Canada Tax Update: A Brief Of Underused Housing Tax (UHT)

According to Canada Budget 2021, the federal government plans to Canada tax residential real estate at one percent annually on the following basis:

Any property owned by a non-resident, non-Canadian, and

An underutilized or vacant space.

This blog focuses solely on national Underused Housing Tax and UTH exemptions. The exemptions include qualification exemptions, Property availability exemptions, and Ownership exemptions.

Introduction of UTH:

The Underused Housing Tax is a policy or tax levied on property owners who have underutilized or under-occupied housing units. This tax aims to encourage the release of such units into the market. The UTH Act is making more housing available and hopefully reducing housing shortages and increasing affordability.

What Does The UHT Mean?

A non-resident, non-Canadian, wholly or partly owns underutilized housing in Canada, whether directly or indirectly. Residents in Canada who own residential properties on December 31 of the relevant year are subject to UHT obligations for calendar years (beginning with 2022).

UHT taxes are due in addition to some filers' annual reporting requirements. Calculate the tax by multiplying the value of the residential property by 1 percent. In addition,  filing the annual return must be paid to the CRA by April 30.

There are three broad groups of residential property owners under the UHT rules:

• Excluded owners
• Affected owners
• Owners who must file the UHT return but do not owe any taxes.

Who are the excluded owners?

UHT obligations are exempt for the following owners (as of December 31 of the calendar year): 

• Citizens and permanent residents of Canada, unless they are exempt from ownership as trustees or partners.
• Corporations listed on the Canadian stock exchange
• The trustees of mutual fund trusts, real estate investment trusts, and specified investment flow-through trusts (SIFTs) have title to property.
• Charities registered with the government
• Associations of cooperative housing
• Organizations and government bodies related to municipal affairs
• A corporation or a governing body of Indigenous peoples
• As of the time of writing, no regulation has defined prescribed persons.

The following residential property owners must file taxes:

• Non-Canadians and permanent residents qualify for an exemption.
• A private corporation, including a Canadian-controlled private corporation or a partnership or trust (other than an estate) that owns residential property in Canada, is not exempt.

What Are The UTH Exemptions?

Owners may be eligible for an exemption from the tax if they meet the below criteria. Otherwise, UHT will apply.

1. Qualifications for exemptions

Following situations may exempt an owner of a residential property for a calendar year.

• A residential property may be used as the primary residence for: 
• Owners, spouses, or common law partners (referred to as "spouses")
• An authorized international student who occupies the residential property of an owner or the owner's spouse.
• Qualifying occupants about the owner occupy at least 180 days during the qualifying occupancy period.
• When a qualifying occupant continuously occupies a residential property unit for at least one month in a calendar year, it is considered a qualifying occupancy period.

2. Owners who qualify as occupants include:

• A written agreement with arm's length tenant
• Tenant with a written agreement for fair rent who occupies a dwelling unit continuously
• A Canadian worker or their spouse who occupies the dwelling unit for authorized work under a Canadian work permit
• An American citizen or permanent resident spouse or parent

In the case of multiple residential properties owned by the owners and their spouses, exemptions may not be available. They apply for an election with the CRA listing only one home as their primary residence. Therefore, you must file the election with your UHT return the following year. With this, co-owners must also vote jointly when the property is owned jointly.

When a primary residence is designated, owners or spouses cannot qualify as occupants of any other properties that they own.

3. Property availability exemptions

There may be an exemption if the residential property is unavailable for the following reasons.

A property that is not suitable as a year-round residence or cannot be accessed during part of the year.

During the calendar year, the property must be uninhabitable for at least 60 days. Therefore, the property was not exempt from the previous year.

Residential properties that have been uninhabitable for 120 consecutive days. Because renovations completed without unreasonable delay qualify for the exemption, and the property was not exempt last year.

The owner acquired a residential property for the first time during the year. During the nine years before, the property was not owned by the owner.

4. Ownership type exemptions

Owners who are exempt from UHT include:

• In the year of death or the following year, deceased owners and their representatives are exempt.
• Survivors with at least 25 percent interest. 
• Corporations with less than 10% foreign ownership of votes or equity value that is specified Canadian corporations.
• People who hold property solely as partners in a Canadian partnership that excludes owners and specified corporations.
• Owners of residential properties who solely act as trustees of specified Canadian trusts. In such trusts, every beneficiary is an excluded owner or listed Canadian corporation.

5. People or areas exempted based on prescribed conditions

If the residential property is not in a densely populated area, the recreational property may be exempt from UHT:

An area of Canada prescribed by law

During the calendar year, it must be used by the owner, the owner's spouse, or both.

Impact of Underused housing tax

The impact of the Underused Housing Tax can be positive. 

Positive impacts can include:

1. Increasing the availability of housing units: 

By incentivizing property owners to release underutilized or under-occupied units into the market, the tax can help address housing shortages and make more housing available, especially in high-demand areas.

2. Reducing housing costs: 

The increased housing supply can put downward pressure on housing prices, making housing more affordable for renters and buyers.

3. Boosting economic activity: 

The increased demand for housing can create jobs in the construction and real estate industries and stimulate economic activity in other sectors.

Depending on the specifics of the tax, it may result in unintended consequences for renters and buyers, such as reduced housing quality, increased rental costs, or reduced access to affordable housing.

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FAQs:

1. Who is subject to the Underused Housing Tax?

The Underused Housing Tax applies to property owners who keep their homes empty for a specified period of time, typically six months or more. The tax is typically levied on the owner, not the property, and is based on the assessed value of the property.

2. How is the Underused Housing Tax calculated?

The Underused Housing Tax is typically calculated based on a set rate that is applied to the assessed value of the property. The rate may vary depending on the jurisdiction and the length of time that the property has been left empty. In some cases, the tax may be waived or reduced for certain types of properties, such as:

3. Undergoing renovations 

Temporarily vacant due to circumstances beyond the owner's control.

4. Who must file UHT returns but are exempt?

An exemption is available to this subset of affected owners, but they still need to file a calendar-year exemption claim.

5. Is the Underused Housing Tax appealable?

Yes, the Underused Housing Tax can be appealed by the property owner. The appeals process typically involves submitting a request for reconsideration or appealing the tax to a higher authority, such as a tax appeals board or court.

Imtiaz Munshi, CPA

CFO, AZSTEC LLC

The author Imtiaz Munshi is a Certified Public Accountant and CFO at Azstec, LLC. He is Business Strategist, Tax Planner, Entrepreneur and Advisor to "HNEs" (High Net Worth Entrepreneurs).