In the 2021 Federal Budget, a new tax was proposed under the description Tax on Unproductive Use of Canadian Housing by Foreign Non-resident Owners.
As originally described, this was to be a one-percent tax on the value of Canadian residential real estate owned by non-residents of Canada considered to be vacant or underused, levied annually beginning in 2022.
However, the enacted legislation contained in the Underused Housing Tax (UHT) Act, provides that certain Canadian taxpayers, notably Canadian corporations, partners of Canadian partnerships and Canadian trusts that own Canadian residential property (a defined term under the UHT Act), will need to apply for an exemption from this tax in a UHT return, or face a penalty for failure to file a UHT return.
This article explores the UHT filings that may need to be considered by Canadian owners who own Canadian residential real estate through a Canadian corporation, partnership or trust, but who will not owe any tax.
This article does not address the filings required by non-residents of Canada who own Canadian residential property, nor does this article address calculating the tax for affected taxpayers.
For shareholders of Canadian corporations who own Canadian residential real estate, review the following key points to learn more about navigating these new rules.
- Residential property for these purposes is real property situated in Canada that is:
- A detached house or similar building, containing not more than three dwelling units, together with the land that is reasonably necessary for its use and enjoyment as a place of residence for individuals
- A semi-detached house, rowhouse unit, residential condominium unit, or similar unit together with the land that is reasonably necessary for its use and enjoyment as a place of residence for individuals
- For example, a residential apartment building with four apartments that do not each have separate title is not considered residential property under the UHT Act, but a three-unit apartment building (a triplex) would be residential property under the UHT Act.
- A separate UHT return must be filed for each residential property where required; however, the filing requirement only applies to residential properties owned on Dec. 31 of the calendar year.
A return under the UHT Act will need to be filed in respect of each residential property located in Canada (as defined) unless the property in question is directly owned by a Canadian citizen or permanent resident of Canada (as defined for immigration purposes). More details on excluded owners are outlined below. A foreign national living in Canada on a work permit or visa and who owns residential property will not be exempt from making a filing under the UHT Act.
Note that the residency of such individuals for income tax purposes is not relevant. It is about whether the individual is a Canadian citizen or a permanent resident. As income taxes are determined based on residency, care will need to be taken to ascertain citizenship and immigration status before evaluating a need to file.
- Many filers, such as Canadian corporations, partnerships or trusts will have no tax to pay but will need to file to claim their exemption from this tax or face a minimum late filing penalty of $10,000 (where the owner is not an individual (e.g., corporations)) or $5,000 where the owner is an individual. The legislation provides that this penalty, if charged, may be waived by the government within 10 years of the calendar year to which the penalty applies. However, in this case, a general penalty of $250 will apply.
- The UHT return must be filed annually by April 30 of the year following the calendar year for which the return relates. The first filing deadline will be for the 2022 calendar year and will be May 1, 2023 (as April 30, 2023 falls on a Sunday). This same deadline applies for all affected entities-the filing deadline does not coincide with the entities' fiscal year end or income tax return filing date.
- An owner of property includes
- A life tenant under a life estate in respect of the residential property
- A life lease holder in respect of the residential property (but not the person who gave possession of the land to the lease holder)
- A person who has continuous possession of the land on which the residential property is situated under a long-term lease (but not the person who gave possession of the land to the lease holder)
The UHT Act does not require a filing from the following entities who own residential property:
- Individual who is a Canadian citizen or permanent resident who owns the property in their name
- Property owned by the following types of trusts is excluded—a mutual fund trust, real estate investment trust, or specified investment flow-through trust (SIFT), an estate controlled by the executor
- Canadian corporation whose shares are listed on a Canadian stock exchange designated for Canadian income tax purposes
- Registered charity for Canadian income tax purposes
- Cooperative housing corporation for Canadian GST/HST purposes
- Indigenous governing body or a corporation wholly owned by an Indigenous governing body
The above noted entities are collectively “excluded owners” under the UHT Act.
Canadian residential property owners who will need to file a UHT Return include:
- Canadian controlled private corporations (CCPCs) and other privately held Canadian corporations
- Any person–including an individual who is a Canadian citizen or permanent resident that owns a residential property as a partner of a partnership
- The trustee of a trust that owns a Canadian residential property other than an estate as referenced above under “excluded owners”
- A Canadian corporation without share capital–this would include many not-for-profit corporations
- Foreign nationals living in Canada who are not permanent residents for immigration purposes
Filing required, but exemption from tax allowed
Common exemptions applicable for shareholders of Canadian corporations
The most common exemptions that will be allowed for shareholders of Canadian corporations will be those for:
- Specified Canadian corporations
- Specified Canadian partnership
- Specified Canadian trusts
These categories are described in more detail below:
Specified Canadian corporation - A corporation that is incorporated or continued under the laws of Canada or a province is a specified Canadian corporation in respect of a calendar year. However, on Dec. 31 of the calendar year, none of the following shareholders can own 10% or more of the ownership or control of the corporation (where such ownership is measured as direct or indirect ownership that controls at least 10% of the voting rights of the corporation or 10% of the value of the equity of the corporation):
- An individual who is not a citizen of Canada, or not a permanent resident of Canada
- A corporation that is not incorporated or continued under the laws of Canada or a province
- A combination of such individuals or corporations
In addition, a corporation without share capital having a chairperson or other presiding officer who is neither a citizen nor a permanent resident, or 10% or more of its directors who are neither citizens nor permanent residents will not be a specified Canadian corporation.
Specified Canadian partnership - A partnership, each member of which is, on Dec. 31 of the calendar year, an excluded owner (such as a Canadian citizen or Canadian permanent resident) or a specified Canadian corporation. If the partnership has even one partner who is not a Canadian citizen or permanent resident or not a specified Canadian corporation, the partnership will not be a specified Canadian partnership.
Specified Canadian trust - A trust under which each beneficiary having a beneficial interest in the residential property is, on Dec. 31 of the calendar year, an excluded owner (such as a Canadian citizen or Canadian permanent resident) or a specified Canadian corporation. If the trust has even one beneficiary who is not a Canadian citizen or permanent resident or not a specified Canadian corporation, the trust will not be a specified Canadian trust.
Note that for individuals, the residency of such individuals for income tax purposes is not relevant. What is relevant is whether the individual is a Canadian citizen or a permanent resident. Our income tax returns ask if the taxpayer is a Canadian citizen, but this is for purposes of the electoral role only; it has no impact on income tax liability.
Future regulations may expand these definitions.
Other exemptions from the UHT
The above noted exemptions are based on the type of owner and are the broadest exemptions. Other exemptions from paying tax could be allowed based on any of the following categories:
- Availability of the residential property
- Location and use of the residential property
- Occupant of the residential property
When considering these other exemptions, it is important to remember that the purpose of the tax is to penalize non-Canadian owners of Canadian residential property that is left vacant for much of the year and is in an area of high-residential demand. For example, a Toronto residential condominium owned by a non-citizen investor that was left vacant in 2022, but was capable of being occupied for the year, will be subject to this tax. If the value of the condominium is $800,000, a 1% tax of $8,000 will be due on April 30, 2023.
Further consideration of these other exemptions is best decided on a case-by-case basis and is not covered in this article.
The attached Appendix shows a few examples of common situations that Canadians may encounter along with a conclusion as to whether a UHT return will be required. Remember that further regulations may provide further clarification of these rules with respect to affected owners.
Filing the UHT return
As this is a new program, the details for filing a return are not all available yet. We expect that the Canada Revenue Agency (CRA) will publish further information as the filing deadline gets closer. However, we do know that it will be necessary to have a valid CRA tax identifier number to file a UHT return. The following tax identifier numbers may be used depending on the situation:
- Social insurance number (SIN)
- Individual Tax Number (ITN) (An ITN is a unique number provided by the CRA to individuals who aren't eligible for a SIN. For example, this type of number would be provided, upon application, to a non-resident of Canada who doesn't work in Canada).
- Canadian business number (BN) with an Underused Housing Tax (RU) program account identifier code (which can be applied for after Feb. 6, 2023).
However, a trust account number (TAN) cannot be used to file UHT returns—it is the trustee that must make the filing where a trust holds property on which UHT can be levied.