Underused Housing Tax Act

Summary

The federal government has introduced the new Underused Housing Tax Act (UHTA), which has been in effect since January 1, 2022. Among other things, this law requires certain owners to pay a tax of 1% of the property value of the residential building with fewer than 4 units.

Individual Canadian citizens and permanent residents are exempt from this tax. On the other hand, certain Canadian-controlled private corporations (CCPCs) are affected: Canadian corporations, of which 10% or more of the votes or equity value are held (directly or indirectly) by non-residents, will have to pay this tax if their residential real estate is underutilized.

In addition, this legislation also introduces a new disclosure requirement for non-residents, as well as for most Canadian resident corporations owning residential real property. This means that, unless there is an amendment or administrative relief, all affected persons will be required to provide the required information for the 2022 year by April 30, 2023, regardless of their tax year end. Failure to file can result in onerous penalties (minimum $5,000 for a non-excluded individual, $10,000 for a corporation), as well as the possibility of being subject to tax.

Overview

Taxes payable on Underused Housing (UHTA)

The owner of a residential building as of December 31 will have to calculate the UHTA. The owner must multiply the property value of his residential building by 1%, and by the percentage of ownership, when it is not sufficiently used.

In order not to be "underused", a rental unit must be rented for at least 180 days in the calendar year, in leases of at least one month, to arm's length persons or non-arm's length persons for a reasonable rent. Documentation of the period of occupancy must be maintained and available to the CRA or the exemption will be denied.

Exemption from payment of the tax

Many situations allow not to pay this new tax: When the owner is a Canadian corporation of which more than 90% of the voting rights and more than 90% of the value of the equity is held by Canadian citizens or permanent residents, when a partnership is held by the type of corporation mentioned above and/or by excluded owners, during the year of the acquisition of the building, when the building is uninhabitable (disaster, major renovation), when the building cannot be used all year long (e.g., non-insulated cottages for the winter).

You think that your corporation is not covered by such a law, either because it is a Canadian-controlled private corporation (CCPC) or because the rental unit is rented year-round? Think again! Unfortunately, you will have to file a disclosure form!

Duty to Disclose

All owners of prescribed residential properties are required to file an annual return with the tax authorities for each prescribed residential property they own. Only "excluded owners" are exempt from filing a return. Beware of "nominees"! The obligation is towards the legal owner of the building, i.e., the one registered in the title registry.

Excluded Owner

An excluded owner does not have to pay this tax or file a form. This includes an individual Canadian citizen or permanent resident, a Canadian corporation listed on a Canadian stock exchange, registered charities, municipalities, and government entities.

Therefore, private corporations, as well as partnerships owning residential properties, are for the most part required to produce. Note that non-profit organizations (NPOs) are not automatically excluded.

Content of the declaration

Although a prescribed form has not yet been provided, the government has announced that the following information will be required:

• the calendar year to which the return relates;
• the street address of the property and other information related to the residential property;
• the legal name of the owner and contact information;
• the type of owner (e.g., individual, corporation, partner in a partnership, trustee of a trust);
• the owner's interest in the property (as a percentage), and if less than 100%, the form of ownership and the names of other owners of the property with an interest of 10% or more;
• the type of residential property (for example, single family homes, semi-detached or row houses, condominium units, duplexes and triplexes);
• the assessed value of the residential property and how it was determined;
• the exemptions claimed for the residential property and information related to the exemptions.

Penalty

Failure to file the return will result in a penalty equal to the greater of:

• $5,000, if the owner is an individual, or $10,000 if the owner is not an individual; or
• 5% of the applicable tax in respect of the owner's interest in the residential property for the calendar year, plus 3% per month of delay.

In addition, if a residential property return for a calendar year is not filed by December 31 of the following calendar year, the exempt owner will be subject to the tax even though he or she should be exempt. For the purposes of assessing the amount of UHTA and calculating penalties and interest, the limitation period will not begin until the return is filed.

Take away

Finally, in seeking to impose a new tax on underused housing properties owned by non-residents, the government has, in effect, imposed a new disclosure requirement on most Canadian corporations owning residential real estate. It will be important to meet the April 30, 2023, filing deadline to avoid onerous penalties. Owners subject to the disclosure requirement will need to verify whether they have any exemptions from paying the tax. For example, corporations with no non-resident shareholders will be exempt from paying UHTA.

Although the UHTA law went into effect on January 1, 2022, the reporting form is still not available as of this filing. There are strong hopes that there will be a relief by regulation for this first year of filing, so that companies that do not have to pay the tax can avoid filing the form by April 30, 2023. We will keep you informed of any developments. It is important to remember that to date, no relief has been announced.

Want to know more?

Michel Rhéaume michel.rheaume@mazars.ca	Marie-France Forest marie-france.forest@mazars.ca