By Karim Adatia CPA, CMA | Tax Consultant.
The Underused Housing Tax Act (UHTA) became federal law in June 2022. This new legislation targets ownership of vacant or underused housing in Canada by requiring certain owners of residential property to file a declaration annually, starting in the 2022 tax year, with the first deadline on May 1, 2023. (Because April 30 falls on a Sunday this year, your return is on time if the CRA receives it on May 1.) Although the Underused Housing Tax (UHT) generally applies only to non-resident, non-Canadian owners, in some situations it may also apply to Canadians.
Under the UHT, the legal owner of a residential property in Canada would be assessed an annual tax of 1% of its value as of December 31, provided they are:
- Required to file an annual declaration for that year, and
- Not eligible to claim a UHT exemption on their interest in the property
First, let’s explore the key definitions related to the UHT. Then we’ll summarize the questions you should ask to determine your UHT obligation, highlight the most relevant exemptions and discuss the penalties for not making a declaration when required.
KEY UHT DEFINITIONS
A residential property is any house or similar building situated in Canada with no more than three dwelling units, and any portion of a building that is or is intended to be owned apart from any other unit in the building.
For example, owners of detached and semi-detached houses, duplexes, triplexes or condominium units may be subject to obligations under the UHTA.
The UHTA defines an owner as a person who is identified as owning a property under a land registry or similar system. In some special situations, a tenant may be considered an owner for the purposes of the UHT—for example, when they have the option to purchase the land they are renting. Every owner of a residential property must file a UHT return unless they are an excluded owner (see below). Where a nominee or bare trust is used to hold a property on behalf of another entity, they will be viewed as the owner and required to file a UHT return, unless they are an excluded owner.
Excluded owners do not need to file the annual declaration for their residential property. The determination of whether an owner qualifies as excluded occurs on December 31 of each year. An owner will qualify if they are:
- A citizen or permanent resident of Canada
- A Canadian corporation with shares traded on a registered Canadian stock exchange
- A trustee of a trust with units traded on a registered Canadian exchange
- A registered charity
- A condominium corporation, hospital authority, municipality, public college, school authority, or university
- An Indigenous governing body
Most notably, this definition does not include privately owned taxable Canadian corporations and Canadian citizens or permanent residents who hold property as a partner in a partnership or as a trustee of a trust. Nor does it include newcomers to Canada without permanent residency or citizenship.
If you are not an excluded owner as of December 31, the UHTA legislation refers to you as an affected owner, and you are obliged to file an annual declaration for each residential property. Failure to file a return could be costly even where there is no UHT liability. So if you own residential property in Canada and are not an excluded owner, make sure you understand your reporting and filing obligations.
DO I NEED TO PAY UHT?
To determine your UHT obligation as a residential property owner, ask these questions.
To fully exempt themselves from the tax, the affected owner must claim an exemption on their UHT return.
The most significant exemptions are to:
- An owner that is a specified Canadian corporation—a Canadian corporation 10% or more of whose votes or share value is not owned by foreign individuals or corporations
- An owner that is a partner in a specified Canadian partnership—a Canadian partnership where each partner is an excluded owner or a specified Canadian corporation
- An owner that is a trustee of a specified Canadian trust—a Canadian trust where each trustee is an excluded owner or a specified Canadian corporation
Other UHT exemptions that could apply to an owner include those for:
- Uninhabitable property (due to disaster, hazardous condition or renovation)
- The first year of ownership
- The death of the owner in the current or preceding year
- The property being used as a primary place of residence
This list is not exhaustive, and you can find more exemptions in the UHTA legislation. Given the highly technical nature of the definitions, you should discuss these exemptions with our team before relying on them.
FILING A UHT DECLARATION
You can make a UHT declaration by completing Form UHT-2900. This filing can be sent electronically or by mail and further instruction can be found here: https://www.canada.ca/en/services/taxes/excise-taxes-duties-and-levies/underused-housing-tax.html#6.
The penalty for failing to file the UHT annual declaration when required is the greater of:
- $5,000 for an individual or $10,000 for other parties such as a corporation or trust, or
- 5% of the UHT, plus 3% of the UHT for each month the return is late
Penalties will apply regardless of whether the residential owner qualifies for a UHT exemption.
HOW WALSH KING CAN HELP
The new Underused Housing Tax will have a major impact on owners of residential property located in Canada. To avoid significant penalties, owners should file all declarations on time.
If you have questions about this tax or would like more information about whether it applies to your situation, please reach out to our team.
Posted in Tax Legislation
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