Finance unveils details of tax on non-resident property owners
TAX ALERT |
In Budget 2021, the federal government proposed a vacant homes tax with the stated intention of making housing more affordable for Canadian residents by deterring non-residents from passively investing their wealth in Canadian real estate. On Aug. 6, 2021, Finance released a backgrounder and technical paper discussing the details of the Underused Housing Tax (UHT). Proposed to be effective on Jan. 1, 2022, the annual 1% UHT would be levied on vacant or underused residential real estate owned by non-residents of Canada.
Under the proposed framework, UHT for a calendar year would apply to residential properties owned on Dec. 31 including, among others, detached and semi-detached homes, duplexes, triplexes, and residential condominium units. Every residential property owner who is not exempt is required to file an annual declaration with Canada Revenue Agency (CRA) each calendar year.
A legal owner of the residential property in Canada would be required to pay UHT if the following two conditions are satisfied:
- The owner is required to file an annual declaration in respect of the property for the calendar year; and
- The owner is not eligible to claim an exemption in respect of their interest in the property for the calendar year.
Exemptions from UHT
The technical paper discusses several exemptions to the UHT. For example, exempt owners would include Canadian citizens and permanent residents, certain Canadian corporations and trustees of certain trusts, among others. There are also various situational exemptions. Situational exemptions proposed include properties rented to an arm’s length person or for fair value rent as well as properties that cannot be lived in for the entire year such as a cabin that is not winterized or a property damaged by a disaster. There are also limited exemptions for renovations, new build inventory and for the year of original purchase or the year of death of the owner. Due to the number of detailed exemptions, the resulting legislation may be complex and raise many questions for taxpayers.
Calculation of UHT
Non-exempt owners are required to pay UHT to the CRA on or before April 30 of the following calendar year. The UHT is calculated as 1% of the specified value of the property – which would be the greater of: (i) its assessed value for the purpose of property taxes or (ii) its most recent sale price. Alternatively, Finance proposes to give owners an option to elect to use the fair market value of the property as its specified value if they obtain an appraisal of the property. Where the property is owned by joint tenants, each owner would be deemed to own an equal proportion of the property, whereas joint tenants in common would pay UHT on their documented percentage of ownership.
The valuation option could introduce additional costs to owners who are not exempt from UHT. There is no discussion of an appraisal being valid from year to year, which could result in an owner in a depressed area with a low property tax assessment and a high purchase value requiring an annual appraisal in order to minimize UHT.
Sale of property subject to UHT
Residential real estate located in Canada is generally considered to be ‘Taxable Canadian Property’ (TCP) pursuant to the Income Tax Act. When sold by a non-resident, the TCP can be subject to withholding tax and often a clearance certificate is requested in connection with the sale. The technical paper proposes review or audit of UHT compliance prior to issuing a clearance certificate to a non-resident. As this certificate relieves the purchaser of the requirement to withhold tax on sale proceeds, and instead allows the non-resident to potentially pay a lower amount of withholding tax directly to the CRA, it is imperative that the certificate is issued quickly. There is no discussion as to how this additional review may impede CRA’s ability to issue certificates in a timely manner, only that the withholding tax may be increased for the purchaser in order to cover any undeclared UHT.
Penalties for non-compliance
Penalties for non-filing of the UHT declaration are proposed at the greater of the following:
- $5,000 (for individual owners) or $10,000 (for owners other than individuals); and
- The total of
- 5% of the UHT in respect of the owner’s interest in the property for the calendar year; and
- 3% of the UHT in respect of the owner’s interest in the property for each calendar month of the calendar year in respect of which declaration is past due.
In addition, taxpayers who do not file a declaration by Dec. 31 of the following year would be precluded from claiming many of the situational exemptions provided by the framework. Finance also proposes to introduce other penalties related to non-disclosure of records, gross negligence and misrepresentation in the draft UHT legislation.
The Department of Finance is seeking stakeholder feedback by Sept. 17, 2021. The feedback will be considered in the design of the draft legislation, which will be introduced through a Parliamentary bill later this year.