April 10, 2023 | Blog
Underused Housing Tax
The Underused Housing Tax (UHT) is a new measure that was recently put into force. The UHT is an annual tax charged to “affected owners” that are, as per the federal government, underusing their residential property. Let’s take a deep dive into this measure.
From tax expert Gerry Vittoratos
New annual tax with a new information return
The Underused Housing Tax (UHT) is an annual 1% tax on the ownership of vacant or underused housing in Canada that took effect on January 1, 2022. Every owner of a residential property other than an “excluded owner” (called “affected owners”) would be required to file an annual return with the Canada Revenue Agency (CRA) for each residential property they own. The annual return form is the UHT-2900. In order to file a return with the CRA, certain owners may need to pre-register with the CRA in advance of filing their return.
The deadline to file the annual return is April 30th of the following calendar year [UHTA 8].
A new legislation, the Underused Housing Tax Act (UHTA), has also been passed to govern the application of the UHT.
As mentioned above, excluded owners are not subject to the tax, nor do they file the annual return.
Excluded owners are [UHTA 1 “excluded owners”]:
· An individual that is a Canadian citizen or a permanent resident of Canada, except where the individual holds an interest in property:
o as a partner of a partnership; or
o as a trustee of a trust, but not including a personal representative of a deceased individual or the estate of a deceased individual;
· A corporation incorporated under the laws of Canada or a province and the shares of which are listed on a Canadian stock exchange;
· A registered charity;
· A cooperative housing corporation;
· An Indigenous governing body or a corporation owned by an Indigenous governing body;
· A municipality or a corporation owned by a municipality;
· The government of Canada or an agent of the Government of Canada;
· The government of a province or an agent of the government of a province;
· Certain other public service bodies (e.g., universities, public colleges, school authorities, hospital authorities);
· A prescribed person or a person of a prescribed class.
Anybody who is not an excluded owner is considered an affected owner and might be subject to the UHT. Affected owners can be exempted from the UHT (see section below), although they must file the UHT-2900 annually to declare their exemption.
From the list of excluded owners above, we can clearly see that the federal government is targeting non-residents who own property in Canada and are underusing it.
Exemptions for affected owners
As mentioned above, affected owners would be subject to the UHT for the calendar year unless the owner qualifies for an exemption in respect of their interest in the property for the calendar year. Affected owners qualifying for an exemption are required to file the annual return and declare the exemption.
· Qualifying occupancy: Under the qualifying occupancy test, a property would need to be occupied, in periods of at least one month that total at least 180 days of the year, by any individual that is a “qualifying occupant” in respect of the owner of the property [UHTA 6(10)]. A qualifying occupant is [UHTA 6(1)]:
o An individual that deals at arm’s length with the owner and the owner’s spouse, if any, and who occupies, for a period of at least one month under a written agreement, a residence that is part of the residential property;
o An individual that does not deal at arm’s length with either the owner or the owner’s spouse, if any, and who occupies, for a period of at least one month under a written agreement at fair rent, a residence that is part of the residential property;
o an individual who is the owner or the owner’s spouse or common-law partner, who is in Canada for the purpose of pursuing authorized work under a Canadian work permit and who occupies the dwelling unit in relation to that purpose;
o an individual who is a spouse, common-law partner, parent or child of the owner and who is a citizen or permanent resident;
o a prescribed individual.
- Specified Canadian Corporations: any corporation that is incorporated under the laws of Canada or a province and which a foreign entity does not own more 10% of common and voting shares [UHTA 1 “specified Canadian corporations” & UHTA 6(7)(b)]
- Partner of Specified Canadian Partnership: Every member of the partnership is an excluded owner, specified Canadian Corporation, prescribed person [UHTA 6(7)(a)(i)]
- Trustee of Specified Canadian Trust: Every beneficiary of the trust is an excluded owner, specified Canadian Corporation, prescribed person [UHTA 6(7)(a)(ii)]
- Property Not Suitable for Year-Round Use: property is uninhabitable (e.g., not winterized) or is inaccessible (e.g., access road not winter maintained) for a portion of the year and is therefore not suitable for year-round use [UHTA 6(7)(d)]
- Year of Acquisition of an Interest in Property: exempt for the calendar year in which the owner first acquires an interest in the property (did not own same property in the last 10 years) [UHT 6(7)(g)]
- Person died during the calendar year or the prior calendar year: owner’s interest in the property would be exempt for the calendar year in which the death occurred and for the following calendar year [UHT 6(7)(h)]
- Personal or Other Legal Representative of Deceased Individual: Deceased person exemption (see above) would extend to the personal or other legal representative of the deceased owner (e.g., trustee of the estate of the deceased individual) [UHT 6(7)(i)]
- Death of other Owner: If an owner of residential property dies, and on the date of death has at least a 25-per-cent interest in the property, any other owner’s interest in the property would be exempt for the calendar year in which the death occurred and for the subsequent calendar year [UHT 6(7)(j)]
- Newly Constructed Property: exempt for a calendar year if the property is a newly constructed property that was not substantially completed before April 1 of the calendar year due to the property being under construction [UHT 6(7)(k)]
- New Property Held by a Developer as Inventory for Sale: An owner’s interest in a residential property would be exempt for a calendar year if the property is held by the owner as inventory on December 31 of the calendar year [UHT 6(7)(m)]
- Prescribed person or prescribed zone [UHT 6(7)(m) & (n)]
Calculation of UHT
The tax is calculated as follows [UHTA 6(3)]:
A X B X C
A is 1%
a) Fair Market Value (FMV) of property, if an election has been filed (see below)
b) In any other case, the taxable value in respect of the residential property;
C is the ownership percentage in respect of the person in respect of the residential property for the calendar year.
An owner would be permitted to elect to use the fair market value of the property as determined at any time on or after January 1 of the calendar year and on or before April 30 of the following calendar year [UHTA 6(4)]. An owner electing to use fair market value would be required to obtain an appraisal of the property.
If the annual return is not filed by the due date, the following penalties apply [UHTA 47(1)]:
a) $5,000, if the owner is an individual, or $10,000 if the owner is not an individual; and
b) The amount that is the total of:
i. 5 per cent of the tax applicable in respect of the owner’s interest in the property for the calendar year; and
ii. 3 per cent of the tax applicable in respect of the owner’s interest in the property for the calendar year for each calendar month the return is past due.
If a return in respect of a residential property for a calendar year is not filed by December 31 of the following calendar year, the UHT applicable in respect of the owner’s interest in the property for the calendar year would be determined without reference to the following exemptions [UHTA 47(2)]:
· Exemption for Qualifying Occupancy;
· Exemption for Property Not Suitable for Year-Round Use;
· Exemption for Property Uninhabitable Due to a Disaster or Hazardous Conditions; and
· Exemption for Property Undergoing Major Renovations
In a recent announcement, the CRA has indicated that the application of penalties and interest under the UHTA for the 2022 calendar year will be waived for any late-filed underused housing tax (UHT) return and for any late-paid UHT payable, provided the return is filed or the UHT is paid by October 31, 2023.