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. This article will discuss the UHT, the tax implications, exemptions available, and the filing obligations.
What is the Underused Housing Tax?
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 Underused Housing Tax?
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 and 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 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 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.
- 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 renovation 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.
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, you must file a UHT return for each residential property that you own in Canada on December 31st of a particular calendar year. You must also pay the UHT unless your ownership qualifies for an exemption for a certain calendar year. Even if your ownership qualifies for an exemption, you must still file a UHT return for the calendar year.
The UHT return must be filed by April 30 of the following calendar year. Any UHT owing will also be due by April 30 of the following calendar year.
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.
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 quite hefty.
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.