The Underused Housing Tax (UHT) in Canada: Impacts and Implications for Property Owners
As a property owner in Canada, you may be subject to the Underused Housing Tax (UHT). The UHT is a new tax that came into effect on January 1, 2022. This tax targets underutilized or vacant residential rental properties and aims to increase the supply of available housing, reduce real estate speculation, and promote better use of residential properties.
While the UHT was primarily proposed to address issues related to foreign property owners, it also affects private Canadian corporations. If you are subject to the UHT, you must file a return by April 30, 2023, and failure to do so may result in significant penalties. It is essential to understand your obligations under the UHT and seek professional advice to determine how the tax may affect your investment strategies. Please note that the information provided in this summary is for information purposed only, and it is recommended that you seek qualified professional advice to evaluate your specific circumstances.
NOTE: The CRA announced on March 27, 2023 that while filings are still due on April 30, 2023 (May 1, 2023), Underused Housing Tax penalties and interest waived for filings after this deadline, but before October 31, 2023, will not be penalized.
The Canada Revenue Agency (CRA) understands that there are unique challenges for affected owners in the first year of the Underused Housing Tax Act (UHTA) administration.
What is the Underused Housing Tax (UHT)?
The UHT in Canada imposes a tax on certain types of residential properties that are deemed to be vacant or underutilized. UHT imposes a 1% annual tax on the value of residential real estate considered to be vacant or underused that is owned on December 31 or each year. The goal of the UHT is to bring about positive changes in the Canadian housing market, benefiting both property owners and those seeking affordable housing options.
The Canada Revenue Agency (CRA) provides the following definitions for a property subject to the UHT:
- A detached house or similar building that contains not more than three units, appurtenances*, and the related land
- A semi-detached house, rowhouse unit, residential condominium unit, or other similar premises, along with any common areas, appurtenances, and the related land.
* Common examples of appurtenances are driveways, drainage ditches, fences, and rights of way.
Generally, the UHT applies to residential rental properties that are unoccupied or not being used to their full potential. It is important to note that there are some exemptions and exclusions from the UHT, such as certain types of properties used for charitable purposes, affordable housing, or temporary accommodations. Property owners should consult with their account or legal counsel to determine whether their properties are subject to the UHT and what their obligations are under this new tax.
Who MUST file the UHT?
The tax usually applies to non-resident, non-Canadian owners. In some situations, however, it also applies to Canadian owners:
- Foreign investors who own rental properties in Canada
- Individuals who are non-residents of Canada
- Non-Canadians
- Canadian private corporations
- Trusts; and
- Partners in a Canadian partnership
To determine if you are an excluded or included owner, visit: CRA – Underused Housing Tax and discuss with your accountant or lawyer.
What is the tax?
The tax is based on 1% of the value of the property annually, if vacant or considered underutilized. To calculate what you owe, CRA advises to:
- Multiply the value of the residential property by the 1% tax rate.
- Then multiply that result by your ownership percentageof the property.
You can determine the value of the property for the year for property tax purposes and by using the most recent sale price. An owner can also elect to use the property’s fair market value as determined at any time during the year up and up to April 30 of the following year. In the later situation, CRA will require an appraisal report prepared by an accredited, professional real estate appraiser operating at arm’s length from the owner.
What is considered “vacant”?
The CRA provides the following definitions for a “vacant” or “underutilized” property subject to the UHT:
- Vacant property – A property is defined to be vacant if it meets one of the following criteria:
- It does not contain any occupants on December 31 of the year in question, and it has not been rented or leased for at least 30 days in a row during the year.
- It is not ordinarily inhabited by individuals as their place of residence or lodging, and it is not being used for any other purpose.
- Underutilized property – A property is defined as underutilized if it meets one of the following criteria:
- It is occupied by one or more individuals, but it is not being used as a place of residence or lodging, and it is not being used for any other purpose.
- It is being used for a purpose other than as a place of residence or lodging, and that use is not consistent with the property’s ordinary use or any restrictions or conditions that apply to the property.
It is important to note that the definitions of vacant and underutilized properties under the UHT may be more restrictive than what property owners may consider “vacant” or “underutilized”. Property owners should consult with their accountant or legal counsel to determine whether their properties meet the criteria.
What is taxable?
There are lots of rules to consider. And lots of exemptions. Essentially, a residential dwelling is generally defined by the CRA as a property that is either one of the following:
- A detached house or similar building that contains not more than three units, appurtenances and the related land
- A Semi-detached house, rowhouse unit, residential condominium unit or other similar premises, along with any common areas, appurtenances, and the related land
Example: Residential units less than 3 units in a single building are taxable. Condominium units are also taxable. So, if you own a 6 Plex, and it is a condominium, and … you own all the units, you will need to complete a separate filing for each unit.
Is there a requirement to file?
Yes, there is a requirement to file, even if there is no tax owing. If the property AND you qualify, you must file even if fully occupied and no tax payable.
Under the UHT in Canada, property owners who fail to file their UHT returns by the due date or who fail to pay the tax owing may face penalties and interest charges. The penalties for non-compliance are significate and can add up quickly.
Here are some details on the penalties that may apply:
- Failure to file penalty – It a property owner fails to file their UHT return by the due date (April 30), they may be subject to a penalty of $5000 for individuals or $10,000 for corporations … per unit! This means that if you own multiple units that are subject to the UHT and you fail to file a return for each unit, you may be subject to multiple penalties.
- Failure to remit penalty – If a property owner fails to pay the UHT owing by the due date, they may be subject to a penalty of 1% of the unpaid amount for each month that the tax remains unpaid, up to a maximum of 12 months.
- Interest charges – If a property owner fails to pay the UHT owing by the due date, they may be subject to interest charges on the unpaid amount. The interest rate is set by the CRA and may change from time to time.
Again, even though you may not have a requirement to pay this tax, you may still have the requirement to file a UHT. In addition to the penalties and interest charges, property owners who fail to comply with the UHT may face other legal or financial implications, such as audits, assessments, or legal action. It is essential to understand your obligations under the UHT and seek professional advice to ensure that you comply with the tax and avoid penalties or other consequences.
As highlighted above, the UHT could have significant impact on property owners depending on how your property and your ownership is structured. It is crucial for property owners to stay informed about the details of the UHT and to review with your accountant how this new tax may affect your investment strategies.
Taking the time to avoid penalty and to verify whether you have a filing and or a tax payment requirement for your properties (or both) is highly recommended.
Here are some additional references and resources for readers to learn more about the Underused Housing Tax (UHT) in Canada:
As discussed throughout this article, it is important to note that the information provided is for informational purposes only and it is not intended to provide legal or professional advice. While we have made every effort to ensure the accuracy and reliability of the information provided, we cannot guarantee its completeness or suitability for any particular purposes. Therefore, readers should seek the advice of qualified professionals that understand their individual situation and potential exceptions, that can provide advice tailored to their specific circumstances. Emerald Management & Realty Ltd. does not accept any liability for any loss or damage arising from the use of this information.
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