What Is the Underused Housing Tax and Why does It Matter?
The federal government's Underused Housing Tax Act (the Act) and the associated Underused Housing Tax Regulations (the Regulations) both took effect on January 1, 2022. With the first filing and remittance deadline fast approaching, it is important for all residential property owners to consider whether the Act applies to them and what they need to do if it does.
The Act requires certain owners of residential properties in Canada to file an annual return with the Canada Revenue Agency (CRA) reporting the occupancy status of the residential property and, unless exempted, pay a 1 percent tax on the fair market value or the taxable value of that residential property (the Tax). The Tax is in addition to home vacancy taxes introduced by municipalities such as Toronto and Vancouver, and provinces like British Columbia, and is consistent with the federal government's attempt to limit or tax residential property ownership by non-Canadians.
While the vast majority of homeowners living in Canada will have no obligations under the Act, it is important for owners of one or more residential properties to determine whether they are an excluded owner or an affected owner under the Act as soon as possible, as the filing and Tax remittance deadline for the 2022 calendar year is May 1, 2023.
Notwithstanding the May 1, 2023 deadline for the filing of returns and payment of Tax, to give affected owners more time to comply with the requirements of the Act, the CRA announced on March 27, 2023, that it will waive the application of penalties and interest (for the 2022 calendar year only) for any Tax return that is filed and Tax that is paid by October 31, 2023.
Key Definitions Under the Act
How do you determine if you need to file a Tax return and remit the Tax on a residential property? The following list is not exhaustive, but includes some key terms to help one determine their Tax liability under the Act:
Residential property: Residential property situated in Canada, including:
- detached houses or similar buildings containing not more than three dwelling units;
- semi-detached houses;
- rowhouse units;
- residential condominium units;
- cottages, cabins and chalets that are not commercial in nature;
- any other similar premises that are used and enjoyed by individuals as a residence; and
- common areas, appurtenances, and subjacent or immediately contiguous lands that go with the properties mentioned above.
As an example, a single condominium unit or strata lot is a residential property under the Act, whereas a quadraplex with separate ownership for each unit is not. High-rise apartment buildings, boarding houses and lodging houses, mobile homes, floating homes, buildings that have more than 50 percent of their premises used for office or retail but contain an apartment, and travel trailers or camping trailers are all considered not to be residential properties.
Owner: The registered (not beneficial) owner of the residential property, as well as:
- life tenants under life estates;
- life lease holders;
- tenants who have continuous possession (20 or more years) of the lands on which their residential properties are located; and
- tenants who have an option to purchase the lands on which their residential properties are located.
Excluded owner: An owner who is any of the following:
- the government of Canada or a province, or an agent of either of them;
- Canadian citizens and permanent residents (subject to those who are "affected owners"—see below);
- corporations incorporated in Canada whose shares are traded on a public Canadian stock exchange;
- entities who own residential properties as trustees of mutual fund trusts, real estate investment trusts, or specific investment flow-through trusts;
- registered charities;
- cooperative housing corporations;
- hospital or school authorities;
- municipalities; and
- Indigenous governing bodies.
An owner who does not qualify as an excluded owner is not specifically defined, but is referred to for administrative purposes by the CRA as an "affected owner". Affected owners include:
- non-Canadian citizens and non-permanent residents;
- Canadian citizens and permanent residents who own residential properties as partners of partnerships and as trustees of trusts (other than trustees considered excluded owners and personal representatives of deceased individuals);
- corporations that are not incorporated in Canada; and
- private corporations incorporated in Canada (with or without share capital).
Please review the Act and the Regulations for the complete definitions referenced above and additional definitions.
Who Must File a Return and Remit the Tax
Excluded owners have no obligations or liabilities under the Act and are not required to file Tax returns or remit the Tax on any of their residential property holdings. In contrast, unless they can claim an exemption, anyone who is an affected owner on December 31 of a calendar year must file a Tax return and remit the Tax for each residential property holding by April 30 of the following calendar year. Since April 30 falls on a Sunday this year, the remittance date is May 1, 2023.
In the cases of life tenancies, life leases or long-term tenants, the life leaseholder or tenant—not the registered owner—will be the affected owner and will be responsible for filing a Tax return and remitting any applicable Tax for the property.
Where more than one affected owner owns the same residential property, each owner must file a separate Tax return for that property even if they can claim an exemption from the Tax. Any Tax payable is prorated according to each affected owner's ownership percentage (as indicated in the applicable land registration system) and, in any other case, is shared equally by the affected owners.
If an individual affected owner owns multiple residential properties, the Tax may be payable on each property (except for that which is designated as the individual's primary residence—see below). The same goes for residential properties owned by individual affected owners together with their non-Canadian or non-permanent resident spouses and common-law partners.
Affected Owner Exemptions
While affected owners must file Tax returns annually, they may not be required to pay Tax if any of the following ownership exemptions are available to them:
- specified Canadian corporations;
- partners of specified Canadian partnerships;
- trustees of specified Canadian trusts;
- owners who acquired residential properties in the calendar year, if they did not own the newly acquired residential properties in any of the previous 9 calendar years;
- deceased owners;
- an individual who owns the same residential property with a deceased owner (if the deceased individual's ownership percentage at the time of death was at least 25 percent); and
- personal representatives of deceased owners.
Residential Property Exemptions
There are also a number of property-specific exemptions for residential properties listed below, which require an affected owner to file an annual Tax return without being liable to pay Tax.
Property availability exemptions: Tax is not payable if a residential property is:
- not suitable for year-round use as a place of residence;
- seasonally inaccessible because public access is not maintained year-round;
- uninhabitable for at least 60 consecutive days due to a disaster or hazardous condition;
- under renovations for at least 120 consecutive days in the calendar year, if this exemption did not apply for any of the 9 previous calendar years; or
- newly constructed and either (1) not substantially completed before April of the calendar year, or (2) substantially completed before April of the calendar year, and within that same year offered for sale to the public and never occupied as a residence or lodging.
Vacation property exemption: There are eligible areas within which residential properties may be Tax exempt if used by an affected owner or spouse or common-law partner as a vacation property for at least 28 days in the calendar year.
Primary residence exemption: A residential property may be Tax exempt if it is the primary residence of either an affected owner or their spouse, common-law partner or child, if the child is a student at a designated learning institution.
Qualifying occupancy exemption: A residential property may also be Tax exempt if it is occupied for at least 180 days in the calendar year (so long as within that time there are continuous occupancy periods of at least 1 month each) by:
- arm's-length third parties under a written agreement;
- related parties under a written agreement where fair rent is paid;
- owners or their spouses or common-law partners who have Canadian work permits; or
- owners' spouses, common-law partners, parents, or children who are Canadian citizens or permanent residents.
Calculating the Tax
So, how much might this end up costing you if you are an affected owner who cannot claim a Tax exemption? It all depends on the value of your residential property. The Tax payable by an affected owner is 1 percent of either the fair market value or the taxable value of the residential property, which is then multiplied by that owner's ownership percentage. An affected owner who is required to pay the Tax may elect either value in calculating the Tax.
The Act currently defines taxable value in any calendar year as the greater of (1) the property value as assessed by a government agency (such as the Municipal Property Assessment Corporation in Ontario or the BC Assessment Authority), and (2) the property's most recent sale price. The Act does allow for the Regulations to set out a separate prescribed amount, but as at the date of this article, no such amount has been determined.
Fair market value is based on a written appraisal prepared by an arm's-length certified real estate appraiser and reflects the property's fair market value on any date between January 1 of a calendar year and April 30 of the following year. The fair market value election may be appropriate for mixed-use housing where only a portion of the property operates as residential property.
Penalties for Failure to File a Return or Remit Tax when Due
Failure to file Tax returns or remit Tax when due carries significant penalties under Division 8 of the Act. For instance, affected owners who fail to file their returns on time (even if the Tax is not payable) are liable to a penalty equal to the greater of the two following amounts:
- $5,000 for individuals and $10,000 for non-individuals; and
- the total of:
- 5 percent of the Tax for that calendar year; and
- 3 percent of the Tax, multiplied by the number of complete calendar months that the return is past due.
If an affected owner fails to file a return for a particular calendar year by December 31 of the following calendar year, then that owner will no longer be able to claim some of the exemptions under the Act.
Additional penalties and interest may also apply, for example, if false statements or omissions are made under a filing, or if further information is not provided once a demand for same has been made. Please consult Division 8 of the Act for a complete list of potential penalties.
Filing the Tax Return
Tax returns can be filed electronically or by mail. Social insurance numbers or individual tax numbers are required for individual affected owners and business numbers are required for corporate affected owners. Affected owners who need to apply for these numbers should start the application process now to ensure that they can complete their Tax returns on time.
Other information required for filing include:
- certain identifying information of the affected owner, including citizenship status;
- partnership or trust account number (as applicable);
- property identification number in the land registration system;
- property tax or assessment roll number (as applicable);
- information about any other owner and their ownership percentage, if the residential property is owned by multiple affected owners; and
- property value.
Be sure to check the Act and Regulations prior to deciding on any course of action, as the Regulations in particular may change at any time.