Canada’s Underused Housing Tax: What You Must Know Earlier than Might 1, 2023 | Bennett Jones LLP

What Is the Underused Housing Tax and Why does It Matter?

The federal authorities’s Underused Housing Tax Act¹ (the Act) and the related Underused Housing Tax Rules² (the Rules) each took impact on January 1, 2022. With the primary submitting and remittance deadline quick approaching, it is vital for all residential property house owners to think about whether or not the Act applies to them and what they should do if it does.  

The Act requires sure house owners of residential properties in Canada to file an annual return with the Canada Income Company (CRA) reporting the occupancy standing of the residential property and, except exempted, pay a 1 p.c tax on the truthful market worth or the taxable worth of that residential property (the Tax). The Tax is along with house emptiness taxes launched by municipalities equivalent to Toronto and Vancouver, and provinces like British Columbia, and is in step with the federal authorities’s try and restrict or tax residential property possession by non-Canadians³.

Whereas the overwhelming majority of house owners residing in Canada can have no obligations beneath the Act, it is vital for house owners of a number of residential properties to find out whether or not they’re an excluded proprietor or an affected proprietor beneath the Act as quickly as attainable, because the submitting and Tax remittance deadline for the 2022 calendar yr is Might 1, 2023.

Key Definitions Below the Act

How do you establish if you want to file a Tax return and remit the Tax on a residential property?  The next checklist just isn’t exhaustive, however consists of some key phrases to assist one decide their Tax legal responsibility beneath the Act:

Residential property: Residential property located in Canada, together with:

• indifferent homes or comparable buildings containing no more than three dwelling items⁴;
• semi-detached homes;
• rowhouse items;
• residential condominium items;
• cottages, cabins and chalets that aren’t industrial in nature;
• another comparable premises which can be used and loved by people as a residence; and
• frequent areas, appurtenances, and subjacent or instantly contiguous lands that go along with the properties talked about above⁵.

For example, a single condominium unit or strata lot is a residential property beneath the Act, whereas a quadraplex with separate possession for every unit just isn’t. Excessive-rise condo buildings, boarding homes and lodging homes, cellular houses, floating houses, buildings which have greater than 50 p.c of their premises used for workplace or retail however comprise an condo, and journey trailers or tenting trailers are all thought of to not be residential properties.⁶

Proprietor: The registered (not helpful) proprietor of the residential property, in addition to:

• life tenants beneath life estates;
• life lease holders;
• tenants who’ve steady possession (20 or extra years) of the lands on which their residential properties are situated; and
• tenants who’ve an choice to buy the lands on which their residential properties are situated.

Excluded proprietor: An proprietor who’s any of the next:

• the federal government of Canada or a province, or an agent of both of them;
• Canadian residents and everlasting residents (topic to those that are “affected house owners”—see under);
• firms included in Canada whose shares are traded on a public Canadian inventory change;
• entities who personal residential properties as trustees of mutual fund trusts, actual property funding trusts, or particular funding flow-through trusts;
• registered charities;
• cooperative housing firms;
• hospital or college authorities;
• municipalities; and
• Indigenous governing our bodies.

An proprietor who doesn’t qualify as an excluded proprietor just isn’t particularly outlined, however is referred to for administrative functions by the CRA as an “affected proprietor”. Affected house owners embody:

• non-Canadian residents and non-permanent residents;
• Canadian residents and everlasting residents who personal residential properties as companions of partnerships and as trustees of trusts (apart from trustees thought of excluded house owners and private representatives of deceased people);
• firms that aren’t included in Canada; and
• non-public firms included in Canada (with or with out share capital).

Please overview the Act and the Rules for the entire definitions referenced above and extra definitions.

Who Should File a Return and Remit the Tax

Excluded house owners haven’t any obligations or liabilities beneath the Act and should not required to file Tax returns or remit the Tax on any of their residential property holdings. In distinction, except they’ll declare an exemption, anybody who’s an affected proprietor on December 31 of a calendar yr should file a Tax return and remit the Tax for every residential property holding by April 30 of the next calendar yr. Since April 30 falls on a Sunday this yr, the remittance date is Might 1, 2023.  

Within the circumstances of life tenancies, life leases or long-term tenants, the life leaseholder or tenant—not the registered proprietor—would be the affected proprietor and can be answerable for submitting a Tax return and remitting any relevant Tax for the property.

The place multiple affected proprietor owns the identical residential property, every proprietor should file a separate Tax return for that property even when they’ll declare an exemption from the Tax. Any Tax payable is prorated in accordance with every affected proprietor’s possession proportion (as indicated within the relevant land registration system) and, in another case, is shared equally by the affected house owners.

If a person affected proprietor owns a number of residential properties, the Tax could also be payable on every property (apart from that which is designated as the person’s main residence—see under). The identical goes for residential properties owned by particular person affected house owners along with their non-Canadian or non-permanent resident spouses and common-law companions.

Affected Proprietor Exemptions

Whereas affected house owners should file Tax returns yearly, they will not be required to pay Tax if any of the next possession exemptions can be found to them:

• specified Canadian firms⁷;
• companions of specified Canadian partnerships⁸;
• trustees of specified Canadian trusts⁹;
• house owners who acquired residential properties within the calendar yr, if they didn’t personal the newly acquired residential properties in any of the earlier 9 calendar years;
• deceased house owners;
• a person who owns the identical residential property with a deceased proprietor (if the deceased particular person’s possession proportion on the time of dying was at the very least 25 p.c); and
• private representatives of deceased house owners.

Residential Property Exemptions

There are additionally plenty of property-specific exemptions for residential properties listed under, which require an affected proprietor to file an annual Tax return with out being liable to pay Tax.

Property availability exemptions: Tax just isn’t payable if a residential property is:

• not appropriate for year-round use as a spot of residence;
• seasonally inaccessible as a result of public entry just isn’t maintained year-round;
• uninhabitable for at the very least 60 consecutive days on account of a catastrophe or hazardous situation;
• beneath renovations for at the very least 120 consecutive days within the calendar yr, if this exemption didn’t apply for any of the 9 earlier calendar years; or
• newly constructed and both (1) not considerably accomplished earlier than April of the calendar yr, or (2) considerably accomplished earlier than April of the calendar yr, and inside that very same yr provided on the market to the general public and by no means occupied as a residence or lodging.

Trip property exemption: There are eligible areas¹⁰ inside which residential properties could also be Tax exempt if utilized by an affected proprietor or partner or common-law associate as a trip property for at the very least 28 days within the calendar yr.

Major residence exemption: A residential property could also be Tax exempt if it’s the main residence of both an affected proprietor or their partner, common-law associate or baby, if the kid is a scholar at a chosen studying establishment.

Qualifying occupancy exemption: A residential property might also be Tax exempt whether it is occupied for at the very least 180 days within the calendar yr (as long as inside that point there are steady occupancy intervals of at the very least 1 month every) by:

• arm’s-length third events beneath a written settlement;
• associated events beneath a written settlement the place truthful lease¹¹ is paid;
• house owners or their spouses or common-law companions who’ve Canadian work permits; or
• house owners’ spouses, common-law companions, mother and father, or kids who’re Canadian residents or everlasting residents.

Calculating the Tax

So, how a lot may this find yourself costing you if you’re an affected proprietor who can not declare a Tax exemption? All of it depends upon the worth of your residential property.  The Tax payable by an affected proprietor is 1 p.c of both the truthful market worth or the taxable worth of the residential property, which is then multiplied by that proprietor’s possession proportion. An affected proprietor who’s required to pay the Tax might elect both worth in calculating the Tax.

The Act presently defines taxable worth in any calendar yr because the better of (1) the property worth as assessed by a authorities company (such because the Municipal Property Evaluation Company in Ontario or the BC Evaluation Authority), and (2) the property’s most up-to-date sale value. The Act does permit for the Rules to set out a separate prescribed quantity, however as on the date of this text, no such quantity has been decided.

Truthful market worth is predicated on a written appraisal ready by an arm’s-length licensed actual property appraiser and displays the property’s truthful market worth on any date between January 1 of a calendar yr and April 30 of the next yr. The truthful market worth election could also be acceptable for mixed-use housing the place solely 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 vital penalties beneath Division 8 of the Act.  As an example, affected house owners who fail to file their returns on time (even when the Tax just isn’t payable) are liable to a penalty equal to the better of the 2 following quantities:

• $5,000 for people and $10,000 for non-individuals; and
• the entire of:
  • 5 p.c of the Tax for that calendar yr; and
  • 3 p.c of the Tax, multiplied by the variety of full calendar months that the return is overdue.

If an affected proprietor fails to file a return for a selected calendar yr by December 31 of the next calendar yr, then that proprietor will now not be capable to declare a number of the exemptions beneath the Act.

Extra penalties and curiosity might also apply, for instance, if false statements or omissions are made beneath a submitting, or if additional info just isn’t offered as soon as a requirement for similar has been made. Please seek the advice of Division 8 of the Act for an entire checklist of potential penalties.

Submitting the Tax Return

Tax returns could be filed electronically or by mail¹². Social insurance coverage numbers or particular person tax numbers are required for particular person affected house owners and enterprise numbers are required for company affected house owners. Affected house owners who want to use for these numbers ought to begin the appliance course of now to make sure that they’ll full their Tax returns on time.

Different info required for submitting embody:

• sure figuring out info of the affected proprietor, together with citizenship standing;
• partnership or belief account quantity (as relevant);
• property identification quantity within the land registration system;
• property tax or evaluation roll quantity (as relevant);
• details about another proprietor and their possession proportion, if the residential property is owned by a number of affected house owners; and
• property worth.

Make sure you examine the Act and Rules previous to deciding on any plan of action, because the Rules specifically might change at any time.

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¹ Underused Housing Tax Act, S.C. 2022, c. 5, s. 10

² Underused Housing Tax Rules, S.C. 2022 c.19, s.116

³ https://www.bennettjones.com/Blogs-Part/New-Guidelines-for-International-Residence-Patrons-in-Canada-Come-Into-Pressure-January-2023-Heres-What-You-Want-to-Know  

⁴ A dwelling unit is outlined within the Act as a residential unit containing non-public kitchen amenities, a personal tub, and a personal residing space. 

⁵ Typically, as much as a half hectare of land that’s subjacent and instantly contiguous to a residential constructing is taken into account to be moderately crucial for a constructing’s use and pleasure as a residence.

6 https://www.canada.ca/en/revenue-agency/companies/forms-publications/publications/uhtn1/introduction-underused-housing-tax.html

7 Specified Canadian firms embody firms which can be included in Canada the place, on December 31 of the calendar yr, lower than 10% of the companies’ fairness worth or voting shares are immediately or not directly owned or managed by international people or international firms or a mixture thereof.  In addition they embody firms with out share capital the place the chair particular person just isn’t a international particular person, or the place lower than 10% of the companies’ administrators are international people.

8 Specified Canadian partnerships embody partnerships the place every associate is, on December 31 of the calendar yr, an excluded proprietor or a specified Canadian company.

9 Specified Canadian trusts embody trusts beneath which every beneficiary having a helpful curiosity within the residential property is, on December 31 of the calendar yr, an excluded proprietor or a specified Canadian company.

10 The Authorities of Canada has designed a device to help affected house owners with figuring out whether or not their residential property is situated in an eligible space of Canada.  Please see: https://apps.cra-arc.gc.ca/ebci/sres/ext/pub/ntrUhtExpnTl?request_locale=en_CA 

11 Truthful lease is outlined by the Act as the quantity that’s 5% of the taxable worth of the residential property for the calendar yr. 

12 Please see hyperlink to the Underused Housing Tax Return and Election Type: https://www.canada.ca/en/revenue-agency/companies/forms-publications/kinds/uht-2900.html