair market value of your residential property instead of the taxable value when calculating your underused housing tax.
To accurately report the fair market value (FMV) of your residential property, it is important to have a written appraisal from an accredited real estate appraiser. This appraiser must be independent and unrelated to you. The appraisal should have an effective date for the FMV between January 1 of the current year and April 30 of the following year. For instance, if you are reporting for 2022, the appraisal should be dated between January 1, 2022, and April 30, 2023.
Computing your UHT tax
In order to determine the amount of underused housing tax, residential property owners need to apply a 1% tax rate to the “taxable value” or the fair market value if they have chosen to make an election.
Where to file the tax return and pay the tax
As a residential property owner in Canada, it’s crucial to file your Underused Housing Tax return for the calendar year. Even if you qualify for an exemption and don’t owe any tax, filing a return is still mandatory. Fortunately, you have the option to file electronically or via mail.
Your UHT return may be filed electronically here.
If you mail your return, the address for submission varies depending on your residence or that of your corporation.
You would mail your completed return to the CRA’s Winnipeg Tax Centre if the address of your residence or corporation is in one of the following:
- Countries – United States of America, United Kingdom, France, Netherlands or Denmark
- Canadian provinces or territories – Alberta, British Columbia, Manitoba, Saskatchewan, Northwest Territories, Nunavut or Yukon
- Places in Ontario – anywhere except Barrie, Sudbury, or Toronto
Winnipeg Tax Centre
Post Office Box 14001
Station Main
Winnipeg MB R3C 3M3
Canada
You would Mail your completed return to the CRA’s Sudbury Tax Centre if the address of your residence or corporation is in one of the following:
- Countries – any country other than the United States of America, United Kingdom, France, Netherlands, or Denmark
- Canadian provinces – New Brunswick, Newfoundland and Labrador, Nova Scotia, Prince Edward Island, or Quebec
- Places in Ontario – Barrie, Sudbury, or Toronto
Sudbury Tax Centre
1050 Notre Dame Avenue
Sudbury ON P3A 5C2
Canada
Penalties for the failure to file a UHT return and pay the UHT tax
Failure to file an Underused Housing Tax return on time can result in substantial penalties. Individual owners face a minimum penalty of $5,000, while corporations face a minimum penalty of $10,000.
Having a thorough understanding of the Underused Housing Tax (UHT) Return and Election Form and the exemptions and how different occupancy statuses affect taxation, as well as making use of fair market value election procedures where applicable, will go far towards ensuring compliance with relevant regulations while optimizing financial outcomes.
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Karlene J. Mulraine, EA, CPA, CA, CPA (NH) is the President of Cross-Border Financial Professional Corporation. Follow us on Linkedin and Twitter, or hang out on Facebook.
The views expressed in this article are those of the author and should not be relied on to make decisions. Consider discussing your specific circumstances with an appropriate specialist.