Announced in the 2021 Federal Budget, the Underused Housing Tax (UHT) is a tax designed to target underused properties owned by non-residents or non-Canadians.
However, many Canadian individuals, corporations, partnerships and trusts will have to file a UHT return in order to avoid significant penalties.
How does the Underused Housing Tax (UHT) work?
The expressed intent of the UHT was to charge a 1% tax on the value of underused properties owned by non-residents or non-Canadians. The 1% UHT applies to properties in Canada owned on or after December 31, 2022 – meaning the first UHT returns are due to be filed, and any related taxes are required to be paid by May 1, 2023.
This is the case even if there is no foreign direct or indirect ownership. And even though there is very likely to be no tax owing, many taxpayer-focused organizations are concerned that clients may be subject to these new filing requirements unknowingly and that the CRA has done a poor job in educating the public about their potential responsibilities.
Steps to take if you’re affected by the UHT
If you believe you have a UHT filing requirement, please review the information below and contact your Virtus advisor. We have compiled a list of those potentially affected but may not have all of the information necessary to determine if your specific situation would require UHT return this year.
UHT-2900 tax return information
The UHT-2900 (the CRA prescribed UHT tax return) was released last week and is currently only available to be paper-filed. This means the required information must be gathered for each applicable residential property, the return completed, signed by the owner, and mailed to the CRA in the next 12 weeks. However, many owners that will be required to file are unaware of their obligation to do so.
The returns are based on the 2022 calendar year, so entities with year-ends other than December 31 are still required to file by the May 1, 2023 deadline (the deadline is officially April 30, but because that falls on a Sunday this year, the deadline is extended to May 1).
UHT filing criteria
A UHT return must be filed by any entity that meets the following criteria:
- Owns a residential property located in Canada, and
- Is a private corporation (incorporated in Canada or not, with share capital or not),
- Is a member of partnership (including Canadian citizens or permanent residents),
- Is a trustee of a trust (potentially including informal trusts where one entity holds legal title on behalf of another party, ie. a parent on title for a child’s home) unless that trustee is acting as a personal representative of a decease individual, or for certain widely held trusts, or
- Is neither a Canadian citizen nor permanent resident
Fitting into any of the categories above would mean that a UHT return will need to be filed for each residential property owned on December 31, 2022 by May 1, 2023 in order to avoid the late filing penalties.
These late filing penalties are a minimum of $5,000 for individuals and $10,000 for corporations, as well as potentially exposing the taxpayer to being assessed tax when otherwise they would have been exempt.
Criteria for residential property affected by UHT
A residential property for UHT purposes includes:
- Detached house or similar building with not more than three dwelling units (a dwelling unit contains private kitchen, bath and living areas)
- Semi-detached house, rowhouse, condo unit or similar premises
But does NOT include:
- Buildings with more than 4 units
- Buildings that are more than 50% retail/office use even if they contain an apartment
- Commercial condos
- Mobile home/trailer homes/travel or camping trailers/floating homes
The owner of such a residential property is based on the land registration system used in the location of the property but can also include life leases/tenancy and lessors on leases over 20 years long or that include an option to purchase.
While falling into any of the categories above requires the filing of the UHT return, there are still many potential exemptions available so that there are not any actual taxes owing on the properties. The rules are just casting a very large net with requirements to file a UHT return but with many, many ways to avoid the actual 1% tax.
Common UHT exemptions from tax
The most common of these exemptions would be:
- Primary place of residence – the property was a primary residence for the owner and/or their spouse, or their child under designated conditions while attending school. This exemption is also subject to additional rules if multiple properties owned by yourself and your spouse combined.
- Qualifying occupancy – the property was rented for at least 6 one-month periods during the year in qualifying rental situations
- The property was owned by: a Canadian corporation that were owned/controlled >90% by Canadian citizens or permanent residents, or other such corporations. These corporations are called “specified Canadian corporations”.
- A partnership where all partners are exclude owners or specified Canadian corporations
- A Trust where all beneficiaries are excluded owners or specified Canadian corporations
- Located in a prescribed area – this mainly applies to “vacation properties” in certain zones determined by recent census data and must have been used at least 28 days during the year by the owner/spouse
- Limited access – properties that are only available seasonally, or were unavailable due to renovation/construction/hazardous for significant periods of time
- Constructed for sale – completed after March, offered for sale and not previously occupied
- New owners – if you became an owner in the calendar year and had not been an owner of a residential property for the previous nine calendar years
Other practical considerations
A single property could qualify under multiple exemptions, but only one is required to ensure that no UHT is payable in a given year.
Many properties that will require a UHT return to be filed will not be subject to any taxes owing due to the available exemptions. However, late-filing the UHT return could also result in a denial of a property’s exemption, resulting in UHT payable on top of the large penalties for not filing the return on time as described above.
If you believe you may be affected by the UHT and subject to filing, please contact your Virtus advisor ASAP to discuss your potential requirements under this new tax legislation.
Further information on the Underused Housing Tax can be found here, including more specific and technical background information.