Part 1: What is an Underused Housing Tax?

What is an Underused Housing Tax? And how might this affect me as an owner of property in Point Roberts and Palm Springs.

Taxation policies are an aspect of any government’s efforts to regulate its economy. The real estate sector is no exception, as evidenced by the introduction of several taxes designed to address various concerns in this market. Underused Housing Tax, Speculation Tax, Empty Home Tax, and Foreign Buyer Tax are some of the measures implemented to manage the housing market’s affordability, availability, and foreign investment. In this blog, we will explore each of these taxes’ purposes, how they work, and their effectiveness in achieving their intended goals.

Navigating Canada’s Underused Housing Tax – from BCREA.

On June 9, 2022, the federal government enacted the Underused Housing Tax (UHT), effective for the 2022 tax year. The first filing for 2022 is due on April 30, 2023.

What is the Underused Housing Tax?

The UHT is a one per cent annual levy on the value of a “vacant or underused” property belonging to “non-resident, non-Canadian owners,” although it may apply to some Canadian owners as well.

Unless residential property owners are “excluded owners,” they are required to complete an annual return. Excluded owners include, but are not limited to:

• Most Canadian citizens or permanent residents (except for affected persons listed below);
• Any person that owns a residential property as a trustee of a mutual fund trust, a real estate investment trust, or specified investment flow-through trust;
• A registered charity;
• A cooperative housing corporation; or
• An Indigenous governing body or corporation owned by an Indigenous governing body.

It is important to underscore that even owners who may fall under one of the exemptions are required to complete a filing. The following affected owners are required to file a return:

• Non-Canadian citizens or permanent residents,
• Canadians who own a residential property as a trustee of a trust,
• Any person that owns a residential property as a partner of a partnership,
• A corporation incorporated outside Canada,
• A corporation whose shares are not listed on a Canadian stock exchange, and
• A Canadian corporation without share capital.

A failure to file an UHT return can result in penalties beginning at $5,000 for individuals and $10,000 for corporations.

Concerns with the Underused Housing Tax.

Both British Columbia Real Estate Association (BCREA) and the Canadian Real Estate Association (CREA) have expressed significant concerns regarding the UHT.

British Columbians are already familiar with these sorts of taxes, with many already subject to the Speculation and Vacancy Tax, as well as the Vancouver Empty Homes Tax. BCREA Economics research has found that these taxes do not have a meaningful impact on real estate markets, housing availability and affordability.

As anticipated by both BCREA and CREA, another concern is that the United States federal government is threatening reciprocal taxes on Canadian owners of American homes. This is a particularly concerning to Vancouverites who own homes in Point Roberts and Palm Springs. On February 15, 2023, Congressman Brian Higgins said that because there is no US exemption, the US should institute its own tax, targeting Canadians.

BCREA will continue to advocate that the UHT’s effects should be re-evaluated and compared to other federal initiatives, such as the Foreign Buyers Ban. As economic conditions change, the effectiveness of this policy should be assessed, along with potential unintended consequences.

•  Government of Canada – Who must file a return and pay the tax.

If you are an excluded owner of a residential property in Canada, you have no obligations or liabilities under the Underused Housing Tax Act.

An excluded owner includes, but is not limited to:

• an individual who is a Canadian citizen or permanent resident – unless included in the list of affected owners below any person – including an individual who is a Canadian citizen or permanent resident – that owns a residential property as a trustee of a mutual fund trust, real estate investment trust, or specified investment flow-through trust (SIFT) for Canadian income tax purposes a Canadian corporation whose shares are listed on a Canadian stock exchange designated for Canadian income tax purposes a registered charity for Canadian income tax purposes a cooperative housing corporation for Canadian GST/HST purposes an Indigenous governing body or a corporation wholly owned by an Indigenous governing body

If you are not an excluded owner government refers to you as an affected owner and you have obligations under the Underused Housing Tax Act for your residential property in Canada. An affected owner includes, but is not limited to:

• an individual who is not a Canadian citizen or permanent resident
• an individual who is a Canadian citizen or permanent resident and who owns a residential property as a trustee of a trust (other than as a personal representative of a deceased individual)
• any person – including an individual who is a Canadian citizen or permanent resident – that owns a residential property as a partner of a partnership
• a corporation that is incorporated outside Canada
• a Canadian corporation whose shares are not listed on a Canadian stock exchange designated for Canadian income tax purposes
• a Canadian corporation without share capital

If you are an affected owner, you must file an Underused Housing Tax return for each residential property that you own in Canada on December 31. You must also pay the Underused Housing Tax, unless your ownership qualifies for an exemption for the calendar year. Even if your ownership qualifies for an exemption, you must still file an Underused Housing Tax return for the calendar year.

Penalties for failing to file the return on time

There are significant penalties if you fail to file an Underused Housing Tax return when it is due. Affected owners who are individuals are subject to a minimum penalty of $5,000. Affected owners that are corporations are subject to a minimum penalty of $10,000.

Exemptions

Your ownership of a residential property may be exempt from the Underused Housing Tax for a calendar year depending on:

• • the type of owner you are
  • the availability of the residential property
  • the location and use of the residential property
  • the occupant of the residential property

• Remember if you are an affected owner of a residential property in Canada on December 31 you still have to file an Underused Housing Tax return for the residential property for the calendar year, even if your ownership qualifies for an exemption.

Exemptions based on the type of owner

Your ownership of a residential property may be exempt for a calendar year if you are:

• • a specified Canadian corporation
  • a partner of a specified Canadian partnership, or a trustee of a specified Canadian trust
  • a new owner in the calendar year

• a deceased owner, or a co-owner or personal representative of a deceased owner

Exemptions based on the availability of the residential property

Your ownership of a residential property may be exempt for a calendar year if the property is:

• newly constructed

• not suitable to be lived in year-round, or seasonally inaccessible
• uninhabitable for a certain number of days because of
• a disaster or hazardous conditions

Exemption based on the location and use of the residential property

Your ownership of a residential property may be exempt for a calendar year if the property is:

• a vacation property located in an eligible area of Canada and used by you or your spouse or common-law partner for at least 28 days in the calendar year

Refer to the Underused housing tax vacation property designation tool to determine if your residential property is located in an eligible area of Canada for the purposes of this exemption.

Exemptions based on the occupant of the residential property

Your ownership of a residential property may be exempt for a calendar year in either of the following situations:

• it is the primary place of residence for you or your spouse or common-law partner, or for your child who is attending a designated learning institution
• at least 180 days in the calendar year are included in one or more qualifying occupancy periods for your ownership of the residential property

A qualifying occupancy period is at least one month in a calendar year during which one of the following qualifying occupants has continuous occupancy of the residential property:

• an individual with a written contract who deals at arm’s length with you and your spouse or common-law partner
• an individual with a written contract who does not deal at arm’s length with you or your spouse or common-law partner, and who pays at least fair rent for the property
• you, or your spouse or common-law partner, who has a Canadian work permit
• your spouse or common-law partner, parent, or child who is a Canadian citizen or permanent resident

Special rule for individual owners of multiple residential properties

If between you and your spouse or common-law partner you own multiple residential properties, your ownership may not qualify for the exemptions for either primary place of residence or qualifying occupancy unless you file an election with the CRA to designate only one property for the purposes of the exemption.

Calculate what you owe

If your ownership of a residential property does not qualify for an exemption from the Underused Housing Tax for a calendar year, you must calculate what you owe for the calendar year.

The tax rate of the Underused Housing Tax is 1%. To calculate what you owe, multiply the value of the residential property by the 1% tax rate. Then multiply that result by your ownership percentage of the property.

You must pay any Underused Housing Tax you owe for a calendar year by April 30 of the following calendar year.

Elections to use the fair market value to calculate the tax you owe, or to qualify for the exemptions for primary place of residence or qualifying occupancy, are due by April 30 and are filed on the return.

Remember, there are significant penalties if you fail to file an Underused Housing Tax return when it is due.

From Rolfe Benson – Tax Alert: Underused Housing Tax (“UHT”) Filing Deadline – 1 May 2023

These are some common scenarios but is in no way an exhaustive list of situations in which a Canadian citizen may be required to file a UHT return:

1. One spouse is the 100% legal title holder but the residential property is beneficially owned by both spouses. Please check your title documentation. If the property is rented, do you both report the rental income? or,
2. You were added to title for probate fee planning purposes (added to title of a parent’s property), or
3. You were added to title for financing purposes (to obtain a mortgage), or
4. You are a shareholder of a company that owns residential property, or
5. You set up a joint spousal trust, joint partner trust or alter ego trust and transferred the residential property to the trust, or
6. You are a trustee of any other type of trust that owns residential property.

In most situations, you will be eligible for claiming an exemption from the UHT, however one must file a UHT return in order to claim an exemption. The UHT was enacted to tax affected owners of residential properties that are underused or vacant. An affected owner is generally anyone other than a Canadian citizen or permanent resident of Canada. The tax rate is 1% of the property’s assessed value, or the sale price if a sale occurred in the previous year, whichever is greater. Both the return and the tax is due 1 May 2023.

The enacted legislation also provides that certain Canadian taxpayers such as Canadian corporations, partners of Canadian partnerships and Canadian trusts that own Canadian residential property will need to file and apply for an exemption from the tax. The fine for non compliance starts at $5,000 per return for an individual and $10,000 for a corporation.

OTHER LINKS:

• Government of Canada Justice Laws– Underused Housing Tax Act
• Chartered Professional Accountants Canada – Basic facts you need to know about the Underused Housing Tax;
• MNP – The latest on the Underused Housing Tax and the unanticipated impact of filing requirements on Canadian private corporations, partnerships and trusts;