Canada: The Underused Housing Tax Act: A Primer

On December 15, 2021 the House of Commons held the first reading of Bill C-8, which includes draft legislation for a new stand-alone tax act: the Underused Housing Tax Act (the “Act”). Very broadly, the draft legislation intends to impose an annual tax of 1% on the value of residential property located in Canada owned, directly or indirectly, by persons who are neither citizens nor permanent residents of Canada, unless the owner is eligible to claim a specific exemption.  Although the Act is drafted to include a number of different exemptions, the two main exemptions are in respect of properties that are used as a primary place of residence by the owner or the owner's immediate family members, and properties that meet the “qualified occupancy period” requirements for at least 180 days in a calendar year.

As a new stand-alone Act, the draft legislation is extensive. In addition to the taxing provisions, the Act also contains detailed administrative and enforcement provisions.  Bill C-8 also includes a large number of consequential amendments to other acts of parliament. Consequential amendments include, but are not limited to, amendments to the Income Tax Act (Canada) (the “ITA”), the Bankruptcy and Insolvency Act, the Excise Tax Act, the Criminal Code, and the Tax Court of Canada Act.   While Bill C-8 has not yet been enacted, in the Economic and Fiscal Update held on December 14, 2021, the Honourable Minister Chrystia Freeland communicated the intention to have the Act be effective as of January 1, 2022, with the initial return required by the Act to be on or before April 30, 2023 for the 2022 calendar year.   As such, the provisions of Bill-C8 as they relate to the Act and the consequential amendments are drafted to come into force on January 1, 2022.

This article intends to provide an overview of the key operating provisions of the Act to bring awareness to readers of the breadth and scope of the Act.  This article outlines in general terms: (i) to whom this tax will apply and, coincidentally, who will be exempt under the Act; (ii) the scope of properties captured by the Act; (iii) how the tax will be computed; (iv) the multitude of exemptions from tax, including the primary place of residence and qualifying occupancy exemptions, that are available to an owner; (v) the effect of the Act on trustees in bankruptcy and receivers; and (vi) a brief overview of some of the administration and enforcement provisions of the Act.

To whom will this tax apply?

The Act is broadly drafted, in the first instance, to impose a tax on every person who, on December 31 of a calendar year, is an owner of a residential property in Canada, including a life tenant under a life estate, a holder of a life lease, and an individual under a long-term lease who has continuous possession of the land on which the residential property is situated.  But the tax will not apply to an owner that is an “excluded owner” or an individual who qualifies for one of several exemptions available under the Act.

Who is an “excluded owner”?

Generally, an excluded owner is exempt from tax imposed under the Act as well as the tax return filing requirements.  The Act provides for a number of categories of excluded owners, including those who, on December 31 of a calendar year, are:

• Her Majesty in right of Canada or a province or one of her agents;
• an individual who is a Canadian citizen or permanent resident, unless such individual owns the property acting in capacity as a trustee of a trust or as a partner of a partnership;
• a Canadian corporation incorporated in Canada or a province and whose shares are listed on a “designated stock exchange” for the purposes of the ITA;
• a person who is the owner of the residential property in their capacity as trustee of a: (i) mutual fund trust, (ii) a real estate investment trust, or (iii) a SIFT trust, as defined under the ITA;
• a registered charity, as defined under the ITA;
• a cooperative housing corporation, a hospital authority, a municipality, a public college, a school authority, or a university, as defined in the Excise Tax Act; and
• an Indigenous governing body or a corporation which is wholly owned by such a body.

In addition, the definition of an “excluded owner” is drafted with flexibility to include or exclude persons who may be prescribed at a later date.  Notably, the definition of an “excluded owner” does not include private corporations, partnerships and personal trusts—their eligibility for an exemption from the tax payable under the Act is governed by specific exemptions applicable to a “specified” Canadian corporation, partnership or trust, as further described below.  The Act, as currently drafted, also does not exclude entities, other than registered charities, that are exempt under section 149 of the ITA.  Consequently, such tax-exempt entities will be interested in ensuring that they qualify for one of the exemptions under the Act in respect of residential properties they own.

Scope of residential properties captured by the Act

The Act imposes a tax on every owner (other than an excluded owner) of a “residential property.”  A “residential property” is defined to include:

along with any common areas and other appurtenances which are reasonably necessary for the use and enjoyment of that property as a place of residence for individuals.

The Act further defines a “dwelling unit” to include a residential unit which contains private kitchen facilities, a private bath and a private living area.

How is the tax computed?

Every person who, on December 31, is an owner (other than an excluded owner) of a residential property is liable for a tax equal to 1% of either the fair market value or “taxable value” of the property, multiplied by that person's “ownership percentage,” as defined by the Act.  An “ownership percentage” generally means either 100% or, where there are multiple owners, the percentage ownership registered on the land registration system or, in the absence of such registration, an equal share of ownership.  Generally, “taxable value” is defined to mean the greater of the assessed value of the residential property for property tax purposes or the property's most recent sale price on or before December 31 of the relevant calendar year.  Alternatively, a taxpayer may, by making a prescribed election, use the fair market value of the property, as determined in a manner satisfactory to the Minister of National Revenue (the “Minister”), to compute amounts payable under the Act in lieu of the property's “taxable value.” This election must be made on or before April 30 of the following calendar year, or when otherwise permitted by the Minister.

Exemptions from the tax

Given the breadth of the tax provision, which is applicable to all owners of residential property, and the fairly prescriptive list of “excluded owners,” the Act is drafted with a multitude of exemptions.  An owner of residential properties who is not an “excluded owner” will need to meet the qualifying conditions of an exemption in order to avoid being subject to the tax under the Act.  Notwithstanding that an exemption may be available, an owner is not exempt from the obligation to file a return in order to claim the appropriate exemption.

Primary place of residence exemption

No tax is imposed under the Act on an individual owner of a residential property if a dwelling unit that is part of the residential property is the primary place of residence for that calendar year of that individual, their spouse, common-law partner, or child, provided that the child occupies the residence while studying at a designated learning institution for the purposes of the Immigration and Refugee Protection Regulations.

Qualifying occupancy exemption

Since the intention of the Act is to tax underused or vacant houses, an exemption is provided where a residential property meets, at minimum, 180 days of a “qualifying occupancy period” for the calendar year.

The term “qualifying occupancy period” in respect of a residential property is defined as a period of at least one month in which any of the following individuals has continuous occupancy of a dwelling unit which is part of a residential property:

• an individual who deals at arm's length with the owner or the owner's spouse or common-law partner, and whose occupancy of the unit is formalized in a written agreement;
• an individual who does not deal at arm's length with the owner or with the owner's spouse or common-law partner, and whose occupancy of the unit is formalized in a written agreement for consideration which is not below fair rent for that property; the term fair rent may be determined in a prescribed manner for the calendar year (no such manner has yet been prescribed), or an amount that is 5% of the “taxable value” of the property for the year;
• an individual who is the owner or the owner's spouse or common-law partner, and who is pursuing authorized work under a Canadian work permit and who occupies the dwelling unit for that purpose;
• a Canadian citizen or permanent resident who is a spouse, common-law partner, parent or child of the owner; or
• a prescribed individual under the Act (no such persons are yet prescribed).

In sum, the Act will exempt owners from tax if the number of days during the calendar year that are included in a “qualifying occupancy period” for the residential property is 180 days or more.  Given that a “qualifying occupancy period” requires one of the above described individuals to occupy the dwelling unit continuously for at least one month, it appears that this exemption requires the residential property to be appropriately occupied for approximately six of the 12 months of the calendar year.  Such occupancy does not need to be a consecutive 180 day period, provided that occupancy includes at least one month.

However, calendar months are required to be excluded from the qualified occupancy period if during that time, the only individuals who have continuous occupancy are its owner or their spouse, common-law partner, parent or child, and those individuals also reside in another residential property for a period of time equal to or greater than the period in which they reside in the owner's residential property.  The exclusion of any calendar month from the qualifying occupancy period on this basis may preclude an owner from accessing this exemption.

Given that the Act is intended to be effective January 1, 2022, there may be a need for some owners to whom this Act applies to closely examine, and rearrange, if necessary, the occupancy arrangements in relation to their residential property as soon as possible to ensure that the exemption is accessible to them.   In certain instances, occupancy arrangements may need to be formalized in writing to ensure that such occupancy appropriately qualifies for the exemption.

Limitations for multiple properties

Where neither an owner of residential property, nor their spouse or common-law partner are Canadian citizens or permanent residents, and one of them is also the owner of other residential property, the primary place of residence exemption and the qualifying occupancy exemption will only be available if certain elections are filed.  Generally, these elections are designed to enable owners of multiple residential properties in Canada to designate only one of their properties for purposes of accessing an exemption.  Since the election is only available to be claimed for one property in a calendar year, the owner will be liable for any tax imposed by the Act on any other residential properties that are owned in Canada.

Other enumerated exemptions

In addition to the primary place of residence and qualifying occupancy exemptions, the Act enumerates a number of other exemptions. These exemptions vary depending on whether the owner or the residential property meets the qualifying criteria for the calendar year.

A person who is an owner of a residential property in their sole capacity as partner of a “specified Canadian partnership” or as a trustee of a “specified Canadian trust” is exempt from tax under the Act. A “specified Canadian partnership” and a “specified Canadian trust” generally mean a partnership or a trust which consists of, on December 31 of the calendar year, partners and beneficiaries, as applicable, who are only “excluded owners” or “specified Canadian corporations” as defined by the Act.  The Act is also drafted with flexibility to introduce prescribed partnerships and trusts as falling within these definitions, but it remains to be seen what regulations, if any, may be introduced in this regard.

A person who is a “specified Canadian corporation” in respect of a calendar year is exempt from tax payable under the Act. A “specified Canadian corporation” generally means a corporation that is incorporated or continued under Canadian federal or provincial law, but specifically excludes any corporation whose shares representing 10% or more of the equity value or voting rights of the corporation are owned by:

(i) an individual who is not a Canadian citizen or permanent resident;

(ii) a corporation incorporated outside of Canada; or

(iii) any combination of the above.

Where a corporation is without share capital, it cannot qualify as a specified Canadian corporation if it has a chairperson or another presiding officer that is neither a Canadian citizen nor a permanent resident, or if 10% or more of its directors are neither Canadian citizens nor permanent residents.

The Act is drafted to also carve out a “prescribed corporation” as qualifying as a specified Canadian corporation, but no such regulations have yet been introduced.

Since the definition of an excluded owner does not include private corporations, meeting the specified Canadian corporation exemption may be quite relevant.  However, it appears that generally a Canadian private corporation with shareholders owning 10% interests (by votes or value) who are foreign corporations or are persons who are neither Canadian citizens nor permanent residents would fail to qualify for this exemption.  There appears to be no provision in the Act that prorates the tax liability under the Act on a shareholder by shareholder basis.  Therefore, unless another exemption applied, the failure to qualify as a specified Canadian corporation appears to subject the corporation to the entire amount of the annual tax, even if, for example, 90% of the shareholders were otherwise “excluded owners.”

A number of exemptions exist for residential properties that are not habitable, accessible or suitable in a variety of circumstances.  For example, residential properties that are not suitable for year-round use as a place of residence are exempt.  This presumably exempts cottages that are not winterized for Canadian climate, where such winterization is necessary for use year-round. Similarly, a residential property which is seasonally inaccessible because public access is not maintained on a year-round basis is exempt. Further, a residential property that becomes uninhabitable for at least 60 consecutive days in a calendar year due to a disaster or a defined “hazardous condition” beyond the reasonable control of the owner is also exempt, provided that the owner had not previously relied on this exemption for the same disaster or hazardous condition in more than one prior calendar year.

An owner of a dwelling unit of a residential property which is rendered uninhabitable for at least 120 consecutive days in a calendar year due to renovations will also be exempt from tax if there was no unreasonable delay in making the renovations, and if the owner had not relied on this same provision in any of the prior nine calendar years. An exemption is also available to an individual who becomes an owner of a residential property in that calendar year, provided they did not previously own the property in the prior nine calendar years.

Moreover, the tax will also not apply if the construction of the residential property is not substantially completed before April of the relevant calendar year.  A residential property that is substantially completed after March of the relevant calendar year, may be subject to an exemption if the property is offered for sale to the public during the calendar year, provided it has never been occupied by an individual as a place of residence during the calendar year.

The Act includes exemptions which apply in the calendar year, or the immediate prior calendar year, in which the owner of a residential property dies. Further, a personal representative of a deceased will be exempt from tax if the deceased was the owner of a residential property during the calendar year or the prior calendar year and the personal representative was not otherwise an owner of the residential property in either of those calendar years. Finally, tax is also not payable under the Act if both of the following conditions are satisfied: (i) an individual who was the owner of a residential property died during the calendar year or the prior calendar year, and that individual's ownership percentage of the property at issue was at least 25% at the time of death, and (ii) the individual was an owner of the residential property on the day they died.

The Act is drafted to also exempt residential properties located in a prescribed area and under certain prescribed conditions, or if an individual is a prescribed person.  Although nothing has yet been drafted in this regard, presumably the ability to pass such regulations is intended to permit the Department of Finance to add additional exemptions for categories of persons and properties with relative ease.

Trustees, receivers and representatives

Trustees in bankruptcy, receivers and representatives need to be aware of their tax and filing obligations under the Act.

Obligations of trustees in bankruptcy

In particular, a trustee in bankruptcy, and not the bankrupt person, becomes liable for any amount payable under the Act, during the period that they act as trustee in bankruptcy, provided that the amounts do not relate to post-bankruptcy activities commenced by the person which are unrelated to the bankruptcy.  The trustee's liability for amounts due in respect of calendar years ending on or before the date of bankruptcy is limited to the property in possession of the trustee to satisfy such liability.  In addition, the trustee's liability does not extend to amounts that a receiver is otherwise liable for under the Act.  A trustee's liability is also discharged to the extent of payments that are made by the bankrupt person.

As typical in bankruptcy, the trustee in bankruptcy is required to file with the Minister all returns required under the Act in respect of activities of the person to which the bankruptcy relates for the calendar years ending in the period during which the trustee acts in their capacity as trustee. In addition, if the bankrupt person has not filed a return required under the Act for a calendar year that ends on or before the date of bankruptcy, the trustee is required to file those returns as well, unless the Minister waives this requirement.  A trustee in bankruptcy is alleviated from including information in a return that a receiver is otherwise obligated to include.

Obligations of receivers

For the purposes of the Act, the term “receiver” is defined broadly to include a person who is appointed or granted authority to operate or manage a business or property of another person.   A receiver includes persons who are appointed: (i) by an authority of a debt instrument, court order or legislation, (ii) by a trustee under a trust deed in respect of a debt security, (iii) by a bank to act as an agent or mandatary under subsection 426(3) of the Bank Act, (iv) as liquidator to liquidate assets, or wind up the affairs, of a corporation, or (v) as a committee, guardian, curator, tutor or mandatary to manage and care for the assets of an individual who is incapable of doing so.  While a receiver also includes a person that is appointed to exercise the authority of a creditor under a debt instrument to operate or manage the assets of another person, it does not include the creditor itself.

The scope of the receiver's obligations are determined relative to the “relevant assets” to which a receiver's authority extends and may include all, or only part, of the properties, businesses, affairs or assets of a person.  Where only part of the assets relate to the business or affairs within the authority of the receiver, such assets are deemed to be separate from all other assets and treated as though they were businesses, properties, affairs or assets of a separate person.

Where a receiver is vested with authority over any business or property, affairs or assets of a person, the person and the receiver are jointly and severally, or solidarily, liable for any amount required to be paid under the Act before or during the period when the receiver acts to the extent that the amount reasonably relates to the relevant assets of the receiver or what would have been the relevant assets of the receiver had they been acting as receiver at the time the amount became payable. The receiver's liability in respect of amounts payable under the Act for periods ending prior to the receiver's appointment is limited to the property of a person in possession or under control or management of the receiver, (i) after satisfying the claims of creditors that rank in priority to the claims of the Crown, and (ii) paying any amounts that the receiver is required to pay to a trustee in bankruptcy of the person.  In addition, the receiver's joint and several or solidary liability is discharged to the extent of payments that are made by the person or the receiver.

A receiver is required to file with the Minister all returns required under the Act in respect of all relevant assets of the receiver for calendar years ending in the period during which they act in its capacity as receiver.  In addition, if a person has not filed a return required under the Act for a calendar year that ends on or before the date the receiver is appointed, the receiver is required to file those returns as well, unless the Minister waives this requirement.

Clearance certificates for receivers and representatives

Persons other than a trustee in bankruptcy or a receiver who are administering, winding up, controlling or otherwise dealing with any property, business estate or the succession of another person are considered “representatives” for the purposes of the Act.  Representatives and receivers who control property of another person that is required to pay any amount under the Act are required to obtain, prior to the distribution of the property, a certificate from the Minister.  The certificate is intended to confirm that all amounts payable have been paid or sufficient security for payment has been made with the Minister.

The failure to obtain a clearance certificate subjects the representative or receiver to personal liability for amounts owing under the Act to the extent of the value of the distributed property.

Anti-avoidance

The Act contains a general anti-avoidance provision (the “GAAR”) which largely mirrors the GAAR in the ITA.  In addition, the Act contains provisions that seek to target transactions which attempt to take advantage of prospective amendments to the Act.  Specifically, the anti-avoidance provisions also target transactions undertaken for non-bona fide purposes which seek to obtain a tax benefit arising from a “parameter change”, which is defined as a change in a rate, words or expressions in the Act.  These types of transactions, or series of transactions, include the property and occur between non-arm's length persons, resulting in, either directly or indirectly, a tax benefit to anyone involved.  As such the anti-avoidance provision in the Act appears to have a broader reach than the GAAR in the ITA.

Administrative and enforcement

The administration and enforcement provisions in the Act are extensive and a detailed review of them is beyond the scope of this article.  Some of these rules resemble similar provisions found in the ITA, especially as they relate to: the imposition of interest, penalties for failures to file returns, limitations periods for assessments and reassessments, processes relating to notice of objections and appeals to the Tax Court of Canada and Federal Courts, record keeping obligations, offences and punishments, and collections and garnishment.

Moreover, the Act contains certain additional provisions that are not otherwise legislated for ITA purposes.  For example, the Act imposes duties on governmental officials to protect confidential information obtained and to not give or produce such information except in specified circumstances.  These include legal proceedings that are criminal in nature or related to the administration of the Act, any tax law, the Canada Pension Plan, Employment Insurance Act or the Greenhouse Gas Pollution Act.  The confidentially of information can also be divulged if it is reasonably regarded as necessary for a purpose relating to the “life, health or safety of an individual or to the environment in Canada or any other country” or certain other enumerated purposes.  A breach of confidentially by a governmental official is a punishable offence under the Act.

Another example are provisions that empower the Minister to authorize, with the consent of the occupant or a search warrant, a person to enter premises, including a dwelling-house or a place where records are kept, for the purposes of an inspection, audit or examination to administer and enforce the Act.

There is little doubt that the administration and enforcement provisions of the Act raise a host of questions relating to procedural fairness that will ultimately be disputed in the courts.

Concluding remarks

The above commentary is intended to bring awareness to property owners and the legal community of the breadth and scope of the proposed Act.

Individuals who are neither citizens nor permanent residents of Canada, who own, directly or indirectly, residential properties situated in Canada that are currently underused or unoccupied are encouraged to seek legal and tax advice to understand their tax and reporting obligations under the Act, and to explore whether their residential property use and management should be rearranged (including formalizing existing lease arrangements in writing or adjusting lease rates in non-arm's length leases), to access an exemption under the Act in order to mitigate taxes that may be applicable in respect of the 2022 calendar year.

Persons who act as trustees, receivers or representatives who participates in the administering, winding up, controlling or otherwise dealing with any property, business estate or the succession of owners to whom the proposed Act will apply need to be aware of their obligations under the proposed Act.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.