The Underused Housing Tax (“UHT”) is an annual 1% tax on the ownership of vacant or underused housing in Canada. This tax took effect on January 1, 2022. The tax is meant to target non-resident, non-Canadian owners of residential property. However, the administration of this tax will impact many Canadian resident individuals and corporations who own residential property. Severe penalties may apply for failure to file a UHT return, even though no tax may be owing.
Who must file a UHT return?
You must file a UHT return if you met all of the following conditions as of December 31, 2022:
- You are the legal owner of a residential property in Canada, and,
- You are not considered an “excluded owner” of the residential property.
What exactly is a “residential property”?
Per CRA, a residential property is defined as property that is one of the following, located in Canada:
- Detached house.
- Semi-detached house.
- Laneway houses and coach houses.
- Townhouse or rowhouse unit.
- Residential condominium unit.
- Cottages, cabins, and chalets that are not commercial cottages, cabins, or chalets.
How do I know if I am the “legal owner” of a residential property?
You are the legal owner of a residential property if any of the following apply:
- You are identified as an owner of the property via the land registration system in which the property is located.
- You are considered an owner of the property based on such a land registration system.
- You are a life tenant under a life estate in the property.
- You are a life lease holder of the property.
- You are a lessee that has continuous possession of the land on which the property is situated under a long-term lease.
I am the legal owner of residential property as of December 31, 2022. How do I determine if I am an “excluded owner”?
Unfortunately, the list of criteria to be considered an excluded owner of a residential property is very limiting. Canadian citizens or permanent residents who hold a residential property personally (such as their principal residence) are not required to file a UHT return.
However, if a Canadian citizen/permanent resident holds a residential property via a trust or a partnership, then that individual is required to file a UHT return. Co-owners of residential rental properties may also be required to file a UHT return.
Who must file a UHT return?
- Canadian individuals and corporations who are partners of a partnership that holds a residential property as of December 31, 2022.
- Canadian individuals and corporations who are trustees of a trust (including a bare trust) that holds residential property as of December 31, 2022.
- Not including trusts that were created upon the death of another person (referred to as a testamentary trust).
- Canadian private corporations that legally own a residential property as of December 31, 2022 (this includes home builders).
- Non-Canadian corporations that own a Canadian residential property in any capacity.
- Individuals who are neither Canadian citizens nor permanent residents of Canada who own residential property in any capacity.
What is a “bare trust”?
A bare trust is a special legal relationship. A bare trust occurs when one person (the trustee) has a legal ownership of a property, and another person has beneficial ownership over the same property. The only responsibility of the trustee is to ultimately transfer the legal title of the property to the beneficial owner.
The problem is that bare trusts are often created without the knowledge of either the trustee or the beneficiary. The Underused Housing Tax Act is unclear whether the trustees of bare trusts are affected by these new rules. However, it is recommended that bare trustees that involve a residential property should file a UHT return in order to avoid any potential penalties. Examples of bare trusts that involve residential properties include:
- When a person co-signs on a mortgage for a home with another individual.
- For example, if an adult child bought a house and the parents of that child were co-signers on the mortgage, the parents have legal ownership, but the child has beneficial ownership. In this instance, the parents are the trustees, and they would be required to file a UHT return.
- If an owner of a residential property adds a family member on title of the residential property for the purpose of avoiding probate.
- For example, an elderly parent may add an adult child on as an owner of a residential property, so that when the parent passes away, the adult child can acquire the property immediately. In this case the adult child is the trustee and would be the one required to file the UHT return.
- If a person sold a residential property in 2022, but the land title did not change to the name of the purchaser until 2023.
- In this example, the person who sold the property would still have legal ownership until the land title changed. Therefore, the seller of the property would be considered the bare trustee and would be required to file a UHT return.
- An individual owned a residential property and transferred it to a corporation owned by that individual. If the land title of the property did not change to the corporation, then the individual would still have legal title of the property. This would create a bare trust, and that individual would have to file a UHT return.
What are other situations where a UHT return may be required?
- In certain circumstances, co-owners of a residential property may be required to file a UHT return.
- The owners of farmland on a which a residential property is located may be required to file a UHT return.
When is the return due?
For the 2022 calendar year, this return is due no later than April 30, 2023
I have to file a UHT return; will I have to pay tax?
There are many exemptions that will prevent a person or a corporation from having to pay UHT. Provided that you meet at least one exemption, you will not have to pay UHT.
However, even if you are not required to pay UHT, you still must file a UHT return.
Our staff at HLH can help determine whether you meet one of these exemptions.
Are there any penalties associated with this return?
Yes. If an individual is required to file a UHT return and it is filed after April 30, 2023, the individual will be subjected to a minimum $5,000 penalty.
Similarly, if a corporation was required to file a UHT return and it is filed late, the corporation will be subjected to a minimum $10,000 penalty.