On January 1, 2022, the Canadian government implemented the Underused Housing Tax (UHT) to reduce foreign ownership of vacant properties and ease housing prices. The UHT targets non-residents and non-Canadians who own a residential property in Canada which could be considered vacant or underused. However, the scope of the legislation is so broad that it could also impact certain Canadian corporations that own residential property.
Failing to file or pay UHT could invite significant penalties. Hence, if you are a private corporation or trust owning a residential property, wholly or partly, directly or indirectly, you must know about the Underused Housing Tax.
What Is Underused Housing Tax (UHT)?
The Act came into existence to make it expensive for foreigners to buy a residential property in Canada for investment purposes. Under the UHT Act, a 1% tax applies to residential properties considered “underused” and owned wholly or partly by affected individuals and entities. The 1% tax is charged on:
- The property’s assessed tax value for the year under the related property tax assessment or the latest sale price of the property on or before December 31 of the calendar year, whichever is greater.
- The fair market value. But the owner has to file a written request with the Canada Revenue Agency (CRA) to use the fair market value appraised by an accredited member of the Appraisal Institute of Canada, operating at arm’s length from the owner.
If you fall under UHT, you must file a return and pay any tax liability, if applicable, before May 1, 2023 (as April 30 is a Sunday). This is where things get complicated.
Are you eligible for Underused Housing Tax (UHT)?
While the UHT is aimed at non-residents, some Canadian residents might also fall under the eligibility. But they can claim tax exemption. The Act categorizes owners of the property as,
- Excluded owners – They need not file UHT returns or face any tax obligation.
- Affected owners – They need to file UHT returns. However, they may or may not incur any tax obligation.
Excluded owners are Canadian residents, public organizations, government bodies, registered charities, cooperative housing societies, and prescribed persons.
Affected owners are non-residents, individuals who are not citizens of Canada, or private corporations, including trusts and partnerships. Once it is established that you are an affected owner, you have to file UHT returns. However, you can claim tax exemption if you are a Canadian resident holding a residential property in the name of a private corporation or trust.
To claim the exemption, you have to show that the property is:
- The primary place of residence of you, your spouse/common-law partner, your child, or
- The property is occupied by ‘qualifying occupants in relation to the owner’ for at least 180 days (with 30 days of continuous occupancy) in the calendar year.
A qualifying occupant in relation to the owner includes:
- The owner’s spouse, parent, or child who is a citizen or permanent resident of Canada
- A tenant (arm’s length or non-arms length tenant) who is occupying the property in exchange for a fair amount of rent.
- An individual owner or their spouse is occupying the property while pursuing authorized work under a Canadian work permit.
The Act has laid down a long list of exemptions based on the type of owners, availability of the property and more. Talk to a professional tax consultant to understand your eligibility.
Who should file Underused Housing Tax (UHT)?
If a property is eligible for UHT, any party who owns 10% or more of the property should disclose their ownership. If you own more than one property, you should file a separate form for each property.
On a separate note, if you are a joint owner, you and the co-owner should file UHT on the same property separately. Even if you have no UHT liability, you must file returns for the qualified property and claim exemption. If you fail to file the returns, you could face a penalty even if you have no UHT liability.
What Happens If You Don’t File or Pay Underused Housing Tax (UHT)?
If your UHT liability is below $50,000, you can pay via cheque, money order or electronically. But if it is above $50,000, you must pay through an acceptable financial institution. If you delay the tax payment, daily compound interest will accrue on the unpaid amount at the rate prescribed by the CRA. You can file a written request for a deadline extension, but it is at the CRA’s discretion to grant you an extension. There is no statute bar for the UHT obligation, which means your tax liability will be legally enforceable from the date it becomes due to the date the property is sold.
You may face a penalty for not filing UHT returns despite being an affected owner. The penalty for individuals is $5,000 or 5% of the UHT obligation, and for others is $10,000 or 3% of the UHT liability multiplied by the number of months the tax is due.
The tax laws keep changing, and the CRA keeps introducing new tax laws like the Underused Housing Tax and tax credits that could impact your tax liability. Not being aware of your tax obligation could compound your tax liability and expose you to huge penalties. A professional tax consultant stays updated with tax laws and can help you determine your tax liability and credits and help you make the most of both.
Contact Glenn Graydon Wright LLP in Oakville to Stay Updated on Your Tax Liability
Talk to a professional tax consultant to help you calculate your tax liability and identify ways to reduce it. At Glenn Graydon Wright LLP, our tax consultants can provide services, such as tax filing and advisory, to reduce tax liability. To learn more about how Glenn Graydon Wright LLP can provide you with the best tax planning services, contact us online or by telephone at 905-845-6633.