Residential real estate owners may soon receive relief from a surprising tax filing obligation
By Josh Proulx, JD, BComm 6 December 2023 7 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 tax filing obligation for the 2022 taxation year 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.
Since the date this article was originally posted, new changes have been proposed. On November 21, 2023, the Department of Finance announced its intention to reduce the scope of the UHT. For the 2023 taxation year onwards, certain types of Canadian corporations, partnerships, and trusts will be exempt from filing a UHT return, depending on their ownership structure. Those entities may still have a filing obligation for the 2022 taxation year. At the time of writing, these proposed changes are not yet in effect.
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 deadline to avoid interest and penalties for the 2022 calendar year has been extended to April 30, 2024
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. 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 deadline for the 2022 taxation year, 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 penalties on late-filed UHT returns, provided that they are filed (and any taxes are paid) on or before April 30, 2024.
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 trust1 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. For the 2022 taxation year, 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, unless you meet the definition of an excluded owner.
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. Assuming that the changes announced in the 2023 Fall Economic Statement are implemented, this penalty is a minimum of $1,000 per failure for individuals, while corporations and other entities face a penalty of $2,000 per failure. 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.
New changes will apply to the 2023 taxation year
The Department of Finance announced in its 2023 Fall Economic Statement that it intends to update the UHT rules for the 2023 and subsequent taxation years. From 2023 onwards, certain Canadian entities will also be considered an “excluded owner” and avoid the need to file a UHT tax return. The specific wording of these new rules has not yet been released at the time of writing, but it is expected to exempt the following entities from the UHT filing obligation:
- Canadian corporations whose shares are almost exclusively held by persons other than non-citizens, non-permanent residents, and non-Canadian corporations;
- Partnerships whose partners are exclusively Canadian; and
- Trustees of a trust whose beneficiaries are exclusively Canadian.
Further exemptions are expected for owners of certain apartment buildings (retroactive to 2022) and certain properties held for employee lodging (from 2023 onwards).
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—especially for the 2022 taxation year—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 Canadian citizens, permanent residents, or excluded owners. From 2023 onwards, these types of entities are expected to avoid the filing obligation, as well.
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. Further exemptions are expected to be added for owners of apartment buildings, retroactive to 2022.
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.
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