Nonresident owners of vacant or underused residential property in Canada should be aware of and understand a new tax - the underused housing tax (UHT) - as they may have upcoming compliance obligations.
The UHT Act, which became effective on 1 January 2022, imposes a 1% tax on the value of vacant and underused residential property owned by a person who is not an “excluded owner,” such as a permanent resident or citizen of Canada (called “affected owners”) as of 31 December of the calendar year (although, in certain situations, Canadian owners also may be subject to the UHT). Affected owners are required to submit a UHT return to the Canada Revenue Agency (CRA) even if the tax is not owed. The filing deadline for the 2022 calendar year is 1 May 2023 (but see below for transitional relief), with stiff penalties imposed for failure to file the return even if the owner qualifies for an exemption under the law.
This article looks at the impact of the UHT on non-Canadian owners of residential property in Canada (click here for an analysis of the impact of the tax on Canadians).
Residential property
Affected owners of residential property in Canada have an obligation under the UHT Act. Residential property for purposes of the UHT is real property situated in Canada that is:
- A detached house or similar building that contains no more than three dwelling units, along with land reasonably necessary for its use and enjoyment as a place of residence for individuals; or
- A semi-detached house, rowhouse unit, residential condominium unit or similar unit that is a separate parcel, together with common areas and land attributable to the unit that is reasonably necessary for its use and enjoyment as a place of residence for individuals.
Residential property therefore includes detached and semi-detached houses, duplexes and triplexes, condominium units, townhouses and rowhouses, cottages, cabins and chalets.
Affected owners
The UHT covers a broad range of taxpayers, resulting in a filing requirement for individuals, as well as many entities such as private corporations, partnerships, trusts and estates.
An affected owner is any person other than an excluded owner. The following are excluded owners and are not required to file a UHT return:
- Canadian citizens and permanent residents of Canada;
- Corporations listed on a Canadian stock exchange;
- Registered charities;
- Cooperative housing corporations;
- Indigenous governing bodies or corporations owned by Indigenous governing bodies;
- Municipalities or corporations owned by municipalities;
- Government of Canada or an agent thereof; and
- Universities, public colleges, school authorities and hospital authorities.
Any person that is not an excluded owner is an affected owner and is required to file a UHT return and may owe UHT unless an exemption is available. An affected owner therefore includes:
- An individual who is not a Canadian citizen or permanent resident (It should be noted that the immigration concept of permanent residency is applied, not the income tax concept. An individual can be a resident of Canada for income tax purposes and still be subject to the UHT if they are not a citizen or permanent resident.);
- An individual who is a Canadian citizen or permanent resident and who owns residential property as a trustee of a trust (other than as a personal representative of a deceased individual);
- A person, including an individual who is a Canadian citizen or permanent resident, that owns residential property as a partner of a partnership;
- A corporation incorporated outside Canada;
- A Canadian corporation whose shares are not listed on a Canadian stock exchange designated for Canadian income tax purposes; and
- A Canadian corporation without share capital.
Exemptions
Although an affected owner will have to file a UHT return, they may not be liable for the tax if one of the statutory exemptions applies. The exemptions include but are not limited to:
- Ownership: UHT exemptions based on ownership are those for specified Canadian corporations, specified Canadian partnerships and specified Canadian trusts. Specified Canadian corporations are those incorporated or continued under the laws of Canada or a province, which on 31 December are more than 90% (by value of the equity or voting rights) owned by individual Canadian citizens or permanent residents or Canadian corporations. Specific rules apply to Canadian partnerships and trusts; notably, if a partnership or trust includes a partner or beneficiary, respectively, who is not an excluded owner, the partnership/trust will not be considered a specified Canadian partnership/trust.
- Occupant: There are exemptions if the property is the primary place of residence of the individual owner or their spouse or common law partner or their student child, or if the individual has a qualifying occupancy. The primary place of residence exemption applies only for individual owners where the residential property is their primary place of residence (on a worldwide basis, not just in Canada). The qualified occupancy exemption applies if the property is occupied for at least 180 days in the calendar year comprised of occupancy of no less than one month at a time by
- An arm’s length tenant who has a written contract (i.e., a lease agreement);
- A non-arm’s length tenant who pays at least fair rent for the property under a written agreement;
- An individual or their spouse or common law partner who has a Canadian work permit and who lives in the residence due to working in Canada; and
An individual’s spouse or common law partner, parent or child who is a Canadian citizen or permanent resident.
The first two qualified occupancy exemptions listed above are available to property held by a corporation, partnership or trust.
- Availability of the property: A UHT exemption is available for residential property that is inaccessible seasonally due to a lack of public access (e.g., a seasonal cottage where public access is not maintained year-round) or where the property is not suitable for year-round use.
- Location and use of the property: An exemption from the UHT is available if the property is in a prescribed area and is used as a place of residence or lodging by the owner or the owner’s spouse or common law partner for at least 28 days during the calendar year.
Calculation of the UHT
The UHT is calculated at a rate of 1% of the taxable value of the residential property. The taxable value is the greater of the assessed value and the residential property’s most recent sale price on or before December of the calendar year. Alternatively, the UHT can be calculated using the fair market value of the residential property, but an election is required to use this methodology and it must be supported by a written appraisal from an arm’s length accredited real estate appraiser.
Filing the UHT return and potential penalties
The CRA released a detailed and complex UHT filing return on 31 January 2023, which may be filed electronically or in hard copy. A separate UHT return must be filed for each residential property owned in Canada on 31 December of the calendar year.
While the UHT return for 2022 generally must be filed by 30 April 2023, the CRA announced on 27 March that it is providing transitional relief to affected owners to give them additional time to comply. Specifically, the application of penalties and interest for calendar year 2022 will be waived for any late-filed UHT return and payment provided the return is filed and any UHT due is paid by 31 October 2023. Per the CRA, this transitional relief means that, although the deadline for filing the UHT return and paying the UHT payable is still 30 April 2023, no penalties or interest will be applied for UHT returns and payments received by the CRA before 1 November 2023.
A foreign national living in Canada on a work permit or visa and who owns residential property will not be exempt from filing under the UHT Act. The residency of such individuals for income tax purposes is not relevant - the critical factor is whether the individual is a Canadian citizen or permanent resident. As income taxes are determined based on residency, care will need to be taken to ascertain citizenship and immigration status before evaluating a need to file a UHT return.
Many filers, such as Canadian corporations, partnerships or trusts, will have no tax to pay but will need to file their returns and claim their exemption from the UHT or face a penalty.
Affected owners who fail to file a 2022 UHT return will be subject to penalties equal to the greater of:
- CAD 5,000 where the owner is an individual and CAD 10,000 where the owner is not an individual; and
- The amount that is the total of:
- 5% of the UHT payable for the residential property for the calendar year; and
- 3% of the UHT payable for the residential property for the calendar year multiplied by the number of complete calendar months that the return filing is late.
Additional penalties may apply if the return is not filed by 31 December of the subsequent year (i.e., by 31 December 2023 for 2022 returns).
In addition to the above penalties, when a nonresident plans to sell Canadian real property, including residential real estate, the seller will usually request a certificate of compliance from the CRA and pay to the CRA 25% of the gain on the sale. If the seller does not obtain the certificate, the purchaser is required to withhold an amount of the proceeds (usually 25% of the purchase price of the property) and provide this to the CRA. Starting in 2023, an application for a certificate of compliance with respect to Canadian residential property will prompt a compliance review by the CRA in relation to the UHT. The CRA is not required to issue a certificate of compliance to an applicant if they are not satisfied that the applicant is compliant with any applicable obligations under the UHT.
Comments
The UHT is a complex and highly nuanced tax with punitive penalties to those that are required to file regardless of whether tax is payable. Any non-Canadian owners or other affected owners of residential property in Canada need to confirm whether they have a filing obligation and any tax payable and ensure filings for each property of the affected owner are submitted by 1 November 2023 for the 2022 calendar year.
Brian Morcombe
Jay Tulsani
BDO in Canada