Underused Housing Tax: Remember to File by October 31, 2023

The Underused Housing Tax (“UHT”) came into effect on January 1, 2022.

If you are not a Canadian citizen or permanent resident and own a vacant or “underused” house in Canada, you may be subject to the UHT. Additionally, if you are a Canadian citizen or permanent resident, but own a residential property in Canada through a corporation, partnership, or trust, you may be subject to the filing requirements under the UHT.

For the calendar year ending on December 31, 2022, the Canada Revenue Agency (“CRA”) announced that the application of penalties and interest under the federal Underused Housing will be waived for any late-filed UHT returns and for any late-paid UHT as long as the UHT return is filed, or the UHT is paid, by October 31, 2023. However, if you do not file the UHT return or pay the UHT by October 31, 2023, you will be subject to interest and penalties accruing from the original deadline of May 1, 2023.

This article will provide a refresher on UHT filing requirements and obligations.

What is the UHT?

The UHT is a 1% annual tax on the ownership of vacant or underused housing in Canada. The properties subject to the UHT include detached and semi-detached houses, duplexes, triplexes, or condominiums.

Who is Obligated to Pay the UHT?

Remember that the obligation to file and pay the UHT depends on whether you are an “excluded owner” or an “affected owner”. Excluded owners include Canadian citizens and permanent residents of Canada, as well as public corporations, registered charities, universities, hospital authorities, and certain government organizations. If you are an excluded owner, UHT does not apply to you.

Conversely, if you are not an excluded owner, you will be considered to be an affected owner and will be required to file a UHT return. Affected owners include foreign owners, Canadian private corporations, partnerships, and trusts.

Exemptions to the UHT for Affected Owners

If it is determined that you are an affected owner, your residential property may be exempt from the UHT if certain conditions are met.

In the following situations, you will be exempt from payment of UHT, but still need to file a UHT return:

• The property is the primary residence for you, your spouse, or for your child who is attending a designated learning institution.
• For more than 6 months in the year the property is occupied by:
  • One or more tenants, each having a lease period of at least one month under written contracts, or an arm’s length tenant who is occupying the property under a written agreement and for consideration not less than fair rent;
  • You or your spouse who has a Canadian work permit; or
  • Your spouse, parent, or child who is a Canadian citizen or permanent resident.
• The property is owned by:
  • A specified Canadian corporation, which includes Canadian corporations of which foreign individuals or corporations do not own 10% or more votes or equity value;
  • A partner of a specified Canadian partnership. Specified Canadian partnerships generally include partnerships that all members of the partnership are either excluded owners or specified Canadian corporations; or
  • A trustee of a specified Canadian trust. Specified Canadian trusts generally include trusts where all the beneficiaries of which are either excluded owners or specified Canadian corporations.
• The property is not suitable to be lived in year-round or is seasonally inaccessible.
• The property is under ongoing renovations for at least 4 months.
• The property is acquired in the year.
• The owner of the property died during the calendar year or the prior calendar year.

Tax Implications

The amount of UHT payable is calculated as 1% of the residential property value. To determine the amount of UHT you owe, multiply the value of the residential property by the 1% tax rate and your ownership percentage of the property. For example, if you own 50% of a $1,000,000 property in Canada, your taxes owing would be calculated as follows:

$1,000,000 x 1% x 50%= $5,000

The value of your property may be determined in one of two ways:

• Its taxable value, which is the higher of the most recent sale price of the property and the assessed value of the property for the purposes of property tax; or
• Its fair market value (“FMV”) if an election is made. If you elect to use the FMV of a residential property, you must also get an appraisal of the property. The appraisal report must be prepared by a certified professional real estate appraiser working at arm’s length from all owners of the property. Additionally, the intended use of the appraisal report must be to assist in the administration of the UHT.

Tax Return Filing Requirements

If you are an affected owner, the UHT return must be filed and paid (if applicable) by April 30^th  for each residential property that you own in Canada as of December 31^st of the previous calendar year. It is important to note that even if you qualify for an exemption, you are still required to file the UHT return by the April 30^th deadline to avoid significant financial penalties.  

Penalties for Failure to Comply with Filing Requirements

Failing to file a UHT return by the deadline can result in substantial penalties. Affected owners who are individuals are subject to a minimum penalty of $5,000, while affected owners that are corporations are subject to a minimum penalty of $10,000.

Recent Updates Surrounding the UHT

The CRA issued additional clarification surrounding the UHT, stating that:

• A property becomes “residential property” for UHT purposes when its construction is substantially completed (generally meaning 90% or more) so that it could be reasonably inhabited;
• A builder/owner is not required to file a UHT return for a calendar year in respect of a property if its construction was not substantially completed on December 31^st of the year;
• A condominium complex does not have to be registered as such for its units to be regarded as “residential property” for UHT purposes, but an individual unit must be substantially completed by December 31^st to require the builder/owner to file a UHT return in respect of the unit for that year;
• A bed and breakfast may not be a “residential property” for purposes of the UHT; and
• A property’s assessed value and most recent sale price do not have to be reported on a UHT return if:
  • No tax is payable in respect of the property due to an available exemption; and
  • The UHT return is filed by December 31^st of the following calendar year (Note that if a UHT return for 2022 is filed after October 31, 2023, and before December 31, 2023, late filing penalties will apply, even if no tax is owed).

GG Observations

Determining whether you are an excluded owner, an affected owner, or whether your ownership of your Canadian property is exempt from the UHT can be challenging. Even though you may not have any UHT payable, you may still have a filing obligation and the penalties associated with failing to comply with the filing requirements can be substantial.

Grewal Guyatt LLP has extensive experience in assisting clients with tax planning strategies for real estate investments. If you are trying to determine if the UHT applies to you or how to structure your real estate investments while minimizing the tax implications, please contact our tax team.