On June 9, 2022, Bill C-8, Economic and Fiscal Update Implementation Act, 2021, received Royal Assent. Bill C-8 implements certain measures announced in the federal economic and fiscal update tabled on December 14, 2021, as well as Canada's new underused housing tax act. Very broadly, the legislation intends to impose an annual tax of 1% on the value of residential property located in 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 are that are used as a primary place of residence by the owner or 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 outlined in the Budget of 2021, the stated purpose for introducing a national underused housing tax is to ensure that non-resident owners who are using Canada as a place to passively store their wealth in housing pay their fair share. This new tax will be administered by the Minister of National Revenue and is modelled to some extent on the speculation and vacancy tax imposed by the province of British Columbia for 2018 and later calendar years.
This article intends to provide an overview of the key operating provisions of the Underused Housing Tax Act. This article outlines in general terms:
- To whom this tax will apply and, coincidently, who will be exempt under the Act.
- The Scope of properties captured by the Act.
- How the tax will be computed.
- The multitude of exemptions from the tax, including the primary place of residence and qualifying occupancy exemptions, that are available to an owner.
- The effect of the Act on trustees in bankruptcy and receivers
- A brief overview of some of the administration and enforcement provisions of the Act.
- Additional residential vacancy taxes already in existence and their effect on the new Underused Housing Tax Act.
- What else do affected owners need to know about Underused Housing Tax when filling their tax returns
- Pro Tax Tip
To whom will this tax apply?
The Underused Housing Tax Act will impose a tax on every taxpayer 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 Underused Housing Tax Act as well as the tax return filing requirements. The Act provides for several categories of excluded owners, including those who, on December 31 of a calendar year, are:
- His Majesty in right of Canada or a province or one of his agents.
- An individual who is a 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 Income Tax Act.
- A person who is the owner of the residential property in their capacity as trustee of a
- Mutual fund trust
- A real estate investment trust, or
- A Specified Investment Flow-Through (SIFT) Trust, as defined under the Income Tax Act
- A registered charity, as defined under the Income Tax Act
- A cooperative housing corporation, a hospital authority, a municipality, a public college, a school authority, or a university, as defined in the Canada 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 taxpayers who may be prescribed later. 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 Underused Housing Tax Act is governed by specific exemptions applicable to a "specified" Canadian corporation, partnership, or trust, as further described below. The Underused Housing Tax Act also does not exclude entities, other than registered charities, that are exempt under section 149 of the Income Tax Act. 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 Underused Housing Tax Act
The Underused Housing Tax Act imposes a tax on every owner (other than an excluded owner) of a "residential property." A "residential property" is defined to include:
- A detached house, a duplex, or a triplex containing no more than three dwelling units,
- A part of a building that is a semi-detached house, a rowhouse unit or a residential condominium unit; or
- A prescribed property,
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 Underused Housing Tax Act also defines a "dwelling unit" to include a residential unit which contains private kitchen facilities, a private bath and a private living area.
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 Underused Housing Tax 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 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 Underused Housing Tax Act is to tax the 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 the property.The term "fair rent" may be determined as 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.
In sum, the Act will exempt owners from the 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 6 of the 12 months of the calendar year. Such occupancy does not need to be consecutive 180-day period if occupancy includes at least one full 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.
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) Exemption for residential properties owned by a "specified Canadian partnership" or "specified Canadian Trust."
A taxpayer 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 Underused Housing Tax Act. A "specified Canadian partnership" and a "specified Canadian trust" generally means 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 Underused Housing Tax Act. This Act is also drafted with flexibility to introduce prescribed partnership and trusts as failing within these definitions, but it remains to be seen what regulations, if any, may be introduced in this regard.
B) Exemptions for residential properties owned by a "specified Canadian corporation."
A taxpayer who is a "specified Canadian corporation" in respect of a calendar year is exempt from tax payable under the Underused Housing Tax 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:
- An individual who is not a Canadian Citizen or a Permanent Resident.
- A corporation incorporated outside of Canada.
- Any combination of the above.
Where a corporation is without share capital property, 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 director are neither Canadian Citizens nor Permanent Residents.
Since the definition of an excluded owner does not include private corporations, meeting the 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 provisions in the Underused Housing Tax Act that prorates the tax liability under this Act on a shareholder-by-shareholder basis. Therefore, unless another exemption is applied, the failure to qualify as a specified Canadian Corporation appears to subject the corporation to the entire annual tax, even if, for example, 90% of the shareholders were otherwise "excluded owners."
C) Exemptions for residential properties which are not available for year-round use, or which are not habitable year-round.
Several exemptions exist for residential properties that are not habitable, accessible, or suitable in a variety of circumstances. For example, residential properties that are not year-round use as a place of residence are exempt. This presumably exempts cottages that are not built keeping in mind the extreme Canadian winters. Similarly, a residential property which is seasonally inaccessible because public access is not maintained on a year-round basis is exempt.
In addition, 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.
D) Exemptions for residential properties which are subject to construction or renovation, or which are newly purchased
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 Underused Housing Tax, provided there was no unreasonable delay, 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 a taxpayer who becomes an owner of a residential property in that calendar year, provided the taxpayer did not previously own the property in the prior nine calendar years.
Moreover, the Underused Housing Tax will not apply if the construction of the residential property is not substantially completed before the month of April of the relevant calendar year. A residential property that is substantially completed after the month of 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 a taxpayer as a place of residence during the calendar year.
E) Exemptions for residential properties following the owner's death
The Underused Housing Tax 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 Underused Housing 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, the Underused Housing Tax is also not payable under the Underused Housing Tax Act if both of the following conditions are satisfied:
- A taxpayer who was the owner of a residential property died during the calendar year or the prior calendar year, and that taxpayer's ownership percentage of the property at issue was at least 25% at the time of death, and
- The taxpayer was an owner of the residential property on the day they died.
F) Exemptions on basis of the location and use of the residential property
An owner of a residential property may be exempt for a calendar year if the residential property is a vacation property in an eligible area of Canada and used by the owner or the owner's spouse or common-law partner for at least 28 days in the calendar year.
Whether an area qualifies as an eligible area must be monitored annually, as the determination will be based on census data, which is updated periodically.
Please refer to the Underused housing tax vacation property designation tool to determine if a taxpayer's property is located in an eligible area of Canada for the purposes of this exemption.
Trustees, receivers, and representatives
Obligations of trustees in bankruptcy
Under the provisions of the Underused Housing Tax Act, the trustee in bankruptcy becomes liable for any amount payable instead of the bankrupt person, 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 Underused Housing Tax 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 of National Revenue all returns required under the Underused Housing Tax Act in respect of activities of the person to which the bankruptcy relates for the calendar years ending in the period during which trustees acts in their capacity as a trustee. In addition, if the bankrupt taxpayer has not filed a return required under the Underused Housing Tax 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 of National Revenue waives this requirement. A trustee in bankruptcy is alleviated from including information in a return that a receiver is otherwise obligated to include.
Obligation 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 taxpayer. A receiver includes persons who are appointed:
- By an authority of a debt instrument, court order or legislation,
- By a trustee under a trust deed in respect of a debt security,
- By a bank to act as an agent or mandatory under subsection 426(3) of the Bank Act,
- As a liquidator to liquidate assets, or wind up the affairs, of a corporation,
- As a committee, guardian, curator, tutor or mandatory to manage and care for the assets of an individual who is capable 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 taxpayer, it does not include the creditor itself.
The scope of the receiver's obligations is 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 taxpayer. 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 taxpayer.
Where a receiver is vested with the authority over any business or property, affairs or assets of a person, the person and the receiver are jointly and severally liable for any amount required to be paid under the Underused Housing Tax 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 Underused Housing Tax 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,
- After satisfying the claims of creditors that rank in priority to the claims of the Crown,
- Paying any amounts that the receiver is required to pay to a trustee in bankruptcy of the person.
In addition, the receiver's joint, 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 of National Revenue all returns required under the Underused Housing Tax 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 nor filed a return required under the Underused Housing Tax 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 of National Revenue 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 to be "representatives" for the purposes of the Underused Housing Tax Act. Representatives and receivers are required to obtain a certificate from the Minister of National Revenue prior to the distribution of the property. The certificate is intended to confirm that all amounts payable have been paid or sufficient security for payment has been made with the Minister of National Revenue.
The failure to obtain a clearance certificate subjects the representatives or receiver to personal liability for amounts owning under the Underused Housing Tax Act to the extent of the value of the distributed property.
General Anti-Avoidance Provision
The Underused Housing Tax Act contains a general anti-avoidance provision which largely mirrors the General Anti-Avoidance Rule of the Canadian Income Tax 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".
The parameter change is defined as a change in a rate, words, or expressions in the Underused Housing Tax Act. These types of transactions, or series of transactions, include the property and occur between non-arm's length taxpayers, resulting in, either or indirectly, a tax benefit to anyone involved. As such the anti-avoidance provision in the Underused Housing Tax Act appears to have a broader reach than the General Anti-Avoidance Rule in the Income Tax Act.
Administrative and enforcement
Some of the administrative and enforcement rules resemble similar provisions found in the Canadian Income Tax Act, especially as they relate to the imposition of interest, penalties for failures to file returns, limitation 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 Underused Housing Tax Act contains additional provisions that are not otherwise legislated for the Canadian Income Tax Act purposes. For example, the Underused Housing Tax Act imposes duties on the 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 Underused Housing Tax Act, any tax law, the Canada Pension Plan, Employment Insurance Act, or the Greenhouse Gas Pollution Act. The confidentiality 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 confidentiality by a government official is a punishable offence under the Act.
Another example are provisions that empower the Minister of National Revenue to authorize, with the consent of the occupant or a search warrant, a person to enter the 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 Underused Housing Tax Act.
There is little doubt that the administration and enforcement provisions of the Underused Housing Tax Act raises a host of questions relating to procedural fairness that will ultimately be disputed by knowledgeable Canadian tax litigation lawyers in the courts.
Additional residential vacancy taxes
Various municipalities, including Vancouver, Toronto, Hamilton, and Ottawa have enacted a vacancy tax on underused residential properties with the hope of increasing the supply of residential properties. These above-mentioned taxes apply to all property owners, including Canadian Citizens and Canadian Permanent Residents, as opposed to the Underused Housing Tax Act which generally applies to foreign property owners, as discussed above in the article.
Regarding these additional residential vacancy taxes, a residential property will be considered vacant if it did not have a taxpayer living in it for at least 6 months of the prior year unless an exemption applies. Exemptions are like the Underused Housing Tax Act, where the tax will not apply if the vacancy was due to safety concerns, renovations, natural disasters, or death of the previous owner.
Mandatory declarations must be filed each year with the respective city and province in which the concerned residential property is located, regardless of being exempt from tax. Each city has their own late filing fees if declarations are not filed on time. The Ontario Municipal taxes are 1% of the assessed property value while City of Vancouver tax rate is 5%. These taxes are levied through property tax statements and have late-payment penalties, if not paid on time.
Furthermore, British Columbia also has its own provincial speculation and vacancy tax, on top of Vancouver's empty home tax. The tax charged is 2% of the total property value for foreign owners and satellite families (meaning less than 50% of family income is not taxed in Canada) or 0.5% for Canadian Citizens or Canadian Permanent Residents who are not members of a satellite family.
For example, an unused residential property in Vancouver could result in all three levels of taxation totalling 6% of the fair market value of a residential property (1% Underused Housing Tax + 3% Vancouver's empty home tax + 2% British Columbia Speculation and Vacancy Tax).
What else do affected owners need to know about Underused Housing Tax when filing their tax returns
Navigating the complexities of the Underused Housing Tax legislation, including its exemptions, and filing requirements can be a lengthy process with expensive consequences.
Individuals who are neither Canadian 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 advise from an expert Canadian Tax Lawyer to understand their tax and reporting obligations under the Underused Housing Tax 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 Underused Housing Tax Act in order to mitigate taxes that may be applicable in respect of the 2022 calendar year.
Taxpayers who act as trustees, receivers or representatives who participate in the administering, winding up, controlling, or otherwise dealing with any property, business estate or the succession of owners to whom the proposed Underused Housing Tax Act will apply need to be aware of their obligations under the proposed Act.
Pro Tax Tip - Underused Housing Tax
If a taxpayer fails to file his return for a residential property for a calendar year when required, there is no time limit for the CRA to assess you with respect to the underused housing tax, penalties, and interest in respect of the property for the calendar year.
In addition to above, all records must be kept supporting the determination of the owner's obligations and liabilities. Even if the ownership is exempt and no Underused Housing Tax to supposed to be paid, the owner must keep records for at least 6 years from the end of the relevant year to support the position taken with respect to the Underused Housing Tax. If an exemption is claimed but the owner does not have adequate records to support that exemption, the Canada Revenue Agency may disallow it-so be sure to consult with one of our experienced Canadian tax lawyers so that you meet all of the requirements for an exemption.
A) Which form can a taxpayer use to file the Underused Housing Tax Return?
To file a Underused Housing Tax Return, the owner must use form UHT-2900, which requires providing extensive information.
B) When will the filing and payment due date for Underused Housing Tax?
The filing and payment due date is April 30 of the following year. For the tax year of 2022, the due date is May 1, 2023, because April 30, 2023 falls on a Sunday.
C) Which unique taxpayer identifier codes should be used to file Underused Housing Tax?
To file a Underused Housing Tax return, a social insurance number or an individual tax number is required for individuals and a business number with an Underused Housing Tax (RU) account identifier code is required for corporations.
If a corporation already has a business number, the corporation will have to register its RU program account before a Underused Housing Tax return can be filed. It is possible to register for a RU program account online.
In addition to above, a taxpayer can also file his Underused Housing Tax Return online.
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.