In June 2022, the Canadian federal government’s Underused Housing Tax (UHT) Act received royal assent. Following the example set by British Columbia with its Speculation and Vacancy Tax, the government has set out to address concerns regarding non-Canadian buyers purchasing Canadian real estate and leaving the properties vacant while housing costs continue to rise in the face of short supply. There are numerous exemptions, however the penalties for not complying with the Act or defaulting on payments are severe.
How does it work?
Starting in 2023, on April 30th foreign residential property owners will be required to produce, and pay tax on, an annual declaration for each residential property owned for the previous calendar year. For example, on April 30th, 2023, UHT returns will be filed for the 2022 calendar year.
A residential property is deemed to be a detached residence of not more than three dwelling units together, a part of a building that is a semi-detached house, rowhouse unit, residential condominium unit, or other similar premises that is, or is intended to be, a separate parcel or other division of real or immovable property owned, or intended to be owned, apart from any other unit in the building, or a prescribed property.1
The tax is calculated as one percent (1%) of the property’s taxable value OR fair market value of the property between January 1 of the calendar year and April 30 of the following calendar year as determined to be satisfactory to the Minister, multiplied by the ownership percentage. The ownership percentage addresses properties with multiple owners. Each owner is liable for the UHT on their ownership share.
1% x taxable value OR fair market value x ownership percentage
Exemptions to the Underused Housing Tax Act
There are several exemptions to the UHT, including if the foreign owner occupies the property for a minimum of six months in a calendar year, if the property is rented on a long-term basis at “fair rent” and if the property is not suitable for year-round use.
Cottages or vacation properties fall under the Seasonal Property exemption, where the property is not suitable for year-round use or is inaccessible because public access is not maintained year-round.
Owners not required to submit a return or pay the UHT fall under “excluded owner(s)” consisting of:
- Individuals that are Canadian citizens or permanent residents of Canada (unless they hold the property interest as a partner in a partnership or as a trustee of a trust)
- Corporations incorporated in Canada or a province whose shares are listed on a Canadian stock exchange for which a designation is in effect under section 262 of the Income Tax Act
- Registered charities
- Cooperative housing corporations, municipalities, colleges, and universities
- Trustees of mutual fund trusts, real estate investment trusts (REITs), or specified investment flow-through (SIFT) trusts (as these terms are defined in the Income Tax Act).
There are approximately ten additional qualifications for exclusion which can be found in Part 2 Section 10 of Bill C-8.
Penalties
There are extensive measures included within the Underused Housing Tax Act to prevent and deter evasion of the UHT. These include an anti-avoidance provision (Part 6, Section 12 -2), daily compounding interest (Part 7, Division 3), assessments (Part 7, Division 5), and penalties (Part 7, Division 8). Penalties can be applied to failures to comply with any provisions of the Act, failure to file, failure to provide information, false statements, and omissions.
Beyond facing the Tax Court of Canada, there are further consequences in the form of being found guilty of an offense where an owner “is liable on summary conviction to a fine of not less than $2,000 and not more than $40,000 or imprisonment for a term not exceeding 12 months, or to both.” 2
The government is sending a strong message with the introduction of the Underused Housing Tax Act. Given the severity and scope of fines and penalties, foreign owners are liable for, engaging a tax professional and legal professional to oversee the administration of annual returns and tax payments is recommended. The price of a plane ticket is minimal compared to daily compounding interest, fines, penalties, and convictions.
