The Liberal government is planning to introduce a new Underused Housing Tax (UHT), to take effect on January 1, 2022, as part of its efforts to reduce housing prices so as to make homes more affordable to Canadian residents.
The tax will apply to:
- residential real estate
- that is owned by non-resident non-citizens
- and that is considered to be vacant or underused.
The tax will apply at 1% per year of the value of the property. “Value” will be the higher of the assessed value for municipal property tax purposes, and the most recent sale price. Or the owner can elect to provide an appraisal to demonstrate fair market value.
The tax will not apply to Canadian citizens or permanent residents of Canada, or to a corporation incorporated under Canadian law that is listed on a Canadian stock exchange. It will apply to other Canadian corporations that have 10% or more foreign ownership (or share voting rights). It will also apply to property held through partnerships and trusts.
The tax will not apply to property that is uninhabitable or inaccessible for part of the year and is thus not suitable for year-round use. This will include if it is undergoing renovations for at least 4 months of the year — provided the work is being diligently pursued, and this “renovations” exemption will be allowed only once every 10 years.
A foreign owner will be required to file a declaration on the property with the CRA every year. A property will need to be lived in for “periods of at least one month that total at least 6 months of the year” to be exempt from the tax.
The declaration will have to be filed by April30 each year. The penalty for not reporting the tax owing will be a minimum of $5,000 per year, but will be 5% of the tax, plus 3% for each month the reporting is late, with no maximum. For example, if an owner is 5 years late in filing all returns by April 30 of the next year, the penalty as of May 1 of Year 6 will be 3×60+5 = 185% of the tax for Year 1, plus 3×48+5 = 149% of the tax for Year 2, plus 113% plus 77% plus 41% for Years 3, 4 and 5, for a total penalty of 565% of the tax (with the tax itself increasing year to year as the property value increases). These exponential increases will make it extremely important for non-resident owners to comply. As well, if the report is not filed by December 31 of the year after the year to which it applies, the various exemptions (including for property that is rented out) will not apply for purposes of determining the penalties.
Beginning in 2023, an application for a “section 116 certificate” for a residential property (required when a non-resident sells real property in Canada, as otherwise the purchaser must withhold 25% of the purchase price and send it to the CRA) will trigger a CRA review of whether the UHT has been reported and paid.
If you have relatives or friends outside Canada who own residential property here, you should inform them of this tax and the stringent reporting obligations that will apply starting April 2023, as well as the sever penalties for not reporting.