The issue of affordable housing has been a significant concern for Canadians for many years. In an attempt to address this problem, the federal government has introduced a new tax known as the Underused Housing Tax (UHT).
The UHT took effect on January 1, 2022 and is designed to encourage homeowners to make better use of their properties by freeing up unused or underutilized properties that can be used to provide affordable housing to those in need.
The goal of this is to help address the issue of housing affordability in Canada, which has been a significant challenge for many Canadians in recent years.
What is the Underused Housing Tax?
The UHT is a 1% tax on the value of a property that is not being used or occupied. The value of the property is either the taxable value or the fair market value. To use the fair market value, you must file an election with the CRA and get an appraisal for the property from an accredited professional real estate appraiser that operates at arm’s length from you as the owner.
If you share ownership, your portion of the tax owing will be proportionate to your ownership percentage.
Who has to File and Pay the UHT?
Generally the tax only applies to non-residents and non-Canadian owners, but there are some situations where it will also be applicable to Canadian owners.
According to the CRA, excluded owners include:
- 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.
Those who aren’t excluded are called “affected owners” and include:
- 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.
Exemption From Paying UHT
Affected property owners who are required to file may not have to actually pay the tax. More specifically, you may be exempt from paying the tax if you meet one of the following criteria:
- Exemption based on type of owner - You may be exempt if you are:
- A specified Canadian corporation
- A partner of a specified Canadian partnership
- A trustee of a specified Canadian trust
- A new owner
- A deceased owner
- A co-owner or personal representative of a deceased owner
- Exemption based on availability of the property - You may be exempt if the property is:
- Newly constructed
- Not suitable to be lived in year-round
- Seasonally inaccessible
- Uninhabitable for a certain number of days due to renovation, a disaster or hazardous conditions
- Exemption based on location and use of the property - You may be exempt if the property is a vacation property located in an eligible area of Canada and was used by you or your spouse or common-law partner for at least 28 days
- Exemption based on availability of the property - You may be exempt if one of the following applies:
- It is the primary place of residence for you or your spouse or common-law partner
- It is the primary place of residence for your child who is attending a designated learning institution
- At least 180 days (approximately 6 months) in the calendar year are included in one or more qualifying occupancy periods for your ownership of the residential property
Additional steps may also need to be taken if you and your spouse or common law partner own multiple residential properties between you and wish to qualify for the exemptions.
Filing and Payment Deadlines
2022 is the first tax year for which the UHT return must be filed.
Those who are affected owners, regardless of whether or not you are exempt, are required to file a return for each residential property they owned on December 31, 2022.
Failure to file your UHT return when it is due will result in a minimum penalty of $5,000 for individuals and $10,000 for corporations. This penalty applies even if there is no tax owing.
The UHT return, along with payment, is due on April 30, 2023. However, to give affected owners time to comply, the CRA will not levy any interest and penalties on 2022 UHT returns so long as they are filed and paid for by October 31, 2023.
Returns can be filed electronically on the CRA website or by mail to your designated tax centre, which is determined by where you reside (for individuals) or the physical address of your corporation (for corporations).
Regardless of when the return is filed and submitted, it’s important to note that the fair market value must be established between January 1, 2022 and April 30, 2023 for the purposes of the fair market value election.
For help with the UHT and determining whether you are excluded, affected or exempt, please contact Koroll & Company today.