THE UNDERUSED HOUSING TAX - Deadline to declare April 30, 2023. Extended to Oct 31, 2023

Update on Feb 1, 2023 Link to the form to File UHT-2900 Underused Housing Tax Return and Election Form

https://www.canada.ca/en/revenue-agency/services/forms-publications/forms/uht-2900.html

Owners of residential property should be aware of a proposed new tax law, effective January 1, 2022, that is intended to discourage foreign ownership of underused (including vacant) Canadian real estate: the Underused Housing Tax (UHT) Act, which is currently before Parliament as part of Bill C-8. The scope of this legislation is much broader than might be expected—particularly for CCPCs—so careful scrutiny of the details is required to avoid missing tax-filing or payment requirements. Practitioners may wish to advise real estate professionals who work with their clients of these new requirements. Regulations (not yet released) may provide relief.

Under the proposed legislation, for every person who is an owner (other than an excluded owner) of a residential property in Canada as of December 31 of a calendar year, section 6(3) imposes a tax of 1 percent on the taxable value of the property, and section 7(1) requires the filing of a return.

Both the tax and the return are due on April 30 of the following year. April 30, 2023 is the first due date, which applies to properties owned on December 31, 2022. Any owner who fails to file as required will be subject to a steep penalty: the greater of $5,000 for individuals ($10,000 otherwise) and a percentage of the UHT.

An excluded owner includes, most notably, a public corporation or an individual who is a Canadian citizen or a permanent resident of Canada as defined in section 2(1) of the Immigration and Refugee Protection Act.

The amount of tax payable is deemed to be zero if an exemption applies (sections 6(7) to (9)). These exemptions include, most importantly,

  • an owner that is a specified Canadian corporation, which is a Canadian corporation of which 10 percent or more of the votes or value of its shares is not owned by foreign individuals or corporations;

  • property that is the owner’s primary place of residence; or

  • property where the qualifying occupancy period is 180 days or more.


These rules create a number of traps, including the following:

  • The exemptions noted above remove only the liability and not the filing requirement. This has two implications: (1) A filing requirement applies to all private corporations (including CCPCs), partnerships, trusts, and estates (including graduated rate estates [GREs]) that own residential property. Presumably, this requirement is intended to identify foreign persons who have indirect ownership of a residential property. (2) For the list of entities in point 1, the filing requirement applies even if the qualifying occupancy period is 180 days or more.

  • The filing date of April 30 comes just four months after the liability-creating date of December 31. For many non-calendar-year taxpayers (including GREs), this may be before the normal post-year-end contact with its tax adviser occurs, which may cause the filing to be late.

  • For payment of the tax, the threshold for foreign ownership is much lower than one would expect (10 percent; see the exemptions above). Thus, many CCPCs with some foreign ownership that own a vacant or underused residential property could have a tax liability.

  • A practitioner may be filing tax returns for an individual resident in Canada, but this does not necessarily imply that the individual is an excluded owner, who is exempt from both paying the tax and reporting. The practitioner must check whether the client has Canadian citizenship or is a permanent resident.

  • In an estate situation, it may not be clear who “owns” the residential property and thus whether the executor has a filing requirement. Legal ownership, which is the basis of the UHT regime, may not pass until probate is granted.

  • The CRA has indicated that a UHT review will now become part of the process of issuing a section 116 certificate of compliance on the disposition of real property by a non-resident. This may uncover many years of missed filings. It is unclear whether a voluntary disclosure to remove the penalties is a possibility.

If you own a residential property in Canada that is vacant or underused and you are a Canadian citizen or permanent resident of Canada, you won’t be subject to this new tax or the annual filing requirement. But if the property is held on your behalf, for example, by a trust under a bare trustee arrangement,8 the bare trustee will be exempt from the annual underused housing tax but will be required to file an annual return in respect of the property. This may also be the case if the property is held on your behalf by a partnership or privately owned corporation.


Filing the return

If you are an affected owner of a residential property in Canada on December 31, you must file an Underused Housing Tax return for the calendar year. Even if your ownership of the property qualifies for an exemption and you do not owe any tax, you still must file a return. Deadline for file is April 30, 2023

More information and details about how to file the return will be available in the coming weeks.

The penalty for failing to file the required return under the Underused Housing Tax (UHT) Act is the greater of $5,000 for an individual ($10,000 if the person is not an individual), and 5% of the UHT applicable for that calendar year plus 3% of the UHT applicable to the property in the calendar year for each calendar month the return is past due. In addition, failing to file the required UHT return by December 31 of the following calendar year renders an owner ineligible for the following exemptions: qualifying occupancy, not suitable for year-round use, uninhabitable due to a disaster or hazardous conditions, major renovations and primary place of residence.

Gov link:

https://www.canada.ca/en/services/taxes/excise-taxes-duties-and-levies/underused-housing-tax.html#3

Jane Zhao