Canada’s Underused Housing Tax – What you need to know

Canada’s new Underused Housing Tax (UHT) is a federal tax on vacant residential homes with three or fewer dwelling units, which impacts residential developers and owners of rental condominium buildings. While most Canadian owners are exempt from paying the tax, many will still need to file an annual return. The deadline to file the return and pay any taxes owed is April 30th each year, and fines will be levied for failure to file. The rules associated with this tax are complex - this article provides a summary. Affected owners should reference the Canada Revenue Agency (CRA) website for more information.

Update: the CRA has announced that penalties and interest have been waived, provided the return is filed or UHT paid by October 31, 2023.

The UHT was introduced as part of the federal budget in 2021, as a tool to cool the overheated housing markets in Canada’s urban centres, and to discourage foreign investors from acquiring residential properties and leaving them vacant. The UHT is additional to similar provincial and municipal taxes, such as BC’s Speculation and Vacancy Tax, and the Vacant Home taxes recently implemented in Vancouver, Toronto and Ottawa.

In 2021, it was anticipated that the UHT would raise $700 million over four years. With the hefty penalties and complex rules, much of the revenue raised may be in penalties, as many may not be aware of their filing obligations – which begin this year.

Affected properties

For the purposes of the UHT, “residential property” means buildings with three or fewer dwelling units, including condo units, single-family homes, and some multiplex properties. We anticipate the reporting requirements will be most significant for developers with unsold inventory, as well as owners of multi-family properties with individual unit title (i.e., rental condo buildings).

Every owner of a “residential property”, unless one of the “excluded owners” listed below, must file a return for each residential property they owned as of December 31 in the prior year (i.e., 2022 for the 2023 return), or face significant penalties.

Excluded owners

Owners exempt from filing the return (“excluded owners”) are as follows:

• Federal, provincial or municipal governments

• A mutual fund trust, real estate investment trust or Specified Investment Flow-Through (SIFT)

• An individual who is a Canadian Citizen or permanent resident

• A publicly-traded Canadian corporation

• A registered charity, housing co-op, hospital, school authority or college/university

• An indigenous governing body or corporation

An individual who is the trustee of a trust or partner of a partnership is not an excluded owner (except in limited cases). Although most Canadian corporations, partnerships and trusts will be exempt from paying the tax, they will need to file an annual return. The penalty for failure to file by the deadline is a minimum of $5,000 for individuals, and $10,000 for corporations. The fines increase as the return remains outstanding, and future exemptions may not be available for those who fail to file on time.

How the Underused Housing Tax is calculated

On the UHT return form, you are required to provide the assessed value of your property for tax purposes, as well as the most recent sale price. If you and/or your property do not qualify for exemption (see partial list of exemptions below), you will be required to pay the 1% tax on the greater of the two values.

In the event that the value of the property has declined since the sale or appraisal, you can elect to pay based on “fair market value”. The fair market value must be supported by a written appraisal prepared by an accredited appraiser, between January of the UHT calendar year and April of the following year. In the case of partial ownership, the tax paid will be in proportion to the owner’s share.

Exemptions from payment of the Underused Housing Tax

Criteria for exemption of properties from payment of the UHT include, but are not limited to:

• Occupancy in periods of at least one month that total at least six months

• Not suitable for year-round use (access not maintained, not winterized, etc.)

• Unusable for at least 60 days due to disaster or hazard

• Unusable for 120 days as a result of renovation (only if not granted in any of the previous 9 years)

• Ownership transferred during the calendar year (i.e. 2023 for 2022 tax)

• Not substantially complete prior to April, or complete by April and offered for sale but not yet occupied.

• Owned by a specified Canadian Corporation, trust or partnership (includes most Canadian companies)

Properties located in tourist areas are also exempt, however many border regions contain metropolitan areas which include summer homes for US residents, and would not be exempt. This has raised the ire of US politicians who point to the large number of Canadian “snowbirds” and suggest that if exemptions for US citizens are not made, they may need to consider similar policies, particularly in the Sun Belt regions.

Penalties

If an owner is not part of the listed “excluded owners” and fails to file by the deadline, the penalties are as follows:

• The greater of $10,000 ($5000 for individuals), and:

• The total of 5% of the UHT payable for the year + 3% of the UHT owing x months payment past due

For continued failure to file by December 31 of the following year, several exemptions will not be available. For failure to file a return when demanded, or to provide required information, or providing false statements or omissions, the penalty is 25% of the tax avoided. The CRA may assess tax, interest and penalties for previous years at any time.

How to file your Underused Housing Tax return

Full details of the UHT requirements and exemptions are found on the CRA website.

To complete your return, download the Underused Housing Return Form. This year, the due date to file the 2022 UHT return and to remit any taxes payable is May 1, 2023 (as April 30 falls on a Sunday).