Understanding the Underused Housing Tax Act

By Mirjana (Mira) Markovic

Effective January 1, 2022, the Government of Canada introduced the Underused Housing Tax Act (“Act”) aimed at non-Canadian, non-residents of Canada. Under this particular Act, individuals who are neither a Canadian citizen nor a permanent resident of Canada but are an “owner” (subject to “excluded owner” and “exemptions”) of a residential property in Canada that is vacant or underused on December 31^st of a calendar year are obligated to file an annual tax return and pay to the Canada Revenue Agency (“CRA”) a 1% Underused Housing Tax (“UHT”) for their property.

The said tax is based on the owner’s proportionate interest in the property and its value. Property owners may determine the value of their property by electing either of the following on the annual return:

1. taxable value (the greater of the assessed tax value for the year under the property tax assessment or most recent sale price on or before December 31^st of a calendar year); or
2. market value, which is to be determined by a written appraisal report prepared by the Appraisal Institute of Canada, operating at arm’s length from the owner.

The annual tax return is due on April 30^th of the following calendar along with any UHT paid to the CRA on the same date. 

Excluded Owners

As indicated above, only excluded owners are exempt from UHT liability and annual filing. Pursuant to Part 3 subsection 6(7) of the Act, an excluded owner is, on December 31^st of a calendar year, one of the following:

1. Canadian citizens or permanent residents of Canada;
2. Publicly traded Canadian corporations;
3. Trustees of widely held trusts;
4. Registered charities;
5. Cooperative housing corporations;
6. Municipal organizations/public institutions/government bodies;
7. Indigenous government bodies or corporations; and
8. Prescribed person (not yet defined).

Affected Owners

Owners that do not fall within the scope of the excluded owner definition are known as affected owners and will be obligated to file an annual return and pay the applicable UHT subject to any exemptions below. These include, but are not limited to:

1. individuals who are neither Canadian citizens nor permanent residents of Canada;
2. individuals who are Canadian citizens or permanent residents of Canada who own property in the capacity of a trustee of a trust, or partner of a partnership;
3. privately held corporations that are incorporated in Canada (even if all of the shareholders are Canadian);
4. corporations incorporated outside of Canada.

Exemptions

Even if an owner does not fall under the scope of the definition of an excluded owner above, pursuant to Part 3 subsection 8, the following use of property and/or characteristics may exempt a residential property from UHT:

1. Primary place of residence;
2. Qualifying occupancy (qualifying occupancy test must be met);
3. Limited seasonal access;
4. Disaster or hazardous condition;
5. Renovation/construction;
6. Year of acquisition;
7. Death of owner;
8. Specified Canadian Corporation;
9. Partner of Specified Canadian Partnership;
10. Trustee of Specified Canadian trust; and
11. Recreational properties in less densely populated areas.

Affected owners must first determine whether they qualify for one of the exemptions. If they do, the UHT will not be payable, however, these owners are still obligated to file the annual return to claim the exemptions for the calendar year.

Residential Properties Subject to UHT

Pursuant to Part 2 of the Act, the following residential properties, as defined, are subject to UHT:

1. Detached houses with no more than three dwelling units and any land subjacent that is reasonably necessary for its use and enjoyment;
2. Semi-detached houses;
3. Rowhouse units;
4. Condominium units; and
5. Any other similar premises intended to be owned as a separate unit(s) or parcel(s) including common areas and land subjacent to the building(s).

Filing Requirements and Penalties

As indicated above, owners impacted by the UHT are obligated to file an annual return using Form UHT-2900 by April 30^th of the following calendar year. Given the fact that the UHT took effect in 2022, the first annual filing and payment due date is April 30, 2023 (May 1, 2023, since, April 30, 2023, falls on a Sunday), for the appropriate residential properties owned by neither a Canadian citizen nor a permanent resident of Canada on December 31, 2022.

Failure to file the return by April 30^th could result in a penalty of $ 5,000.00 for individuals and $10,000.00 if a person is not an individual (i.e., corporation), pursuant to Part 7, Division 8, subsection 47(1).

Owners of two or more residential properties in Canada on December 31, 2022, are obligated to file two separate returns for each property along with any owners where ownership is joint or shared.

It is important to note that if the annual return is not filed by the deadline of April 30^th, the owner will no longer be able to access an available exemption for their property for the previous calendar year therefore, UHT will be levied for their property. Furthermore, where an owner fails to file a return for a calendar year, that particular year does not become statute-barred therefore, the CRA may assess tax, interest, and penalties at any time after the calendar year for overdue returns and tax payments.

Although the Act is in force, some details remain unclear. Some of the areas that need to be addressed include: a) Under the Act, prescribed persons are exempt from the UHT however, this term has not been defined to date; b) the CRA has not established the form and manner for the annual filing; c) the Act does not clearly define what is considered to be an underused property. Regardless, non-Canadians owning residential properties in Canada should be mindful of this new tax and the reporting requirements.

Form UHT-2900 may be found here: https://www.canada.ca/en/services/taxes/excise-taxes-duties-and-levies/underused-housing-tax/underused-housing-tax-technical-information.html