The federal government’s new Underused Housing Tax came into effect on January 1st, 2022. It introduced a 1 per cent annual tax on the ‘specified value’ of a vacant or ‘underused’ residential property owned in whole or in part by non-resident, non-Canadian citizens. Despite the legislation’s many exemptions, it is very broad and ensnares several categories of entity that may be used to hold residential property.
Individuals defined under the law as ‘affected owners’ are required to file an annual Underused Housing Tax (UHT) return with the Canada Revenue Agency, even if they’re exempted from paying the tax. The filing deadline for the first (e.g., 2022) UHT declaration and tax payment—using the Underused Housing Tax Return and Election Form — is April 30th, 2023.
Why you need to act now to comply
Failure to comply with reporting requirements could result in interest payments at the prescribed rate, along with fines of at least as much as $5,000 for individual owners and $10,000 if the owner is not an individual, plus:
- 5 per cent of the UHT applicable in respect of the owner’s interest in the property for the calendar year; and
- 3 per cent of the UHT applicable in respect of the owner’s interest in the property for the calendar year for each calendar month the declaration is past due
It’s important that you contact a KRP partner or manager as soon as possible to discuss your residential property holdings and determine whether you have reporting or tax obligations under the Underused Housing Tax.
Who is considered an ‘affected owner’?
You could be required to report your residential properties (and possibly pay tax) if you fall into one of the following categories of ‘affected owner.’ They include:
- Canadian-controlled private corporations that own residential property, the exception being some specified Canadian corporations
- Corporations incorporated outside of Canada
- A Canadian corporation with no share capital
- Individuals engaged in a business partnership where the partners hold title to one or more residential properties
- Trusts (including those held by Canadian citizens or permanent residents) that hold residential property. In this case, the trustee(s) are considered the affected owner(s) who must complete the annual UHT declaration and pay applicable taxes. Importantly, unless all beneficiaries of a trust are considered excluded owners, UHT on the property may be owed
Separate UHT returns are required for each property in an affected owner’s residential property portfolio. The same rule applies for joint owners of residential properties that are considered ‘affected owners.’
What types of properties are covered under the UHT?
- Detached homes, duplexes and triplexes
- Semi-detached homes
- Row house units
- Residential condominium units
The tax does not apply to:
- Residential properties that are uninhabitable for at least 120 consecutive days in a calendar year due to ongoing renovations
- Residential properties whose owner has died during the calendar year or the previous calendar year
- Vacation properties that are located in rural areas and used personally by the owner, owner’s spouse, or common-law partner for at least four weeks in a calendar year
Who is considered an excluded owner?
There is a long list of excluded owners that will be exempt from making the annual declaration, including:
- Canadian citizens and permanent residents (unless they qualify as ‘affected owners’)
- Corporations listed on a Canadian stock exchange
- Registered charities
- Cooperative housing corporations
- The government of Canada or an agent of the Government of Canada
- Provincial governments
- Indigenous governing bodies or corporations owned by Indigenous governing bodies
- Public institutions such as hospital and school authorities, universities and public colleges
- A prescribed person or a person of a prescribed class
Claiming a UHT exemption
In some cases, affected owners can claim an exemption to the UHT if they file their return by December 31st of the following year. Exemptions could be claimed based on:
- A property’s location and use
- Property occupancy
- Ownership type
- Property availability
Late returns will be denied by CRA, at which point any applicable UHT and related interest and penalties will be payable.
Contact your KRP partner today
While your team at KRP LLP has record of your personal or professional assets and related tax and other compliance obligations, we may lack a fully updated inventory of the residential properties in your portfolio. Having this knowledge will allow us to provide comprehensive strategic and tax advice, ensuring that all necessary reporting requirements are met.
Let’s connect to discuss changes to your residential property holdings and determine your Underused Housing Tax reporting obligations.
Armando Iannuzzi, Co-Managing Partner