Real estate owners may have a surprise tax filing obligation in 2023
By Josh Proulx, JD, BComm 10 April 2023 5 min read
The Underused Housing Tax Act came into effect on Jan. 1, 2022, introducing a new tax on vacant or underused real estate owned by certain non-Canadians. Though the tax is intended to apply to people who are neither citizens nor permanent residents of Canada, many Canadians will be surprised to discover they have a new tax filing obligation under this Act. This article provides an overview of the new Underused Housing Tax (UHT). For further details, visit the Canada Revenue Agency’s (CRA) website.
A new tax on residential properties
The UHT is a tax on the value of residential real estate, intended to tax non-Canadian property owners on vacant or underused housing. In some cases, the tax can extend to Canadian owners, as well. If the UHT applies, the property owner is liable for a tax of 1% on the value of the real estate. By default, the value is the assessed value for property tax purposes, unless it was purchased that calendar year for a higher price. You may file an election to use the fair market value instead.
The filing deadline for the 2022 calendar year is May 1, 2023
Every taxpayer who is an owner of residential real estate on Dec. 31 must file a UHT return, unless they are an excluded owner (see definition below). This filing requirement applies even if you do not owe the tax. If you are required to make a filing, you must file no later than April 30 of the following year. Since April 30 falls on a Sunday in 2023, the UHT return is due on May 1 this year. This deadline applies irrespective of your normal income tax filing deadline, which may catch corporate taxpayers by surprise.
The CRA has recognized that some people will miss this upcoming deadline, since this is the first year in which UHT returns are required. For the 2022 taxation year only, the CRA has decided to waive interest and penalties1 on late-filed UHT returns, provided that they are filed (and any taxes are paid) on or before Oct. 31, 2023.
An excluded owner is not required to file a UHT return. An excluded owner includes:
- A citizen or permanent resident of Canada who owns the property directly in their personal name (provided that they do not own the property in their capacity as trustee of a trust2 or partner of a partnership).
- Certain types of government entities and registered charities.
- Certain types of public entities, like mutual fund trusts, real estate investment trusts, and publicly listed corporations.
It is not always obvious whether you fall within this definition, and some taxpayers may mistakenly assume they do not have a filing requirement. Some examples where residential property is owned indirectly that may catch taxpayers off-guard are as follows:
- Farming families who hold residential property in a farming partnership (even an informal partnership), such as a residence on the home quarter.
- Residential property held in a special-purpose trust (e.g., alter ego, spousal, or joint-spousal trusts), which are relatively common outside of Alberta.
- Residential property held in your capacity as trustee of a bare trust.
An owner usually refers to the people registered as owners of the property with Land Titles, rather than the beneficial owner. However, it can also include people who do not own property, having only the right to long-term use of a property. If you have the right to use the property for the remainder of your life (a life estate or life lease) or hold a continuous long-term lease, you may be considered an owner of that property and need to file a UHT return.
A separate filing is required for each residential property. This filing obligation cannot be ignored. If you are required to file a UHT return and fail to do so, you may be subject to large penalties. For individuals, this penalty is at least $5,000, while corporations and other entities face a penalty of at least $10,000. The penalty increases over time if your return remains unfiled. This failure-to-file penalty applies even if you do not actually owe tax under the UHT.
If you owned residential real estate on Dec. 31 of the previous year—whether personally, through a corporation, or as a member of a partnership or trustee of a trust—you should seek advice from your tax advisor about whether you are required to file a UHT return.
There are many exemptions from paying the tax
Filing a UHT return does not necessarily mean you owe tax. There are a broad range of exemptions from this tax. These exemptions are largely designed for Canadian citizens and permanent residents who own real estate indirectly (e.g., through a corporation, partnership, or trust) and for owners who are making reasonable use of the property. If an exemption applies, you must still file your UHT return, but the tax would be avoided.
One important exemption for Canadian citizens and permanent residents is for indirectly owned residential property. If a Canadian citizen or permanent resident owns property indirectly through a corporation, partnership, or as trustee of a trust (including a bare trust), the owner must file a UHT return. Despite this filing obligation, there is no tax payable if the property is owned through a specified Canadian corporation, specified Canadian partnership or specified Canadian trust. This largely refers to corporations, trusts, and partnerships where the owners, beneficiaries and controlling minds are almost exclusively Canadian citizens, permanent residents, or excluded owners.
This exemption will be enough for most Canadian citizens and permanent residents to avoid the UHT. However, in some cases, you may have shareholders, partners, or trust beneficiaries who are not Canadian citizens or permanent residents. In those instances, you may need access to another exemption. The full set of exemptions—which are described in some detail across several CRA tax notices here—is beyond the scope of this article. These additional exemptions can include certain properties that are occupied by the owner’s family, occupied by tenants for a long enough period under written agreements, or that are generally unsuitable for residential use for certain periods of time.
The details of those additional exemptions are complex. If you are not a citizen or permanent resident of Canada, or if non-citizen non-permanent residents have an indirect interest in your residential property, you should consult with a tax advisor to understand your exposure to the UHT.
In most cases, if the only people who have an interest in the property (directly or indirectly) are Canadian citizens or permanent residents, the UHT tax is typically avoidable. Even if a non-Canadian has an interest in the property, the UHT tax may still be avoidable if the property is occupied for a long enough period of time during the year. If you are required to file a UHT return, you should consult with your tax advisor to confirm whether you will actually owe tax on the property.
Other than as a personal representative of a deceased individual
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