MBB LAW INSIGHTS SERIES - REAL ESTATE

Underused Housing Tax

Background

The Underused Housing Tax Act imposes an annual 1% underused housing tax (UHT) on the value of vacant and underused residential properties owned directly or indirectly by those who are not Canadian citizen or a permanent resident of Canada. It became effective on January 1, 2022, and the first tax return for the year-end December 31, 2022 is due on April 30, 2023.

Mandatory Declaration by Non-Canadian Residential Property Owners

Every owner of a residential property, other than an “excluded owner”, must file an annual declaration with the Canada Revenue Agency (CRA) for each residential property owned.

“Excluded Owners”

An “excluded owner” is not subject to the UHT. Excluded owners include the following, as of December 31:

Canadian citizens and permanent residents of Canada;
Corporations listed on a Canadian stock exchange;
Registered charities;
Cooperative housing corporations;
Indigenous governing bodies or corporations owned by Indigenous governing bodies;
Municipalities or corporations owned by municipalities;
Government of Canada or an agent of the Government of Canada; and
Universities, public colleges, school authorities, hospital authorities.

Private corporations, partnerships, and trusts are not excluded owners and, therefore, are subject to filing an annual UHT declaration if they own a residential property, even if there is no UHT owing.

Residential Properties Located in Canada Subject to the UHT

The UHT applies to every legal owner of “residential properties” located in Canada unless the owners are excluded owners or if an exemption applies.

“Residential properties” include:

Detached homes;
Detached homes with up to three units (e.g., duplex, triplex);
Semi-detached homes;
Row houses; and
Condominiums.

Exemptions

If an owner is not an excluded owner, the residential property owned may be exempt from the UHT. These exemptions include:

Primary Place of Residence	No UHT is payable if the residential property is the primary place of residence of: The owner, or the owner’s spouse or common-law partner; or A child of the owner or the owner’s spouse or common-law partner, who occupies the residential property for the purpose of authorized study at an institution designated to host international students. Where an owner owns more than one residential property, only one property can be declared as a primary place of residence.
Qualifying Occupancy	No UHT is payable if the residential property is occupied by one of the following individuals in periods of at least one month and in aggregate for at least six months (180 days) during the year. Such individual includes an individual who: deals at arm’s length with the owner and any spouse or common-law partner of the owner, under an agreement evidenced in writing; does not deal at arm’s length with the owner or with any spouse or common-law partner, and who is given continuous occupancy of the dwelling unit under an agreement in writing, and for consideration that is not below the fair rent for the residential property; is the owner or the owner’s spouse or common-law partner, who is in Canada for the purpose of pursuing authorized work under a Canadian work permit, and who occupies the dwelling unit in relation to that purpose; or is a spouse, common-law partner, parent, or child of the owner and who is citizen or permanent resident. Where an owner or their spouse have declared that one of their properties as their primary place of residence, they cannot declare qualifying occupancy for other properties they own.
Specified Canadian corporation	No UHT is payable for a calendar year if the residential property is owned by a Canadian corporation of which foreign individuals or corporations do not own 10% or more of the votes or equity value.
Partner of specified Canadian partnership	No UHT is payable for a calendar year if the owner holds an interest in the property as a partner of a specified Canadian partnership. A specified Canadian partnership means a partnership, each member of which, is an excluded owner.
Trustee of specified Canadian trust	No UHT is payable for a calendar year if the owner holds the interest in the property as trustee of a specified Canadian trust. A specified Canadian trust means a trust under which each beneficiary is an excluded owner.
Uninhabitable property	No UHT is payable for a calendar year if the residential property is uninhabitable for a portion of the year and unsuitable for year-round use.
Ongoing renovations	No UHT is payable for a calendar year if the residential property is uninhabitable for at least four months of the calendar year due to the continuing renovation of the residence.
Acquisition of interest	No UHT is payable for the calendar year the owner first acquires an interest in the property.
Deceased owner and other owner	If an owner of a residential property dies, their legal or personal representative would be exempt for the calendar year; If an owner of a property dies and has at least 25% interest in the property, the other owner would be exempt for the calendar year and subsequent calendar year.
Newly constructed property	No UHT is payable for a calendar year if the residential property is newly constructed and not substantially completed before April 1 of the calendar year.

Owners who do not qualify as excluded owners must file a UHT declaration if they own a residential property and claim the exemption, even if no UHT is payable.

How Much Is the UHT?

The UHT is 1% of the home’s taxable value or 1% of its most recent sale price, whichever is greater. Owners can also file an election between January 1 and April 30 of the following calendar year to use the property’s fair market value to determine the owing UHT and if they can obtain an appraisal.

If two or more individuals hold title to a property, each owner will be responsible for the UHT based on their ownership interest.

Failure to File Declarations

If an owner fails to file a declaration in respect of a residential property for a calendar year, the owner would not be entitled to the exemptions.

When assessing the owner for UHT and penalties, the CRA would have the discretion to use the fair market value of the property at the time an assessment is issued in calculating the amounts owing.

Failure by an owner to file a declaration in respect of a property for a calendar year could also result in significant consequences for the owner, as well as penalties and interest.

For further details, please contact us.