If you own residential property, you should be aware of the newly proposed Underused Housing Tax (“UHT“) set to take effect on January 1, 2022. The UHT is a national, annual 1% tax on the value of non-resident, non-Canadian-owned residential real estate that is vacant or underused.
The legislation received royal assent on June 9, 2022 and is officially the law of the land.
Even if your residential property is not vacant or underutilized, you may still need to make an Annual Declaration. Failure to make this declaration could result in penalties starting at $5,000 to $10,000 per year.
What is the UHT Tax?
The UHT would be calculated by multiplying the property’s value by 1%.
The UHT would apply to an “owner” of “residential property” in Canada as of December 31 of the calendar year if:
- the owner is required to file an Annual Declaration for the property for the calendar year; and
- the owner is not eligible to claim an exemption regarding their interest in the property for the calendar year.
The UHT tax does not apply under two circumstances.
- The first is if the owner is an Excluded Owner.
- The second is if the owner qualifies for one of the UHT Exemptions.
Who Needs to File an Annual Declaration?
Every residential property owner, other than an “Excluded Owner,” needs to file an Annual Declaration with the CRA for each residential property they own.
The owner must file the declaration and pay the tax by April 30 of the following calendar year. For example, for 2022, the owner needs to file the declaration by April 30, 2023.
The return will be a prescribed form released by the CRA, and our understanding is that it can be filed online. More details should follow in the coming months. Nothing has been released from the CRA at the time of writing this article.
Who are Excluded Owners?
Excluded owners do not need to file the Annual Declaration.
An Excluded Owner includes, among other things:
- public corporations, and
- individuals who are Canadian citizens or permanent residents of Canada.
Every other type of owner must file an Annual Declaration even if they have to pay no tax. For instance, if a private corporation (including a CCPC) owns the property, it will generally be required to file an Annual Declaration, even if its UHT tax is $0.
Above, we discussed who would be required to file the Annual Declaration and pay the tax. This section discusses situations where you may need to file an Annual Declaration but are exempt from the UHT tax.
An owner that is not an “Excluded Owner” (see above) would be subject to UHT unless the owner qualifies for a UHT exemption. Here are some of the notable exemptions:
|Exemption for Qualifying Occupancy||Exemption where the qualifying occupancy period is 180 days or more.|
|Exemption for Specified Canadian Corporations||Exemption if the owner is a Canadian corporation where foreign individuals or corporations do not own 10% or more of the votes or value of its shares|
|Exemption for Primary Place of Residence||Exemption if the property that is the owner’s primary place of residence|
|Exemption for Personal or Other Legal Representative of Deceased Individual||Exemption for the calendar year in which the death occurred and for the following calendar year if the owner dies.|
Other exemptions include:
- Exemption for Property Not Suitable for Year-Round Use
- Exemption for Property Uninhabitable Due to a Disaster or Hazardous Conditions
- Exemption for Property Undergoing Major Renovations
- Exemption for Year of Acquisition of an Interest in Property
Note that the UHT exemptions above exempt you from the UHT tax; it does not exempt you from filing an Annual Declaration. For example, a Canadian corporation with no foreign shareholders should be exempt from UHT, but it still needs to file an Annual Declaration. So you may think that you do not need to file the Annual Declaration because you are exempt from tax; this may not be the case! Even if you are exempt from the UHT tax, you may still need to file an Annual Declaration.
Failing to File the Annual Declaration
If you fail to file the Annual Declaration, you may face significant penalties and interest.
For example, if the owner fails to file the Annual Declaration by April 30, the owner will face penalties equal to the greater of:
- $5,000, if the owner is an individual, or $10,000 if the owner is not an individual; and
- The amount that is the total of
- 5% of the UHT + 3% of the UHT for each calendar month the declaration is past due.
There are even harsher penalties if the return is not filed by December 31 of the following year. If this is the case, you will lose the ability to qualify under the following exemptions:
- Exemption for Qualifying Occupancy;
- Exemption for Property Not Suitable for Year-Round Use;
- Exemption for Property Uninhabitable Due to a Disaster or Hazardous Conditions; and
- Exemption for Property Undergoing Major Renovations.
There are also penalties for failing to provide the required information on the form. So, you must take care to complete this form correctly.
As you can see, the tone of this legislation is strict, with extremely harsh penalties for failing to file the Annual Declaration on time. To avoid these penalties, you must let your tax advisor know of all the residential properties you or your corporation owns.
Pitfalls to Watch Out For
Unless you are an Excluded Owner (public company, Canadian citizen/PR individual), you or your corporation may be required to file the Annual Declaration even if your UHT tax for the year is $0.
Failing to file the Annual Declaration on time could result in minimum penalties of $5,000 for individuals and $10,000 for corporations. So, if you own real estate, you may have more filings to do next year, even if they are not vacant or underused.
A New Tax Deadline & Next Steps
To avoid the harsh penalties, you must start the conversation with your tax advisor on how this new legislation affects you to make sure you file all the required information before the April 30th deadline.
Our team is happy to help identify your UHT filing and tax payment obligations ahead of time so that you have all the documentation in place for the April 30, 2023 deadline. Be cautious that if you typically reach out to your accountants after this date for your corporate work, you would want to reach out well in advance in 2023 because of this new deadline.
If you have any questions, please contact us at (905) 836-8755 or by email at [email protected].