Significant changes to Underused Housing Tax (UHT) compliance obligations have been proposed in the federal government’s 2023 Fall Economic Statement released on November 21, 2023. Draft legislation relating to the proposed changes has been released for consultation, with feedback to be provided to the Department of Finance by January 3, 2024.
In the 2021 Federal Budget, the government proposed a tax on the value of vacant or underused Canadian residential real estate owned by non-residents of Canada. However, the enacted legislation provided that certain Canadian taxpayers were required to file a UHT return even if their ownership qualified for exemption, with significant penalties for failure to file.
The UHT took effect on January 1, 2022, applicable to residential properties—generally, buildings with less than four dwelling units—owned on December 31 of each calendar year. Although returns are required to be filed by April 30 of the following calendar year, the Canada Revenue Agency (CRA) previously announced transitional relief with the waiver of penalties and interest for late-filed 2022 returns, initially to October 31, 2023, and subsequently to April 30, 2024.
Expansion of the excluded owner definition
Currently, every person that is not an excluded owner on December 31 of the calendar year is required to file a UHT return for each residential property they own. Affected owners include certain owners of residential properties that are Canadian corporations, partners of Canadian partnerships, and trustees of Canadian trusts that are substantially or entirely Canadian-owned and are eligible to claim an exemption from the UHT.
The government has proposed to expand the definition of an excluded owner to include specified Canadian corporations, partners of specified Canadian partnerships, and trustees of Canadian trusts as defined in the UHT Act, eliminating the need for these owners to file a UHT return and claim an exemption.
This proposed change would apply beginning with the 2023 calendar year UHT returns. This means that an owner of a residential property that is a specified Canadian corporation, a partner in a specified Canadian partnership, or a trustee of a specified Canadian trust is required to file a UHT return for the 2022 calendar year but not in subsequent years.
Reduction of failure to file penalties
The current minimum late filing penalty per return under the UHT Act is $5,000 where the owner is an individual and $10,000 where the owner is a corporation.
The government has proposed to reduce the minimum late filing penalties to $1,000 for individuals and $2,000 for corporations per late filed return.
The reduction in penalties will be applicable to the 2022 calendar year and future UHT filings although, as noted above, the CRA previously announced transitional relief for 2022 returns filed by April 30, 2024.
New Exemption for employee accommodations
The government has proposed an exemption for residential properties used as a place of residence or lodging for employees and located outside a census metropolitan area or a census agglomeration having 30,000 or more residents. This exemption will be applicable for 2023 and subsequent calendar years.
Additional technical changes
The government has proposed that unitized (‘condominiumized’) apartment buildings will no longer be considered to be residential properties for UHT purposes, effective in respect of 2022 and subsequent calendar years.
In addition, it is proposed that an individual or a spousal unit will be limited to a UHT vacation property exemption for only one residential property for a calendar year, effective in respect of 2024 and subsequent calendar years.