Bill C-8, Economic and Fiscal Update Implementation Act of 2021 was granted royal assent on June 9, 2022. Bill C-8 brings into effect a number of the policies stated in the government economic and fiscal report presented on December 14, 2021, as well as Canada's new underutilized housing tax act. The Act, in its broadest sense, aims to levy an annual tax of 1% on the value of residential property situated in Canada, unless the owner is qualified to seek a special exemption. Despite the fact that the Act is written to include a variety of exemptions, the two main exemptions pertain to homes used as the primary residence by the owner, the owner, or a member of the owner's immediate family, as well as homes that satisfy the "qualified occupancy period" requirements for at least 180 days in a calendar year.
The stated objective of enacting a national underused housing tax, as mentioned in the Budget of 2021, is to make sure that non-resident owners who use Canada as a location to passively keep their money in real estate pay their fair contribution. The speculation and vacancy tax levied by the province of British Columbia for 2018 and subsequent calendar years is a major inspiration for this new tax, which will be implemented by the Minister of National Revenue.
The main operational provisions of the Underused House Tax Act will be summarized on this page. In broad strokes, the following is explained in this article:
- Who will be subject to this tax and, by coincidence, who will be exempt under the Act
- properties covered by the Act's scope.
- the way for calculating the tax.
- the comprehensive list of tax exemptions that an owner is eligible for, including the principal place of residence and qualified occupancy exemptions.
- The impact of the Act on bankruptcy trustees and receivers
- A quick review of some of the Act's administration and enforcement features.
- Existing residential vacancy taxes in addition to those mentioned above and how they affect the new Underused Housing Tax Act.
- What else do impact property owners need to know about the Underused Housing Tax when completing their tax returns
- Pro Tax Tip
Who will be subject to this tax?
Every taxpayer who is the owner of a residential property in Canada on December 31 of a calendar year, including a life tenant under a life estate, a person holding a life lease, and a person under a long-term lease who has continuous possession of the land on which the residential property is situated, will be subject to taxation under the Underused Housing Tax Act. An owner who is an "excluded owner" or a person who is eligible for one of the several exclusions provided by the Act will not be subject to the tax.
Who exactly is an "excluded owner"?
In most cases, an excluded owner is free from both the tax levied under the Underused Housing Tax Act and the procedures for submitting tax returns. The Act specifies the number of groups of excluded owners, including those who, as of December 31 of a calendar year, are:
- His Majesty in right of Canada, a province, or one of his representatives
- A person who is a citizen or a permanent resident, unless they are the owner of the property while serving as a trustee of a trust or a partner in a partnership.
- A Canadian corporation with its corporate headquarters in Canada or one of its provinces, and whose shares are traded on a "designated stock exchange" for the purposes of the Income Tax Act.
- One who is the trustee of a mutual fund trust and who also owns the residential property
- A real estate investment trust or
- A specified investment flow-through (SIFT) trust, is one that complies with the Income Tax Act's
- A recognized charity under the Income Tax Act
- A cooperative housing organization, a hospital authority, a city or town, a public college, a school district, or a university as those terms are used in the Canada Excise Tax Act and
- An indigenous governing body or a business that is fully controlled by such a body.
Moreover, the term "excluded owner" is defined in a flexible manner that allows for the inclusion or exclusion of taxpayers who may be prescribed in the future. Notably, private corporations, partnerships, and personal trusts are not included in the definition of an "excluded owner"; rather, their eligibility for an exemption from the tax payable under the Underused Housing Tax Act is governed by specific exemptions applicable to a "specified" Canadian corporation, partnership, or trust, as further described below. Apart from recognized charities, organizations that are exempt under section 149 of the Income Tax Act are not excluded by the Underused Housing Tax Act. As a result, such tax-exempt companies will want to make sure that they qualify for one of the Act's exemptions for residential buildings they hold.
The range of residential properties covered by the Underused Housing Tax Act
Every owner of a "residential property" (except an exempt owner) is subject to a tax under the Underused Housing Tax Act. According to the definition, a "residential property" includes:
- a detached home, duplex, or triplex that has no more than three residential units,
- a section of a house that is a semi-detached home, a rowhouse unit a residential condominium unit; or
- A specified property, as well as any communal spaces and additional adornments that are comfortingly essential for the use and pleasure of such property as a house for people.
The Underused Housing Tax Act also includes a residential unit with a private living space, a private bathroom, and a private kitchen as a "dwelling unit" under its definition of the term.
The Tax's Exemptions
Considering the extent of the tax provision, which is applicable to all owners of residential property, and the rather rigorous list of "excluded owners," the Underused Housing Tax Act is structured with a plethora of exclusions. The Act requires that every owner of residential property who is not an "excluded owner" must satisfy the requirements of an exemption in order to be free from the tax. Owners still need to submit returns in order to claim any applicable exemptions, regardless of whether an exemption is available.
Exemption for the primary place of residence
If a dwelling unit that is a part of the residential property serves as the owner, their spouse, common-law partner, or child's principal residence for that calendar year and the child occupies the residence while attending a designated learning institution for the purposes of the Immigration and Refugee Protection Regulations, no tax is owed by the owner of the residential property under the Act.
Exemption for qualifying occupancy
A residential property is eligible for an exemption if it has at least 180 days of "qualified occupancy time" during the calendar year. This is because the Underused Housing Tax Act's purpose is to tax underutilized or unoccupied homes.
An individual who occupies a housing unit that is a portion of a residential property continuously for a period of at least one month is considered to have a "qualified occupancy period" with respect to a residential property. These people include any of the following:
- An individual whose possession of the unit is formally acknowledged by a written agreement and who has no business relationships with the owner, the owner's spouse, or the owner's common-law partner.
- A person whose occupation of the unit is formally acknowledged by a written agreement for remuneration that is not less than the reasonable rent for the property and who has a business relationship that is not at arm's length with the owner, the owner's spouse, or the owner's common-law partner.
- The amount that constitutes "fair rent" may be calculated as being equal to 5% of the property's "taxable value" for the year.
- a person who is the owner, the owner's spouse, or the owner's common-law partner, and who is pursuing allowed employment under a Canada Work Permit while residing in the dwelling unit for that reason.
- A parent, child, spouse, or common-law partner of the owner who is a Canadian citizen or permanent resident.
In conclusion, the Act exempts owners from the tax if the number of days in a calendar year that are comprised of a "qualified occupancy period" for the residential property is 180 days or more. Given that a "qualified occupancy period" necessitates that one of the aforementioned persons occupy the dwelling unit continuously for at least one month, it appears that this exemption necessitates that the residential property be suitably occupied for around 6 of the calendar year's 12 months. If the occupation spans at least one full month, it is not necessary for the occupancy to last for a continuous 180-day period.
The owner, their spouse, common-law partner, parent, or child must be the only persons in continuous occupancy during the qualified occupancy period if they also live in another residential property for a period of time that is equal to or longer than the time they spend in the owner's residential property. In this case, calendar months must be excluded from the qualified occupancy period. This basis may prevent an owner from claiming this exemption if any calendar month is excluded from the qualifying occupancy period.
Restrictions on several properties
The primary place of residence exemption and the qualifying occupancy exemption is only available if certain elections are made in cases where neither a residential property owner nor their spouse or common-law partner are Canadian citizens or permanent residents and one of them is also the owner of another residential property.
These elections are often created to allow Canadian residents who own numerous residential properties to choose only one of those homes to use as their designated property for the purpose of getting an exemption. The election may only be used for one property per calendar year, therefore the owner will be responsible for paying any Act-imposed taxes on any other residential properties they hold in Canada.
Additional listed exemptions
The Act outlines a multitude of other exemptions in addition to the exemptions for the primary place of home and qualified occupation. If the owner or the residential property satisfies the requirements for the applicable calendar year determine which exemptions apply.
A) Residential homes owned by a "specified Canadian partnership" or "specific Canadian trust" are exempt from the tax.
According to the Underused House Tax Act, a taxpayer who owns a residential property only in their role as a partner in a "specific Canadian partnership" or as a trustee in a "specified Canadian trust" is not subject to taxation. The terms "specified Canadian partnership" and "specified Canadian trust" generally refer to a partnership or trust that, as of December 31 of the relevant calendar year, only includes "excluded owners" or "specified Canadian corporations" as defined by the Underused Housing Tax Act for partners and beneficiaries, respectively. It is unclear what restrictions if any, may be implemented in this regard. This Act is also flexible enough to create specified partnerships and trusts as failing within these categories.
B) Residential property exemptions owned by a "specified Canadian corporation."
A taxpayer is exempt from paying tax under the Underused Housing Tax Act if he or she qualifies as a "specified Canadian corporation" for a certain calendar year. A corporation that is incorporated or continues to exist under Canadian federal or provincial law is referred to as a "specified Canadian corporation"; however, this definition specifically excludes any corporation the shares of which represent 10% or more of its equity value or voting rights and are owned by any of the following parties:
- a person who is neither a permanent resident nor a Canadian citizen.
- a business that was incorporated outside of Canada.
- any of the aforementioned combinations.
If the chairperson or another presiding officer of a corporation is neither a Canadian Citizen nor a Permanent Resident, or if 10% or more of the directors are neither Canadian Citizens nor Permanent Residents, the corporation cannot qualify as a specified Canadian corporation if it lacks share capital property.
Meeting the Canadian Corporation exemption may be very important since private corporations are not included in the definition of an excluded owner. Therefore, it would seem that a Canadian private corporation with foreign companies as shareholders or with individuals who are neither Canadian citizens nor permanent residents and who control 10% of the voting or value interests would not be eligible for this exemption. The Underused House Tax Act does not appear to have any provisions that divide the tax obligation under this Act among shareholders. As a result, unless another exemption is used, it appears that the business will be liable to the full-year tax even if, for instance, 90% of the shareholders were otherwise "excluded owners" if it does not qualify as a specific Canadian Corporation.
C) Residential properties that cannot be used year-round or are uninhabitable all year-round are exempt from the requirement.
For residential homes that are not livable, accessible, or appropriate in a variety of situations, there are a number of exclusions available. Residential properties, for instance, that are not used year-round as a place of habitation, are excluded. Those houses that were not designed with the severe Canadian winters in mind are probably excluded from this. The same exemption applies to residential properties that are only sometimes accessible to the public due to inadequate maintenance of year-round public access.
A residential property that becomes uninhabitable for at least 60 days in a row in a calendar year due to a disaster or a predetermined "hazardous condition" that is beyond the owner's reasonable control is also exempt, provided that the owner hasn't previously used this exemption for the same disaster or hazardous condition in more than one prior calendar year.
D) Residential properties that are being built, renovated, or that have just been bought are exempt
If renovations make a dwelling unit on a residential property unlivable for at least 120 days in a calendar year, the owner of that dwelling unit is also exempt from paying the Underused Housing Tax, provided that there was no unreasonable delay and that the owner had not previously relied on this clause in any of the nine years prior.
A taxpayer may also be eligible for an exemption if they acquire ownership of a residential property during that calendar year even though they did not previously possess it within the previous nine calendar years.
Also, if the residential property's development is not substantially finished before the month of April of the relevant calendar year, the Underused Housing Tax will not be applicable. If a residential property is offered for sale to the general public during the calendar year and is substantially finished after the month of March of the relevant calendar year, it may be eligible for an exemption, so long as the property has never been used by a taxpayer as a place of residence during that year.
E) Residential property exemptions upon the demise of the owner
The Underused Housing Tax Act contains exclusions that are valid in the year that the owner of a residential property passes away or the year that was immediately preceding. Furthermore, if the deceased was the owner of a residential property during the current calendar year or the prior calendar year and the personal representative was not the other owner of the residential property in either of those calendar years, the personal representative will not be subject to the Underused Housing Tax.
Last but not least, if the following two requirements are met, the Underused Housing Tax is likewise not payable under the Underused Housing Tax Act:
- If a taxpayer who owned a residential property passed away in the current or previous calendar year, provided that the taxpayer owned at least 25% of the property at the time of death, and
- On the day of their passing, the taxpayer was a proprietor of the residential property.
F) Exemptions determined by the place of residence and usage of the residential property
If a residential property is utilized as a vacation home in an eligible Canadian region for at least 28 days throughout the calendar year by the owner, his or her spouse, or common-law partner, the owner of the residential property may be excused from paying taxes on that property for the whole year.
Although the decision will be based on census data, which is updated sometimes, whether an area qualifies as an eligible area must be evaluated annually.
To discover if a taxpayer's property is situated in a region of Canada that qualifies for this exemption, please see the Underused Housing Tax Vacation Property Designation Tool.
Representatives, receivers, and trustees
Obligations of bankruptcy trustees
In accordance with the provisions of the Underused Housing Tax Act, the bankruptcy trustee is responsible for paying any amounts due in place of the bankrupt person, provided that the payments are unrelated to any post-bankruptcy endeavors the bankrupt person started that had nothing to do with the bankruptcy. The property in the trustee's possession to meet such responsibility is the extent of the trustee's liability for amounts due in respect of calendar years ending on or before the date of bankruptcy. Also, the trustee is not responsible for any amounts for which a receiver would otherwise be responsible under the Underused House Tax Act. To the degree that a bankrupt individual makes payments, their responsibility as a trustee is likewise discharged.
As is customary in bankruptcy, the trustee in bankruptcy is required to file with the CRA all returns required under the Underused Housing Tax Act in respect of the activities of the person to whom the bankruptcy relates for the calendar years ending in the period during which the trustee acts in their capacity as a trustee. Moreover, unless the CRA waives this obligation, the trustee must file any returns that the bankrupt taxpayer is obligated to file under the Underused House Tax Act for a calendar year that ends on or before the date of bankruptcy. Anything that a receiver is ordinarily required to provide in a return is exempt from inclusion by a bankruptcy trustee. A trustee in bankruptcy is exempt from including information in a return that a receiver is ordinarily required to include.
For the purposes of the Act, the word "receiver" has a broad definition that covers anybody who is appointed or given the authority to run or manage the company or assets of another taxpayer. Those who are chosen as receivers include:
- By virtue of the power of a debt instrument, a court order, or a piece of law,
- A trustee acting under the terms of a trust deed involving debt security,
- For a bank to serve as an agent or required under subsection 426(3) of the Bank Act,
- As a liquidator to dispose of a corporation's assets or wind up its business,
- As a committee, guardian, curator, tutor, or requirement to oversee and look after the assets of a person who is competent to do so.
Although a receiver may sometimes be designated to execute a creditor's right to control or manage the assets of another taxpayer according to a debt instrument, the creditor itself is not included in the definition of a receiver.
The extent of the receiver's responsibility is determined in relation to the "relevant assets" that fall under the purview of the receiver's power, which may or may not encompass all of the taxpayer's properties, enterprises, affairs, or assets. When only a portion of the assets are related to the business under the receiver's authority, such assets are thought to be distinct from all other assets and are dealt with as if they belonged to a different taxpayer who is responsible for their businesses, properties, affairs, and assets.
When a person is granted authority over their business, property, affairs, or assets, the person and the receiver are jointly and severally liable for any amounts due under the Underused Housing Tax Act prior to or during the period in which they act, to the extent that the amount is reasonably related to the receiver's relevant assets or what would have been the receiver's relevant assets had they been acting as a receiver at the time.
The property of a person in the receiver's possession, under the receiver's control, or under management is the only property for which the receiver is liable in relation to amounts owed under the Underused Housing Tax Act for periods ending prior to the receiver's appointment.
- paying any sums that the receiver is compelled to pay to a trustee in the person's bankruptcy.
- after satisfying the claims of creditors whose claims are superior to the claims of the Crown.
In addition, to the extent that payments are made by the person or the receiver, the receiver's joint, multiple, or solidary responsibilities is relieved.
Every return required by the Underused Housing Tax Act in relation to all relevant assets of the receiver for calendar years ending in the time during which they act in their position as receiver must be filed with the Minister of National Revenue by the receiver.
Moreover, unless the Minister of National Revenue waives this obligation, the receiver is obligated to file any returns that have not been filed that are due under the Underused Housing Tax Act for a calendar year that ends on or before the day the receiver is appointed.
Certifications of clearance for receivers and representatives
For the purposes of the Underused Housing Tax Act, "representatives" are defined as those individuals, other than a trustee in bankruptcy or a receiver, who are in charge of, administering, winding up, controlling, or otherwise dealing with any property, business property, or the succession of another person. The Minister of National Revenue must provide a certificate to representatives and receivers before the property may be distributed. The certificate's purpose is to attest to the fact that the CRA has been provided with enough security for payment, or that all sums due have been paid.
The representatives or receiver may be deemed personally responsible for any monies due under the Underused House Tax Act up to the full value of the dispersed property if they fail to get a clearing certificate.
Provision for Anti-Avoidance in General
The Underutilized Housing Tax Act has a broad anti-avoidance provision that is similar to the General Anti-Avoidance Rule of the Canadian Income Tax Act. Particularly, the anti-avoidance regulations also target transactions performed for non-bona fide objectives which aim to receive a tax benefit stemming from a "parameter change".
Under the Underused Housing Tax Act, a parameter change is described as a change in a rate, words, or phrases. These sorts of transactions, or series of transactions, involve property and take place between non-length arm's taxpayers, resulting in a tax advantage to everyone engaged, directly or indirectly. As a result, the anti-avoidance provision in the Underutilized Housing Tax Act appears to have a larger reach than the General Anti-Avoidance rules in the Income Tax Act.
Enforcement and Administrative
Some of the administrative and enforcement rules are similar to provisions found in the Canadian Income Tax Act, particularly when it comes to the imposition of interest, fines for failure to file returns, limitation periods for assessments and reassessments, procedures relating to notice of objections and appeals to the Tax Court of Canada and Federal Courts, record keeping requirements, offenses and penalties, and collections and garnishment.
Moreover, for the purposes of the Canadian Income Tax Act, the Underused Housing Tax Act has additional requirements that are not elsewhere codified. For instance, the Underused Housing Tax Act establishes obligations on public employees to safeguard the information they collect and to conceal or withhold it from the public except under certain conditions.
The Underused Housing Tax Act, any tax legislation, the Canada Pension Plan, Employment Insurance Act, or the Greenhouse Gas Pollution Act are among those that fall under this category, as well as legal actions that have a criminal focus or are connected to their administration. The confidentially of information may also be disclosed if it is reasonably believed to be required for a purpose related to "the life, health, or safety of a person or to the environment in Canada or any other nation" or other specifically listed objectives. Under the Act, a government employee who violates confidentially is guilty of a criminal offense.
Another illustration would be the provisions that allow the Minister of National Revenue to permit entry into a building, including a residence or a location where records are kept, with the occupant's permission or with the help of a search warrant in order to conduct an inspection, audit, or examination to implement and enforce the Underused Housing Tax Act.
There is little uncertainty that the administration and enforcement provisions of the Underused Housing Tax Act pose a number of issues pertaining to procedural fairness that will ultimately be contested in court by experienced Canadian tax litigation lawyers.
Extra vacancy taxes on residential property
A vacancy tax on vacant homes has been implemented by a number of municipalities, including Vancouver, Toronto, Hamilton, and Ottawa, in an attempt to boost the supply of homes. Unlike the Underused Housing Tax Act, which often only affects foreign property owners, as was covered in the article above, the aforementioned taxes are applicable to all foreign property owners, including Canadian citizens and Canadian permanent residents.
If a taxpayer does not dwell in a residential property for at least six months of the previous year, it will be deemed empty for the purposes of these extra residential vacancy taxes, barring any exemptions. Similar to the Underused Housing Tax Act, exemptions provide that the tax would not be levied if the vacant property was left vacant owing to repairs, safety issues, natural catastrophes, or the passing of the prior owner.
Regardless of whether a residential property is tax exempt, mandatory statements must be submitted annually to the city and province where the relevant residential property is situated. If declarations are not submitted by the deadline, each city has its own late filing fines. Whereas Vancouver's tax rate is 5%, Ontario's municipal taxes are 1% of the assessed value of the property. If these taxes are not paid on time, late fees will be assessed through property tax statements.
In addition to Vancouver's vacant property tax, British Columbia also has its own provincial estimations and vacancy tax. The tax levied is 0.5% for Canadian citizens or Canadian permanent residents who are not part of a satellite family or 2% of the total property value for foreign owners and satellite families (meaning less than 50% of family income is not taxed in Canada).
For instance, in Vancouver, the three levels of taxes (1% Underused Housing Tax + 3% Vancouver Vacant Home Tax + 2% British Columbia Speculation and Vacancy Tax) might add up to taxes equal to 6% of the fair market value of a residential property.
What else do owners who are impacted by the Underused Housing Tax need to know when submitting their tax returns
It may be a time-consuming procedure with pricey repercussions to navigate the legislation's complexity regarding the Underused House Tax, including its exclusions and reporting requirements.
Individuals who are neither Canadian Citizens nor Permanent Residents of Canada and own, directly or indirectly, residential properties in Canada that are currently underutilized or unoccupied are encouraged to seek legal and tax advice from an expert tax lawyer in Toronto in order to fully comprehend their tax and reporting requirements under the Underused Housing Tax Act, as well as to consider whether their residential property use and management should be rearranged (including formalization existing lease arrangements in writing or adjusting lease rates in non-arms length leases), to access an exemption under the Underused Housing Tax Act in order to mitigate taxes that may be applicable in respect of the 2022 calendar year.
The responsibilities under the proposed Underused Housing Tax Act must be understood by those who act as trustees, receivers, or representatives and who are neither Canadian citizens nor permanent taxpayers. They must also be careful and aware of their responsibilities when dealing with any property, business estate, or succession of owners to whom the proposed Act will apply.
Pro Tax Tip: Underused Housing Tax
There is no time restriction on when the CRA may assess you for the underutilized housing tax, fines, and interest related to the property for the calendar year if a taxpayer fails to file his return for a residential property for a calendar year when required.
Any records that are necessary to determine the owner's responsibilities and liabilities must be maintained in addition to those mentioned above. Even if the owner is exempt and no Underused Housing Tax is required to be paid, the owner must maintain records for at least six years following the end of the applicable year in order to justify the position adopted with regard to the Underused Housing Tax. The Canada Revenue Agency may reject an exemption claim if the owner fails to maintain sufficient documents to support it, so be proactive and speak with one of our knowledgeable Canadian tax lawyers to ensure you are in compliance with all exemption criteria.
Frequently Ask Questions
Which form may be utilized by a taxpayer to submit an Underused Housing Tax Return?
Form UHT-2900, which requests a lot of information, must be utilized by the owner to submit an Underused Housing Tax Return.
What will be the deadline for reporting and paying the Underused Housing Tax?
On or before April 30 of the following year, documents must be filed and payments made. Due to April 30 falling on a Sunday in 2023, the tax year 2022's deadline is May 1 of that same year 2023.
Which special taxpayer identity numbers ought to be used when submitting an Underused Housing Tax form?
A social insurance number or individual tax number is needed to submit an Underused Housing Tax return for a person, and a business number with an Underused Housing Tax (RU) account identity code is needed to submit a return for a corporation.
Even though a corporation already has a business number, it must register its RU program account before submitting an Underused Housing Tax report. Online registration for an RU program account is available.
Together with the aforementioned options, a taxpayer may also submit his Underused Housing Tax Return online.
"Only general information is provided in this article. Only as of the publishing date is it current. It hasn't been updated, therefore it might no longer be relevant. It cannot or ought not to be relied upon because it does not offer legal advice. Each tax circumstance is unique to its facts and will be different from the instances described in the articles. You should contact a Canadian tax lawyer if you have specific legal inquiries."