Written by Stewart Bullard, CPA, CA from DMCL
At first glance, you probably (and understandably) assumed that the new Federal Underused Housing Tax (UHT) doesn’t apply to you. We hate to be the bearer of bad news, but the name of this tax is misleading; many more people will have filing obligations under this legislation than the ‘underused’ qualifier suggests.
The Underused Housing Tax Act has a surprisingly broad application, and the penalty for late filing starts at $5,000. Let’s take a look at the details of this new tax and whether you need to file a UHT return by April 30 and pay the tax, so you can be certain which obligations apply to you this tax season.
What is the UHT?
The UHT was originally announced as part of the 2021 Federal Budget. The rules were enacted on June 9, 2022 and it came into effect for the 2022 calendar year. The UHT imposes an annual 1% tax on the taxable value of a property, and 2022 UHT returns are due by April 30, 2023.
The taxable value of a residential property is the greater of the property tax assessed value and the property’s most recent sale price. Alternatively, an election may be made to use the fair market value as determined.
While many people won’t need to do anything and very few people will actually have to pay any tax, a surprising number of people will need to file an annual UHT return to claim an exemption, including:
- A partner who holds legal title for a partnership
- Non-residents with Canadian rental properties
- Trustees of trusts
- Corporations
- Lessees under long term leases, or leases that contain a purchase option A life tenant
How does the UHT Work?
Every owner of residential property is subject to UHT, unless:
- They are an “excluded owner”
- An exemption applies
If the owner of the residential property is an excluded owner then they are exempt from UHT and they don’t need to file a return.
If the owner of the residential property is not an excluded owner then they must file a UHT return, and either:
- Claim an exemption
- Calculate and pay the tax
What is an ‘owner’ (i.e., the person/entity that may have to file a UHT return)?
Owner generally means the person who is registered as the holder of legal title to a residential property; however, it also includes a person that:
- Is a life tenant under a life estate in respect of the residential property
- Is a life lease holder in respect of the residential property
- Is under a long-term lease, with continuous possession of the land on which the residential property is situated
Can a person who leases a residential property be an owner?
Yes, a person who leases a residential property may be an owner of that property if they have continuous possession of the land on which the residential property is situated under a lease, license or similar arrangement:
- Which provides for continuous possession of the land for a period of at least 20 years
- That contains an option to purchase the land
What is an ‘excluded owner’ (i.e., a person/entity exempt from filing a UHT return)?
An excluded owner of a residential property for a calendar year includes a person that is, on December 31 of the calendar year:
- An individual who is a citizen or permanent resident; however, such an individual won’t be an excluded owner if they hold legal title as:
– A trustee of a trust (e.g. family trust, alter ego trust, joint spousal trust, bare trust), unless the trust is an estate of a deceased individual
– A partner of a partner - A corporation incorporated under the laws of Canada or a province whose shares are listed on a designated stock exchange in Canada (i.e. the TSE, TSX-V tiers 1 and 2, M-X, CNSX, or NEO)
- A registered charity as defined in subsection 248(1) of the Income Tax Act
Most corporations will not be excluded owners, including private corporations (whether incorporated in or outside of Canada), corporations incorporated outside Canada and subsidiaries of a company whose shares are listed on a designated stock exchange in Canada.
What is a residential property?
Residential property generally means property that is situated in Canada and is:
- A detached house or similar building, containing not more than 3 “dwelling units”
- A part of a building that is a semi-detached house, rowhouse unit, residential condominium unit or other similar premises that is, or is intended to be, a separate parcel or other division of real or immovable property owned, or intended to be owned, apart from any other unit in the building
A dwelling unit is a residential unit that contains private kitchen facilities, a private bath and a private living area.
What exemptions are available to claim on a UHT return?
A number of exemptions are available, which are based on factors such as the condition of the property, the use of the property, the capacity in which the person is an “owner” of the property, the length of ownership, etc.
For a full list of exemptions, please refer to the UHT notices page on the CRA website.
A return must be filed to claim any of these exemptions, so talk to your CPA to determine if you are eligible for an exemption, and to get help with preparing your UHT return.
What happens if I don’t file a UHT return?
There are significant penalties if you fail to file an annual return when it’s due. Owners are subject to a penalty equal to the greater of:
- $5,000 if the owner is an individual or $10,000 if the owner is a corporation
- 5% of the UHT payable for the property, plus 3% of the UHT payable for each month the return is past due
Like many other tax measures, the UHT isn’t exactly what it seems on the surface; its far-reaching requirements could affect you and your residential property. Reach out to your CPA for assistance in determining your obligations under the UHT so you can avoid any unpleasant surprises.