When the 2021 federal budget introduced the underused housing tax (UHT), many tax practitioners (including myself) assumed this new measure solely impacted non-residents and non-citizens who owned underused or vacant Canadian residential real estate. Canadian residents didn’t need to be concerned, we thought.
While it’s true that the tax generally applies to non-residents, the UHT rules are impacting Canadian residents and citizens. That is, while Canadian residents and citizens may not be subject to the 1% tax, they may be required to file the six-page UHT return for residential properties or face penalties for not filing.
With 2022 being the first year of UHT filings, this past tax season left many Canadians scrambling to determine whether the UHT rules apply to them.
Most individual Canadian citizens or permanent residents who own real estate properties personally don’t have anything to worry about. They aren’t subject to the filing nor the tax.
However, if your client owns residential properties in a private Canadian corporation or as a trustee in trust for someone else, they may be obligated to file.
Clients could potentially fall into one of three categories.
The first is “excluded owners.” These individuals are not subject to the tax nor required to file a UHT return. An excluded owner includes a Canadian citizen or permanent resident; trustees with title to property in a mutual fund trust, real estate investment trust or specified investment flow-through trust; publicly traded Canadian companies; and registered charities, among others.
If you are not an excluded owner, you are considered an “affected owner” — the second category of owners — and you must file a UHT return. Those who are not eligible for exemptions — the third category of owners — are required to pay the 1% tax.
Affected owners of underused residential property include:
- individuals who are not Canadian citizens or permanent residents
- individuals who are Canadian citizens or residents who own residential property as a partner in a partnership or as a trustee of a trust
- foreign corporations
- Canadian corporations not traded on a stock exchange
Exemptions from paying the UHT are available for affected owners. Some examples of exemptions based on the type of owner include specified Canadian corporations, partners of Canadian partnerships, trustees of Canadian trusts, new owners in a calendar year, and deceased owners (and their personal representatives).
There are other exemptions based on the availability of the residential property, such as a newly constructed or seasonally inaccessible property. There are also exemptions based on the location and use, as well as the property’s occupants.
It is important to note that real estate properties subject to UHT filings are not limited to investment or rental properties, but include any “residential” property. Therefore, whether the property is for personal use or an investment is not relevant. Residential property is defined as a detached house or similar building that contains three units or fewer, a semi-detached house, rowhouse unit, residential condo unit or other similar premises. Property that is mixed-use between commercial and residential will not be considered “residential” if the residential component is less than 50% of the property.
So, which clients may be obligated to file?
A family member may hold residential property in a trust for a person with a disability who may be living in the home as their personal residence. Or a senior may use an alter ego trust to hold residential real estate as an estate planning or succession strategy. In both cases, it appears the trustee must file a UHT return; however, given the exemptions available, there would not be any tax applicable.
For affected owners required to pay, the tax is based on the property value (adjusted for your client’s proportionate ownership in the property). Property value is defined as the greater of the property tax assessment value or the most recent sale price before Dec. 31 of the calendar year. Another option is to use the fair market value determined by an accredited appraiser.
It’s also worth noting that a separate UHT return must be filed for each residential property owned. For example, if an individual owns, say, three residential properties in a private corporation, they may be required to file three separate UHT returns.
Finally, the penalties for not filing the UHT return on time are hefty. The penalty is the greater of 5% of the tax payable and $5,000 for individuals ($10,000 for corporations). The deadline to file the UHT return is the same as the regular T1 personal tax filing deadline — April 30 following the tax year.
So much confusion about UHT tax compliance arose leading up to the 2022 tax filing deadline. Fortunately, on March 27 the government announced transitional relief for Canadians, waiving all penalties and interest (on late-filed UHT returns and late-paid UHT tax) provided the UHT return is filed and tax is paid by Oct. 31, 2023. This transitional relief means that, although the deadline for filing the UHT return and paying the UHT is still May 1, 2023, no penalties or interest will be applied for UHT returns and payments that the Canada Revenue Agency receives before Nov. 1.
Frank Di Pietro, CFA, CFP, is assistant vice-president of tax and estate planning at Mackenzie Investments. He can be reached at firstname.lastname@example.org.