On March 27, 2023 Canada Revenue Agency (“CRA”) granted an extension of time to file UHT returns to October 31, 2023.

The CRA official announcement (see https://www.canada.ca/en/revenue-agency/news/newsroom/tax-tips/tax-tips-2023/underused-housing-tax-penalties-and-interest-waived.html) describes this as a “waiver of penalties and interest” for returns filed after the April 30, 2023 filing deadline as long as the returns are filed, and any tax owing is paid, by October 31, 2023. However, the practical reality is that many issues created by the legislation are difficult to interpret, and CRA requires more time to analyze these issues, develop their administrative policies, and publish those policies so that affected owners can apply CRA’s policies to their own situation and file their UHT return(s) accurately.

As a result of this extension being granted by CRA, our recommendations are:

• If you have a UHT filing requirement and there is no uncertainty in applying the law in your particular situation, then filing by the April 30, 2023 due date probably makes sense but is not essential. Filing by the October 31, 2023 extended deadline is essential to avoid penalties and interest.
• If there is any uncertainty about your UHT situation, then you should delay filing your UHT return(s) until the CRA issues published positions that give you certainty as to how CRA will apply the new law to your particular situation. Delaying your filing is probably prudent to make sure that the return is prepared accurately and takes into account any CRA published positions released over the next six months. Filing by the October 31, 2023 extended deadline is essential to avoid penalties and interest.
• If you are an individual who is not a citizen or a permanent resident of Canada and who needs to make an election with respect to a “qualifying occupancy” because you and/or your spouse own more than one residential property in Canada, you should still file your UHT returns by April 30 because the election due date has not been explicitly extended. Filing by the April 30, 2023 due date may be essential for your elections to be valid.

Please contact your D&H Group LLP advisor if you have any questions.

FEBRUARY 14, 2023

THE NEW UNDERUSED HOUSING TAX – A NEW TAX FILING OBLIGATION FOR 2022 TAX YEAR

Some Canadian individuals and corporations, as well as non-residents of Canada, will be required to file a new annual tax return by April 30 and either claim an exemption or pay a tax of 1% on the value of “underused housing” in Canada which they own.

This new federal tax legislation applies in addition to other vacancy and speculation taxes introduced recently at the provincial and municipal levels.

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The new Underused Housing Tax Act (the “UHTA”) and its regulations implement a national annual 1% tax on the value of residential property that is vacant or underused (the “Underused Housing Tax” or “UHT”). 

The UHT rules categorize owners of residential property in Canada in two groups:

1. Excluded owners: Owners with no UHT reporting obligation and an automatic tax exemption;
2. Affected owners: There are two categories of affected owners:
   • Owners required to file the UHT return but with no tax payable because they can claim an exemption; and
   • owners required file the UHT return and pay tax because an exemption is not available.

To avoid penalties and claim any available exemptions, affected owners must file a separate UHT return (and, if a tax exemption does not apply, pay the UHT) by April 30, 2023 for each qualifying residential property they owned on December 31, 2022.

Canadian citizens and permanent residents of Canada are not subject to the tax, but many Canadian residential property owners (including corporations wholly owned by Canadian citizens, nominee owners who hold title for other Canadian citizens, partners of partnerships, and trustees of trusts) need to file a return even if no tax is payable. 

The penalties for failure to file a UHT return are very onerous – with the minimum penalty being as high as $10,000 per property per year – even if the property is exempt from the tax. If you own a residential property in a corporation, trust, or partnership, you will need to file a UHT return for that residential property to avoid penalties even if that property is exempt from the tax. 

An owner (other than an “excluded owner”) of one or more residential properties in Canada on December 31 of a calendar year is required to file a return for each residential property for the year. 

Generally speaking, you are an “owner” of a residential property where: 

• You are listed as an owner of the property in the land registration system where the property is located (or are considered an owner of the property based on this system);
• You are a life tenant under a life estate in the property; 
• You are a life lease holder of the property; or
• You are a lessee that has continuous possession of the land on which the property is situated under a long-term lease.

What is a residential property?

The UHT applies to “residential property” in Canada. Generally speaking, “residential property” is defined as property that is either of the following:

• a detached house or similar building that contains not more than three dwelling units, along with any appurtenances and the related land; or
• a semi-detached house, rowhouse unit, residential condominium unit or other similar premises, along with any common areas, appurtenances and the related land.

A “dwelling unit” is a residential unit that contains:

• private kitchen facilities;
• a private bath; and
• a private living area.

Generally speaking, a “residential unit” is a single self-contained set of rooms in a building or part of a building that is distinguished from any other such set of rooms in the building or part and that is characteristic of, and suitable as, a residence.

A building that has four or more residential units under a single land title registration is not a “residential property”, and the tax return filing requirement does not apply to such a property. However, if the property is a strata property (i.e. each unit is a separate strata lot with a separate legal title) then each property is a separate residential unit, and a separate UHT return is required for each property unless the owner is an “excluded owner”. 

UHT Return Filing 

A prescribed return (Form UHT-2900, Underused Housing Tax Return and Election Form; the “UHT return”) containing certain required information must be filed with the Canada Revenue Agency (“CRA”) for 2022 on or before April 30, 2023 unless the owner of the property is an “excluded owner” (see next section). 

Important: If you own more than one residential property in Canada, you have to file a separate return for each property if you are not an “excluded owner” in respect of the property.

The UHT return is six pages of data to be entered, and three pages of instructions, for a total of nine pages. There are numerous questions about the property, and the nature of the ownership of the property, which are required to be completed. For example, the property identification number (used in the provincial land title system) and the property tax or assessment roll number (from your property tax assessment) must be entered on the form. Unless you have this information (perhaps in the purchase documents from when you acquired the property), a title search may be necessary. If the property is in BC, you can use https://www.bcassessment.ca/  to find the Parcel Identifier (the “PID”, which is nine digits; e.g. 123-456-789) and the assessment roll number (the number of digits depends on the location of the property). 

Owners must calculate the amount of tax owing for each residential property that does not qualify for an exemption and make a payment of the tax by April 30, 2023.

Excluded Owners – Exempt from Filing a Return and Paying the Tax

An “excluded owner” of a residential property is not liable to pay the UHT or required to file an annual UHT return. An excluded owner includes, but is not limited to, a person that is on December 31 of the calendar year:

• an individual who is a citizen or permanent resident of Canada, except individuals who are holding their interest as a trustee of a trust (other than as a personal representative of a deceased individual) or as a partner of a partnership; 
• a corporation incorporated under the laws of Canada or a province whose shares are listed on a designated stock exchange in Canada; 
• a person who holds an interest in a resident property as a trustee of a mutual fund trust, a real estate investment trust, or a specified investment flow-through (“SIFT”) trust;
• a Canadian registered charity;
• a cooperative housing corporation, a hospital authority, a municipality, a public college, a school authority, or a university; or
• an Indigenous governing body or a corporation which is wholly owned by such a body.

If you are an individual who is a Canadian citizen or “permanent resident” of Canada (under the Immigration and Refugee Protection Act of Canada) you are an “excluded owner” and are exempt from the tax, and from the tax return filing requirement, unless you are an owner of the residential property as either of the following:

• a trustee of a trust (except if you are the personal representative of a deceased individual, in which case you are an excluded owner of the residential property); or
• a partner of a partnership (this does not include people who live together as common law partners, just partners of some kind of business or commercial venture).

This means that individuals who are Canadian citizens and permanent residents are exempted from a tax return filing requirement unless they own the property as a trustee or as a partner of a partnership.

            Example #1:

Susan and Bob, who live as common-law partners, own their townhouse in North Vancouver, BC. Legal title to the house is registered at the Land Title Office in their names. Susan and Bob are both Canadian citizens, and they don’t own the home as nominee or trustee for any other person, nor do they own it as partners of business partnership. 

• Susan and Bob are “excluded owners” in respect of the North Vancouver property, and don’t have to file a UHT return or pay the UHT for this property. 

            Example #2:

Sylvia and Mario, who are married, are the trustees of a Joint Partner Trust they created as part of their estate planning. The Joint Partner Trust owns the house in Nanaimo, BC that they live in, and a rental property in Comox, BC. Both these properties are registered with the land title office in the names of Sylvia and Mario. Even though Sylvia and Mario are both Canadian citizens, and therefore exempt from paying the UHT, they hold the properties as trustees for a trust. 

• Sylvia and Mario must each file a separate UHT return for each of the two properties to claim an exemption (four UHT returns in total). If they fail to file the four UHT returns, they will be liable to a $5,000 penalty for each return, or $20,000 in total. 

            Example #3:

Jose, a Canadian citizen, is the executor of his late mother’s estate. As executor, Jose holds legal title to his late mother’s house in Edmonton, AB. 

• Because Jose holds property as the personal representative of a deceased individual, he doesn’t have to file a UHT return or pay the UHT in respect of his late mother’s house.  

            Example #4:

Steve, a U.S. citizen who does not have Canadian citizenship or permanent resident status in Canada, owns a house in Victoria, BC where his family vacationed for six weeks in 2002 and then left the house vacant for the rest of the 2022. 

• Steve must file a UHT return and will need to pay tax under the UHT because he is not a Canadian citizen or permanent resident of Canada and not eligible for an exemption.

            Example #5:

XYZ Holdings Ltd., a privately held corporation formed under the laws of BC, owns three rental properties in Toronto, ON. All of the shareholders of XYZ Holdings Ltd. are Canadian citizens. XYZ Holdings Ltd. must file three separate UHT returns (one for each property in Toronto) even though an exemption from the UHT applies.

            Example #6:

Jack and Jill are married with an adult child named Jane. All three are Canadian citizens. They have added Jane’s name to the legal title of their one and only home, to make it easier for Jane to deal with the property should something happen to them. Jane is on title only as bare trustee, and Jack and Jill still otherwise beneficially continue to own the whole property. 

• Jane must file a UHT return since she holds her share of the title to the property as a trustee for her parents, even though an exemption from the UHT applies.

Tax Payable under Legislation

The UHT imposes a tax on every owner (other than an “excluded owner”) of a residential property on December 31 of a calendar year. The UHT is payable on April 30 of the following calendar year. 

The tax is calculated as 1% of the greater of: 

1. the assessed value used for the purpose of property tax; and 
2. the residential property’s most recent sale price on or before December 31 of the calendar year, 

Alternatively, a person may elect to use the fair market value (instead of the assessed value) of the residential property determined at any time on or after January 1 of the calendar year and on or before April 30 of the following calendar year. This requires the person to establish the fair market value to the satisfaction of the government and will likely only apply where the property has declined in value relative to the assessed value. 

Where a person is co-owner of a property, the tax will be based on the person’s ownership percentage of the property. For example, a person who owns 50% of a property that is subject to the UHT will pay tax of 1% of 50% of the value of the property. 

Other Exemptions from the UHT

An owner of a residential property that is not an “excluded owner” is liable to pay the UHT unless an exemption applies. The most notable exemptions from the tax (which are not exemptions from the requirement to file a return to claim the exemption) are as follows:

• a “new owner”, which is an owner who meets both of the following conditions:
  • they became an owner of the residential property in the calendar year; and
  • they were never an owner of that residential property in any of the previous nine calendar years.
• an owner that is a “specified Canadian corporation”, which generally means a corporation that is incorporated in Canada, except for those corporations with shares representing 10% or more votes and value owned by non-citizens and/or non-permanent residents of Canada;
• an owner who holds their interest solely as a partner of a Canadian partnership where each member of the partnership is either an “excluded owner” or a “specified Canadian corporation” on December 31 of the calendar year;
• an owner who holds their interest solely as a trustee of a Canadian trust under which each beneficiary is either an “excluded owner” or a “specified Canadian corporation” on December 31 of the calendar year;
• the residential property is the “primary place of residence” of the owner who is (a) an individual, (b) the individual’s spouse or common-law partner, or (c) a child of the individual or the individual’s spouse or common-law partner and the child occupies the property for the purposes of pursuing authorized study at a “designated learning institution”. 
  • If 
    • the owner owns more than one property and is not a Canadian citizens or permanent resident of Canada on December 31 of a calendar year, or 
    • both an owner of a residential property and their spouse or common-law partner are neither citizens nor permanent residents of Canada on December 31 of a calendar year, and their spouse or common-law partner is also an owner of another residential property
      certain elections must be filed by April 30 of the following calendar year (or a later day at the CRA’s discretion) to qualify for the primary place of residence exemption and qualifying occupancy exemption. This will prevent a family unit from using exemptions for more than one property.
  • The CRA has provided the following comments on the meaning of the term “primary place of residence”:
    • Generally, if you have more than one place of residence, the place of residence that is first in order of importance to you is your primary place of residence. A place of residence that is not first in order of importance to you is a secondary place of residence. 
    • For example, a secondary place of residence may be one that is used mainly for recreational purposes or that is occupied less often than another residence. 
    • If you are not a citizen or a permanent resident of Canada and your primary place of residence is outside Canada, any residential property that you own in Canada is generally considered to be a secondary place of residence, unless you can prove otherwise.
  • The CRA has provided the following comments on a “designated learning institution”:
    • All primary and secondary schools in Canada are automatically designated learning institutions.
    • A list of post-secondary designated learning institutions can be found here: https://www.canada.ca/en/immigration-refugees-citizenship/services/study-canada/study-permit/prepare/designated-learning-institutions-list.html
• the property is rented to a tenant and the “qualifying occupancy period” of the tenant is 180 days in the calendar year.
  • The property can be occupied by an arm’s length tenant, but there must be a written tenancy agreement. Landlords who are not “excluded owners” should keep a written agreement with their tenant as part of their records (where a tenancy has ended, the agreement should be retained for six years in case Canada Revenue Agency asks to see it).
  • The property can be occupied by a non-arm’s length tenant, but the rent must be “fair” and there must be a written tenancy agreement. The term “fair rent” is defined to mean the amount determined in prescribed manner, or 5% of the assessed value of the property for the year.
  • In measuring occupancy, the minimum increment is 30 days; occupancy for less than 30 consecutive days is not included in the 180-day calculation. This means that a property that is only occupied for shorter periods during the year (for example, only on weekends and for two or three week increments for vacations) might not meet the test even if the total number of days occupied is more than 180 days). 
• The property is occupied by a qualified owner or family member and the “qualifying occupancy period” is 180 days in the calendar year.
  • The property can be occupied by the owner or the owner’s spouse or common-law partner if they are occupying the property for the purposes of pursuing authorized work under a Canadian work permit.
  • The property can be occupied by a citizen or permanent resident of Canada who is the owner’s spouse, common-law partner, parent, or child, unless they reside or lodge at another place for an equal or greater number of days.
  • In measuring occupancy, the minimum increment is 30 days; occupancy for less than 30 consecutive days is not included in the 180-day calculation. This means that a property that is only occupied for shorter periods during the year (for example, only on weekends and for two or three week increments for vacations) might not meet the test even if the total number of days occupied is more than 180 days). 
• A “vacation property” owned by individuals (but not by a corporation) that meets both of the following conditions:
  • the residential property is located in an “eligible area of Canada”. An “eligible area” is a place that is any of the following (See https://apps.cra-arc.gc.ca/ebci/sres/ext/pub/ntrUhtExpnTl?request_locale=en_CAfor a tool created by Canada Revenue Agency to help identify eligible areas by postal code):
    • outside both a “census metropolitan area” and a “census agglomeration” (as defined by Statistics Canada);
    • inside a “census agglomeration” that is not a “specified census agglomeration”; or
    • inside a “census metropolitan area” or a “specified census agglomeration” but outside a “population centre” that is part of such an area or agglomeration; and
  • you, or your spouse or common-law partner, personally use the residential property as a place of residence or lodging for at least 28 days in the calendar year.
  • See https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/uhtn5/exemption-vacation-properties.html for more details
• An “unhabitable property” that meets both of the following conditions:
  • the residential property is uninhabitable for at least 60 consecutive days in the calendar year because of a disaster or hazardous condition caused by circumstances beyond your reasonable control or the reasonable control of any other owner; and
  • this exemption did not apply to the residential property for the same disaster or hazardous condition for more than one previous calendar year.
  • See https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/uhtn10/exemptions-uninhabitable-residential-properties.html for details.
• The property is not suitable for year-round use as a place of residence )for example, if the property does not have any heating or insulation and is therefore uninhabitable in winter) or is seasonally inaccessible (for example, the only access to the property is by a road that is impassible in the winter because it is not plowed, sanded, or salted).

Failure to file penalty

An owner of a residential property who is required to file a UHT return and fails to file by April 30 of the following year will be liable to a penalty equal to the greater of

• $5,000 if the owner is an individual or $10,000 if the owner is not an individual, and
• the total of
  • 5% of the UHT payable by the owner in respect of the residential property for the calendar year, plus
  • 3% of the UHT payable by the owner in respect of the residential property for the calendar year for each complete month the UHT return is past due. 

If an owner who is required to file a UHT return fails to file by December 31 of the following calendar year, the failure to file penalty will be calculated without the application of certain exemptions which may otherwise apply (including the primary place of residence and qualifying occupancy exemptions). This makes the penalty for filing more than eight months late even more onerous. 

For example, if a person who is required to file a UHT return for 2022 for a property with a value of $1,000,000 (but is exempt from the tax for one of the reasons described above) fails to file a UHT return by December 31, 2023, then the penalties become even more onerous because the penalty is calculated as if the tax was owing (even where a tax exemption applied). 

Other penalties

The UHTA also imposes penalties for failure to provide information, and for gross negligence or false statements or omissions in filing a UHT return. 

The UHTA contains a general anti-avoidance provision as well as special provisions that aim to deny tax benefits arising from non-arm’s length transactions which attempt to take advantage of prospective amendments to the UHTA. 

Keeping records

Every affected owner of a residential property must keep records to enable the determination of their obligations and liabilities under the UHTA. Generally, you must keep the records for six years from the end of the year to which they relate.

If you do not have adequate records to support that your ownership of a residential property is exempt from the UHT for a calendar year, the CRA may disallow your exemption for that year.

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