Taxing vacant homes

The Federal Government recently introduced an annual 1% Underused Housing Tax (“UHT”) on the ownership of vacant or underused housing in Canada to deter non-Canadians and non-residents from passively storing their wealth in Canada’s housing market.¹ The purpose of this annual tax is to make housing more affordable and readily available for Canadians and residents of Canada.² The Underused Housing Tax Act (“UHTA”) came into effect January 1, 2022 and imposes strict compliance requirements for owners of vacant or underused property. The first deadline for filling a return and paying the tax is April 30, 2023 for the 2022 calendar year.³

What properties are subject to the Underused Housing Tax

The tax is applicable to residential property which is defined as:

• a detached house or similar building, containing not more than three dwelling units, together with that proportion of the appurtenances to the building and the land subjacent or immediately contiguous to the building that is reasonably necessary for its use and enjoyment as a place of residence for individuals;
• a part of a building that is a semi-detached house, rowhouse unit, residential condominium unit or other similar premises that is, or is intended to be, a separate parcel or other division of real or immovable property owned, or intended to be owned, apart from any other unit in the building together with that proportion of any common areas and other appurtenances to the building and the land subjacent or immediately contiguous to the building that is attributable to the house, unit or premises and that is reasonably necessary for its use and enjoyment as a place of residence for individuals; or
• a prescribed property.⁴

Who is subject to the Underused Housing Tax?

Generally, in the case of individual owners, the tax will apply to owners of real property that are both non-resident and non-Canadian. However, in some situations, this tax may also apply to individual Canadian or permanent resident owners (see below).

In terms of organizational structures, such as corporations, parterships, and trusts, generally, the tax will apply to foreign corporations (incorporated outside of Canada) or domestic corporations, or parnerships or trusts of any kind, comprised of individual shareholders, members, or beneficiaries, respectively, that are both non-resident and non-Canadian. However, for corporations, there is a percentage threshold to meet on this aspect similar to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (Canada), the threshold being 10% foreign ownership or control. There is also an exception for Canadian corporations listed on a Canadian stock exchange designated for Canadian income tax purposes. See below for further details.

There are three types of owners under the UHTA, each with varying obligations:

1. Excluded Owners
2. Affected Owners
3. Exempted Owners

Excluded Owners

For the purposes of the UHTA, excluded owners are not subject to the annual tax, and are not required to file an annual UHT return. If, as of December 31 of a calendar year, any one of the below apply, you may be considered an excluded owner. You are:

• A Canadian citizen or permanent resident of Canada;
• A corporation that is incorporated under the laws of Canada or a province whose shares are listed on a Canadian stock exchange designated for Canadian income tax purposes;
• A person with title to the property in their capacity as trustee of a mutual fund trust, real estate investment trust, or specified investment flow-through trust for income tax purposes;
• A registered charity;
• A cooperative housing corporation;
• An Indigenous governing body or a corporation wholly owned and operated by an Indigenous government body; and
• A municipal organization or other public institution and government body.⁵

This is a non-exhaustive list of excluded owners. For further information, see the definition of “excluded owner” under the UHTA.⁶

Affected Owners

The opposite of excluded owners are affected owners – they are required to file an annual return and pay the tax owing, unless they can show they meet certain exemptions. Affected owners may include:

• Individuals that are not Canadian citizens or permanent residents;
• Individuals that are Canadian citizens or permanent residents that own residential property as a trustee of a trust;
• Any person, including Canadian citizens and permanent residents, that own residential property as a partner of a partnership;
• A corporation incorporated outside of Canada;
• A Canadian corporation that does not have its shares listed on a Canadian stock exchange designated for Canadian income tax purposes; and
• A Canadian corporation without share capital.⁷

Exempted Owners

If an owner would otherwise be considered an affected owner on December 31 of a calendar year, they may claim an exemption from payment of the tax. Exempted owners are not required to pay an annual tax, but are required to file a UHT return every year for the residential property they own and want to claim an exemption for. Exemptions can be claimed based on:(i) the type of owner (ii) the availability of the residential property, (iii) the location and use of the residential property, or (iv) the occupant of the residential property.

Your ownership of a residential property may be exempt from paying the annual tax for a calendar year, where any of the following from the below non-exhaustive list applies:

1. Type of owner exemptions

• You are a specified corporation⁸
• You are a partner of a specified Canadian partnership, or a trustee of a specified Canadian trust
• You are a new owner in the calendar year the exemption applies to
• You are a deceased owner, or a co-owner or personal representative of a deceased owner

2. Availability of the residential property exemptions

• The property is newly constructed
• The property is not suitable for habitation year-round or is seasonally inacessible
• The property is uninhabitable for a period of time due to disasters/hazardous conditions or renovations

3. Location and use of residential property exemption

• The property is a designated vacation property that is used by the owner or the owner’s spouse or common-law partner for at least 28 days each calendar year

4. Occupant exemptions

• The propety is the primary place of residence for the owner, the owner’sspouse or common-law partner, or for the owner’s child that is attending a learning institution.
• at least 180 days in the calendar year are included in one or more qualifying occupancy periods for your ownership of the residential property
  • A qualifying occupancy period is at least one month in a calendar year during which one of the following qualifying occupants has continuous occupancy of the residential property:
    • an individual with a written contract who deals at arm’s length with you and your spouse or common-law partner
    • an individual with a written contract who does not deal at arm’s length with you or your spouse or common-law partner, and who pays at least fair rent for the property
    • you, or your spouse or common-law partner, who has a Canadian work permit
    • your spouse or common-law partner, parent, or child who is a Canadian citizen or permanent resident.⁹

What are the obligations of an Affected or Exempted Owner?

Affected and exempted owners that own residential property in Canada on December 31 of a calendar year are required to file a UHT-2900 return form for each residential property they own by April 30 of the following year. Affected owners are required to pay the annual tax for each property by April 30 of the following year.¹⁰ Even though exempted owners do not have to pay tax, they must still file a tax return for the calendar year. Excluded owners (as opposed to exempted owners) have no obligation to file a return or make any payment.

Since the UHTA came into effect on January 1, 2022, any individual or non-indvidual that is considered an affected or exempted owner under the Act, is required to file a return and pay the tax, where applicable, by May 1, 2023 (since April 30, 2023 falls on a Sunday this year).

Affected owners are requried to calculate the tax owed per calendar year. To calculate the tax owed, multiply the value of the residential property by the 1% tax rate. The resulting value is then further multiplied by the individual or non-individual’s ownership percentage of the property.¹¹ The value of the property can be determined by using its taxable value, or using its fair market value. Where an affected owner elects to use the property’s fair market value, they are requried to prepare and file an appraisal report conducted by an accredited, professional real estate appraiser with the Canada Revenue Agency.¹² The taxable value of the residential property for a calendar year is the greater of the following amounts:

1. the value of the residential property established by an authority that has the power to establish the assessed value of property for purposes of calculating a property tax; and
2. the residential property’s most recent sale price on or before December 31 of the calendar year.¹³

In addition, where a non-resident owner files an application under Section 116 of the Income Tax Act for a certificate of compliance relating to the disposition of their residental property, this automatically triggers a UHT compliance review by the Canada Revenue Agency. Until the Canada Revenue Agency satisfies itself that an applicant has complied with their obligations under the UHTA, a certificate of compliance will not be issued.¹⁴

Here is where you can access the Underused Housing Tax return Form – UHT-2900, Underused Housing Tax Return and Election Form.

What are the consequences of failing to file a return or pay the tax owed?

There are monetary penalties for failing to file a return by April 30^th following the end of the previous calendar year. Both affected and exempted individuals that fail to file a return are subject to a penalty equal to the greater of the following amounts:

1. $5,000.00 for affected and exempted individuals, or $10,000.00 for affected and exempted non-individuals (e.g. corporation); and
2. 5% of the applicable tax for the property for the calendar year plus 3% of the applicable tax for each complete calendar month the return is late.¹⁵

If a person fails to file a return for a calendar year by December 31^st of the following calendar year, penalties may arise, and the applicable tax is calculated on the basis that certain exemptions are no longer available (e.g., non-exhaustively, the primary place of residence and qualifying occupancy exemptions).¹⁶ As such, some exempted owners may lose their ability to claim an exemption.

Affected (non-exempted) owners may face additional penalties and interest including payment of interest on outstanding taxes that are not paid by April 30^th following the reporting year. There are additional penalities for failing to provide the required information, making false statements or ommissons, and failing to file under gross negligence.¹⁷

Where there are multiple affected owners of a residential property, each owner, including those that are exempt from paying the tax, are required to file a separate tax return or face penalties.¹⁸

However, please note, on March 27, 2023, the CRA published a notice waiving penalties and interest under the UHTA for the 2022 calendar year for any late-filed UHT return and for any late-paid UHT payable, provided the return is filed or the UHT is paid by October 31, 2023. The above should be read in the context of this notice.

What are a real estate lawyer’s obligations?

For real estate lawyers that represent foreign owners of residential properties, there is an additional compliance burden on your clients to meet an annual filing return deadline for the UHT. Foreign clients are also required to take an additional step each calendar year to assess whether they meet certain exemption qualifications and, if they do not, to pay the tax accordingly. Foreign clients need to be advised of these obligations and the specifics referred to above.

Therefore, when acting for clients that are purchasing, selling, refinancing, leasing, and/or otherwise dealing with real property, it is prudent for the lawyer to inquire with their clients whether they are foreign clients and whether they may be considered affected or exempted owners. In such cases, clients should be provided with advice in accordance with the above matters and any other matters that may be appropriate. Alternatively, lawyers should adjust their retainer letters appropriately and clients should be referred to, or otherwise required or strongly encouraged to seek advice from, other experts. As the threshold for foreign ownership is low, any level of foreign ownership is worth monitoring closely and should be done as early as possible in the course of a retainer and monitored throughout the retainer as appropriate.

It is worth noting that the UHTA does not explicitly impose any direct or indirect obligation on a lawyer to make such inquiries but, nonetheless, such inquiries should be done for the client’s benefit.

When purchasing from a foreign vendor, there is no explicit obligation under the UHTA for a purchaser to withhhold any portion of the purchase price similar to s. 116 of the Income Tax Act (Canada) which imposes an obligation on the purchaser to withhold 25% of the purchase price, when purchasing from a non-resident (unless the purchaser makes the required “reasonable inquiry” and, after such inquiry, has no reason to believe that the vendor is non-resident). Nonetheless, in such circumstances, a purchasing lawyer should remain alert to any suspicious circumstances that may suggest that the UHT may not be paid as “memorials,” evidencing certificates for amounts payable by a would-be taxpayer to His Majesty, may be registered as a Charge against the property being purchased at any time, and, as such, would then need to be dealt with in the course of the transaction as otherwise would be appropriate.¹⁹

As a final note to keep in mind, lawyers acting for represenatives (as defined under the UHTA) that are responsible for administering, winding up, controlling or otherwise dealing with any property, business, estate or succession, should adivse the reprentative client that they are responsible for paying any amounts owing under the UHTA before distributing any property. The representative is required to obtain a certificate from the Minister of National Revenue certifying that all payments have been made, which cover all amounts owing under the UHTA during the calendar year where distribution of property was made. Any representative that distributes property before obtaining the certificate will be held personally liable for the payment of the value of the amounts distributed.²⁰

The Underused Housing Tax Act operates in addition to other vacant unit taxes

The UHT is a federal tax that operates alongside other vacant unit taxes imposed by provincial and municipal governments. While the UHT targets non-Canadians and non-residents, provincial and municipal vacant unit taxes apply to all owners and contain no exclusions and exemptions for Canadian citizens or permanent residents. Residents of British Columbia are subject to a speculation and vacancy tax in addition to the UHT. The municipalities of Vancouver, Toronto and Ottawa have empty home or vacany taxes that must also be paid in addition to the UHT. Many other municipalities across Ontario are considering introducing similar vacant unit taxes in the near future.²¹

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Matthew Reardon is a commercial real estate lawyer at Merovitz Potechin LLP in Ottawa, Ontario, specializing in commercial real estate transactions and leasing, among other matters. Wafa Khan is an articling student at Merovitz Potechin LLP in Ottawa, Ontario, assisting in the firm’s real estate practice group, among others.

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