Do you have to pay tax on your residential property in Canada?

Do you have to pay tax on your residential property in Canada?

On June 9, 2022, the federal government introduced the Underused Housing Tax (UHT) to deter non-resident investors from owning vacant or underused residential property In Canada. The aim is to cover non-resident and non-Canadian owners under the umbrella of UHT. However, in some situations, reporting obligations can also apply to Canadian owners. UHT is governed by a separate Act, the Underused Housing Tax Act (UHTA) which came into effect on Jan. 1, 2022. Since then, Bill C-32 introduced key amendments to the UHTA and regulations. 

Background

Under the UHTA, there are two types of property owners – excluded owners and affected owners. The UHTA requires that, beginning in 2022, an affected owner of a residential property in Canada on Dec. 31 of a given year must file an annual UHT return. In addition, the affected owner must pay a 1% tax on the specified value of property for each calendar year, unless ownership qualifies for an exemption. An affected owner who owns two or more properties on Dec. 31 must file a separate return for each property. Similarly, if two or more affected owners jointly own a property on Dec. 31, each owner must file a separate return even if the respective ownership of each affected owner qualifies for an exemption. The return and tax for each calendar year are due on Apr. 30 of the following calendar year. The return is to be filed in the form UHT-2900, Underused Housing Tax Return and Election Form.

The first return and taxes were due on Apr. 30, 2023. However, the Canada Revenue Agency (CRA) has provided transitional relief to affected owners whereby no penalties or interest will be applied if the UHT return for the 2022 calendar year is filed and taxes due (if any) are paid by Oct 31, 2023.

Owner

UHTA provides that, generally, an owner of a property means a person who is identified as an owner in respect of the property under the land registration system or other similar system applicable where the property is located. Owners, other than excluded owners, must file a UHT return provided that they own residential property on Dec. 31 of a given calendar year. The CRA refers to these types of owners as “affected owners”.

An excluded owner, on the other hand, is a property owner who generally has no filing obligations or tax liabilities under the UHTA. Excluded owners may include, but are not limited to:

• Canadian citizens or permanent residents of Canada (unless such individuals are trustees of a non-estate trust or a partner of a partnership);
• trustee(s) of a mutual fund trust, real estate investment fund trust or specified investment flow-through trust;
• Canadian corporations whose shares are listed on a Canadian stock exchange;
• registered charities, cooperative housing corporations and Indigenous governing bodies and their wholly-owned corporations.

As a result, affected owners would generally include, but are not limited to:

• individuals who are not Canadian citizens or permanent residents;
• private Canadian-resident corporations;
• corporations incorporated outside Canada;
• Canadian corporations without share capital;  
• trusts and trustees (subject to some exceptions);
• any person who owns the property as a partner of a partnership.

Residential property

The UHTA defines a residential property as property situated in Canada that is:

• a detached house or similar building, containing not more than three dwelling units, that is used as a place of residence for individuals;
• a part of a building that is a semi-detached house, rowhouse unit, residential condominium unit or other similar premises that is used as a place of residence for individuals; or
• a prescribed property.

The UHTA defines a dwelling unit as a residential unit that contains private kitchen facilities, a private bath and a private living area.

As of the release date of this article, no property yet falls into the category of “prescribed property”, but subsequent amendments to the UHT regulations may change that.

Exemptions

An affected owner is liable for tax under the UHTA unless an exemption applies for a given calendar year. However, even if the ownership qualifies for an exemption, the affected owner must file a UHT return for the calendar year. The exemption can be availed under various categories as follows:

• Type of owner: Affected owners that are:
  • a specified Canadian corporation (generally, must be limited to 10% foreign ownership);
  • a partner of a specified Canadian partnership or a trustee of a specified Canadian trust (generally, all partners/beneficiaries must be either excluded owners or a specified Canadian corporaton);
  • the owner of a property that was acquired in the calendar year and was not an owner of that property in the prior nine calendar years; or
  • a deceased owner or a co-owner or personal representative of a deceased owner during the calendar year or prior calendar year.
• Type of property: Property that is:
  • newly constructed and the construction was not substantially completed before April of the calendar year;
  • offered for sale to the public during the calendar year, if construction of the property was substantially completed in January, February or March of the year, and had never been occupied by an individual as a place of residence during the year;
  • not suitable to be lived in year-round or seasonally inaccessible;
  • uninhabitable for at least 60 consecutive days because of a disaster or hazardous conditions;
  • subject to renovations making the dwelling unit uninhabitable for 120 consecutive days; or
  • a vacation property located in a prescribed area of Canada and used by the affected owner or his spouse or common-law partner (referred to as spouse in the article) for at least 28 days.
• Occupant of the property: The property is occupied by:
  • the affected owner, spouse or for the child of the affected owner who is attending a designated learning institution as a primary place of residence; or
  • certain individuals for a period of at least a month of continuous occupancy for a total of at least 180 days in the calendar year (“qualifying occupancy period exception”).

The individuals that meet the criteria for the qualifying occupancy period exception above include:

• an arm’s length tenant, under a written contract;
• a non-arms length tenant paying at least fair rent, under a written contract;
• the affected owner or spouse, occupying for Canadian work permit purposes; and,
• the affected owner’s spouse, parent or child who is a Canadian citizen or permanent resident.

The individual is considered not to meet the qualifying occupancy period exception if they are the affected owner, spouse, parent or child and they reside at another place other than the residential property in question for an equal or greater number of days.

To avail the primary place of residence or qualifying occupancy period exemption, the affected owner must disclose this information in the return.

Tax Payable

Tax must be paid by affected owners that are not eligible for an exemption annually. In the case of joint owners, each owner must pay their proportionate share of taxes based on their percentage of ownership. For tax calculation, an affected owner can use either the property’s taxable value or fair market value (FMV).

The taxable value for a calendar year is the greater of:

• the assessed value of the property for local property taxation purposes for that year; and,
• the property’s most recent sale price on or before Dec. 31 of that year.

Alternatively, if the affected owner wishes to use the FMV, an election must be filed with the CRA (which is part of the form UHT-2900). In addition, the affected owner must get an appraisal of the property from an arm’s-length accredited real estate appraiser.

For the 2022 calendar year, if an affected owner files an election as part of a late-filed UHT return under transitional relief, the CRA will allow the election as long as the return is filed by Oct. 31, 2023. However, for the FMV election, the FMV of the property must have been established between Jan. 1, 2022, and Apr. 30, 2023.  

Penalties and interest

There are significant penalties associated with failure to file the UHT return by the due date, which is the greater of:

• $5,000 for individuals or $10,000 for affected owners other than individuals; and,
• the sum of:
  • 5% of the UHT for the calendar year; and
  • 3% of the UHT for the calendar year multiplied by the number of months the return is late.

The affected owner may be subject to additional penalties for failing to file the return on demand, failing to provide supporting documentation when required, gross negligence and misrepresentation. In addition, failure to pay the tax by the due date will lead to the charging of interest on the outstanding amount at the prescribed rates. Furthermore, if the failure to pay the tax is intentional, the affected owner is guilty of an offense and is liable for a fine, imprisonment or both.

Other related implications

To ensure compliance with the UHT rules, affected owners must consider various other practical implications/ tips as below:

1. Keeping records: An affected owner must keep records to support the determination of UHT obligations and tax liabilities for six years from the end of the year to which the tax relates, even if no tax is due on account of exemption. If an exemption is claimed but no records or proof supports it, the CRA may disallow it.
2. Section 116 certificate: Where the affected owner is a non-resident and does not comply with the UHT obligations, the CRA may deny issuing a certificate of compliance under section 116 of the Income Tax Act (Canada) on the sale of property by the non-resident.
3. Extended assessment period: If an affected owner fails to file the UHT return for a calendar year by the due date, there is no time limit for the CRA to assess the affected owner the UHT tax, penalties and interest in respect of the property for the calendar year.
4. Other provincial or local vacancy taxes: The UHT is a federal tax. However, provincial bodies and municipalities impose similar provincial and local vacancy taxes. The property owners must review the taxes and levies that apply in the jurisdiction of the properties owned by them.  
5. Identification number: To file the UHT return, the affected owner must have a valid CRA tax identifier number such as a social insurance number (SIN) or an individual tax number (ITN). The corporate owners should have a Canadian business number (BN) with an underused housing tax (RU) program account identifier code to file the return.