To target the unproductive use of domestic housing, and to ensure that residential properties in Canada are not being used as speculative financial assets, the Government of Canada recently introduced the Underused Housing Tax Act ("UHT Act")1 and the Prohibition on the Purchase of Residential Property by Non-Canadians Act ("ProhibitionAct").2 Both acts may have a significant impact on current owners of residential property and on non-Canadians hoping to enter the Canadian residential property market.
Underused Housing Tax
The Underused Housing Tax ("UHT") is a federal tax of 1% of a residential property's value, applied annually to certain owners of underused or vacant residential property in Canada.3 The tax took effect on January 1, 2022, and generally applies to non-resident, non-Canadian owners, although some Canadian owners can be subject to the UHT as well, so they should carefully review their obligations under the UHT Act before the May 1, 2023, deadline (described below).
Specifically, any legal owner of residential property in Canada as of December 31 of any calendar year who is not an excluded owner must file a UHT return.4 These owners are referred to by the Canada Revenue Agency ("CRA") as "affected owners".5 UHT returns and taxes payable pertaining to residential property owned on December 31, 2022, are due by May 1, 2023,6 although the CRA has stated its intention to waive penalties and interest for late filed returns and late paid taxes, provided the return is filed and the tax is paid by October 31, 2023. All affected owners must file a return by the deadline, regardless of whether they qualify for an exemption or have any tax payable.
a. Excluded Owners
Excluded Owners are not required to file a UHT return and have no obligations or liabilities under the UHT. Ownership for UHT purposes is based on the person who is the registered owner on title of the property.
Excluded Owners include, but are not limited to, persons that fall into one of the following categories on December 31 of the relevant calendar year:7
- a Canadian citizen or permanent resident;
- a corporation incorporated under Canadian Law and listed on a designated Canadian stock exchange (meaning that Canadian-controlled private corporations do not qualify as excluded owners);
- a person that is the owner in their capacity as a trustee of a mutual fund trust, a real estate investment trust, or a SIFT trust (as such terms are defined in the Income Tax Act (Canada) ("ITA"));
- a registered charity as defined in the ITA;
- a cooperative housing corporation, a hospital authority, a municipality, a public college, a school authority, a university, or a para-municipal organization as such terms are defined in subsection 123(1) of Part IX of the Excise Tax Act;8
- a "prescribed person", of which there are currently none;9
- an Indigenous governing body or corporation owned by such an entity; and
- the Government of Canada and the government of a province, or an agent of either.
Many exemptions are also available under the UHT Act for persons who do not qualify as "excluded owners". Such a person may not have to pay the tax, but still needs to file a UHT return. No tax is payable by such owner if the owner (or the property) falls into any of the categories in subsection 6(7) of the UHT Act. These categories are as follows:10
- an owner of the residential property solely in its capacity as the partner of a specified Canadian partnership11 or a trustee of a specified Canadian trust;12
- an owner which is a specified Canadian corporation;13
- the property is not suitable for year-round use or is seasonally inaccessible;
- the property is uninhabitable for a period of at least 60 consecutive days in the calendar year as a result of a disaster or hazardous condition;
- a dwelling unit that is part of the residential property is uninhabitable for a period of at least 120 consecutive days in the calendar as a result of a renovation to the property;
- the person becomes an owner of the residential property in the calendar year (and was never an owner of the residential property in the prior nine calendar years);
- the person died during the calendar year or the prior calendar year or the person is the personal representative of a deceased individual who was the owner;
- the construction of the residential property is not "substantially completed" before April of the calendar year. In this respect the CRA confirmed that it may use its GST/HST guidelines in determining whether the construction of a residential property is substantially completed under the UHT Act. This may likely be because the "substantial completion" concept is found in several places in the Excise Tax Act, particularly in respect of the GST/HST self-supply rules applicable to newly constructed or substantially renovated residential properties. In general, it refers to a stage of completion of 90% or more which allows an individual to reasonably inhabit the property.14 The CRA indicated that a residential property may be considered to be substantially completed even if there are outstanding minor repairs, adjustments or upgrades, since these wont reasonably impair the use and enjoyment of the property as a place of residence;15
- the construction of the property is substantially completed in January, February, or March of the calendar year, and the property is put up for sale during the year but the property has never been occupied as a place of residence or lodging during the year;
- the property is located in a prescribed area and prescribed conditions are met; or
- the person is a prescribed person.
c. Primary Place of Residence
Tax is also not payable under the UHT Act if the residential property is the primary place of residence of the individual or the individual's spouse or common-law partner. If the property is occupied by a child of the individual or their spouse or common-law partner for the purposes of studying at a designated learning institution, then the UHT is also not payable.16
As well, tax is not payable if the "qualifying occupancy" test is met.17 This test requires a determination of whether the residential property was occupied by the owner, the owner's spouse, common-law partner or child, or a tenant for 180 days or more for no less than a month at a time and whether certain other conditions are met.18 For example, for the qualifying occupancy test to be met in the case of a tenant who deals at arm's length with the owner, the tenant must be given continuous occupancy of the dwelling unit under an agreement evidence in writing.19
If an individual and such individual's spouse or common-law partner each own one or more residential properties collectively, then they need to file an election with the CRA to designate only one property for certain exemptions. This includes the exemptions for a primary place of residence or qualifying occupancy.20
d. What is Residential Property?
A residential property generally means a property that is situated in Canada and that is a detached house or similar building, containing not more than three dwelling units, along with any appurtenances and the related land, a semi-detached house, rowhouse unit, residential condominium unit or other similar premises intended to be a separate parcel along with any common areas, appurtenances and the related land.21
Related land generally refers to the land that is subjacent or immediately contiguous to a residential building and that is reasonably necessary for the building's use and enjoyment as a place of residence for individuals. The CRA's view is that up to a half hectare of land that is subjacent and immediately contiguous to a residential building is considered to be reasonably necessary for the building's use and enjoyment as a place of residence for individuals. We note that this concept is also used in determining the principal residence exemption for income tax purposes and in determining whether the land is part of the residential complex for GST/HST purposes.
Careful attention should be paid to the definitions contained in the UHT Act to assess, firstly, whether a particular residential property is subject to the new rules. For example, the CRA clarified in another recent interpretation letter dated February 27, 2023, that a building did not qualify as a "residential property" for purposes of the UHT if it met the following two conditions:
- the building contains one dwelling, but the building is used "primarily" (generally meaning more than 50%) for retail or office space, i.e., for commercial purposes;
- the building is not divided into parts each of which is a separate parcel or other division of real or immovable property in which there is, or is intended to be, a property right separate from the property rights of the other parts of the building.22
In this letter, the CRA confirmed that a two-storey mixed-use building containing a retail store on the ground floor having 1,000 square feet of space and a second floor dwelling unit of 700 square feet of space, where both are part of a single parcel or division of real property, should not qualify as a residential property under the UHT Act.
e. Election Form
If a person is required to file a UHT Return, the applicable form is UHT-2900, Underused Housing Tax Return and Election Form.23 The entity filing the UHT Return must have a valid CRA Tax Identifier Number to file this form (including either a social insurance number (SIN), an individual tax number (ITN) or a Canadian business number (BN) with an UHT program account (RU)24 identifier code. Affected individual owners who do not have a SIN or ITN must apply for one before filing their returns. Other entities such as corporations, partnerships, or trusts which either do not have a BN or have a BN but no RU program account must also apply for BN & RU program account as necessary prior to filing their returns.
All of these technical requirements should then carefully be reviewed in advance of the filing deadline. If there are multiple owners of a property, such as undivided or divided co-owners of a property, then a separate return is required to be filed for each co-owner of the property.
Owners of multiple residential properties in Canada on December 31 must file a separate UHT return for each property. The form may be filed either electronically or by mail, and generally must contain the following information:
- the type of owner; for example, a corporation, a partner of a partnership, a trustee of a trust, an individual other than a partner of a partnership or a trustee of trust;
- the name of all of the owners of the residential property and their percentage of ownership, respectively;
- the type of residential property; for example, a detached house, a semi-detached house, a rowhouse unit, a residential condominium unit, a duplex, a triplex, etc.;
- the taxable value of the residential property and the method of determining such value; and
- any exemption requested in respect of the residential property.
f. Amount of Tax Payable
The tax payable is assessed as 1% of the greater of
- the property's assessed value for the year for property tax purposes, and
- the most recent sale price, in each case applied to the ownership percentage.
An owner can also elect to use the property's fair market value as determined at any time during the year and up to April 30th of the following year. However, if the this approach is chosen, the CRA requires an appraisal report to be prepared by an accredited professional real estate appraiser operating at arm's length from the owner. The intended use of the appraisal report must be to assist in the administration of the UHT Act.
Unlike other prescription periods relating to tax matters, there is no statute of limitation limiting the CRA's ability to assess UHT liabilities, penalties and interest where taxpayers fail to file a required return.
Individual owners that fail to file a return on time, even if no tax is payable, are subject to a minimum $5,000 penalty, and non-individuals (such as corporations, partnerships and trusts) are subject to a minimum $10,000 penalty per property, as well as an amount equal to 5% of the tax that was otherwise payable by the person, plus 3% of such tax payable multiplied by the number of months the return is late in its filing.25
Other penalties under the UHT Act include:
- a penalty of $250 for a failure to comply with any provision of the UHT Act for which no other penalty is specified;26
- a penalty of $500 for a failure to file a return as and when required under a demand issued under section 10 of the UHT Act;27
- a penalty of $500 and 25% of the false statement or omission as calculated according to section 52 for every person that knowingly, or under circumstances which amount to gross negligence, makes or participates in, assents to or acquiesces in the making of a false statement or omission in a return.28
Similar to other Canadian tax laws, the UHT Act also provides for offences and punishment fines under specific circumstances, including for failure to file return or to comply with demand or order, for false or deceptive statement and for failure to pay tax, all of which can be found under Division 9 of the UHT Act.29
To accommodate the uncertainty and unique challenges owners may face in the first year of the UHT administration, the CRA has recently provided transitional relief to affected owners. TheCRA is waiving penalties and interest for late filed returns and late paid taxes, provided the return is filed and the tax is paid by October 31, 2023.
Many exemptions are available under the UHT Act, and a thorough review of the particular facts must be undertaken to confirm whether an affected owner has a UHT liability for the calendar year with respect to a residential property.
For example, affected real estate developers of vacant residential condominium units substantially completed on December 31st of the calendar year should carefully review their obligations under the UHT Act as they may have a filing and a tax payment requirement for each of the unused condos.
It is noteworthy that in a recent interpretation letter dated March 10, 2023, the CRA clarified that a condominium complex does not need to be registered as a condominium in order for the condominium units situated therein to qualify as property included in the definition of "residential property" under the UHT Act. However, the construction must be substantially completed on December 31 of the calendar year in order for the developer/owner/builder to then have an obligation to file a UHT-2900 return in respect of the property for the calendar year.30
The CRA has published a series of technical publications and other helpful information regarding the UHT on its website which can be found here.
- Prohibition on Purchasing for Non-Canadians
The Prohibition Act came into force on January 1, 2023. This prohibits non-Canadians from purchasing residential property in Canada, either directly or indirectly, until January 1, 2025.31 Failure to adhere to these new rules can result in financial penalties and a court order to sell the property.
As mentioned above, the Prohibition Act prohibits "non-Canadians" from purchasing, either directly or indirectly, any residential property in Canada. The Prohibition Act defines "non-Canadian" as:
- an individual who is not a Canadian citizen, permanent resident of Canada, or registered as an Indian under the Indian Act;
- a corporation that is not incorporated under the laws of Canada or a province;
- a private corporation incorporated in Canada or a province but that is "controlled" by a person referred to in (a) or (b) above;32 and
- a prescribed person or entity as described in the Regulation.33
While at first glance the definition of "non-Canadian" seems somewhat limited, it is interesting to note that the term "prescribed entity" is broadly defined in section 2 of the Regulations, and includes any "entity":
- formed otherwise than under the laws of Canada or a province, and
- an entity formed under the laws of Canada or a province – whose shares or ownership interests are not listed on a stock exchange in Canada for which a designation under Section 262 of the ITA is in effect – and controlled by an entity referred to in paragraph (a) or controlled by a person referred to in paragraph (a), (b) or (c) of the definition non-Canadian in section 2 of the Act.34
The term "entity" is not defined under the Prohibition Act nor in the Regulations, but one may consider that it includes partnerships and trusts, although there is some uncertainty on this point, and hopefully the CRA will provide additional guidance.35
b. Residential Property
In section 2, the Prohibition Act defines "residential property" as property in Canada that is:
- a detached house or similar building containing not more than 3 dwelling units;
- 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 property or immovable owned, or intended to be owned, apart from any other unit in the building; or
- any prescribed real property or immovable as described in the Regulations.36
The Regulations further specify that the prohibition only applies to property in Canada that is located within either a census agglomeration or a census metropolitan area as defined by the Statistics Canada document entitled Standard Geographical Classification (SGC) 2021.37 This clarifies that the Prohibition Act is intended to apply only to residential property in large urban areas. To determine whether a location is in either of these areas, you can search using the Statistics Canada GeoSearch Tool.38
The prohibition does not apply to agreements of purchase and sale of residential property entered into before January 1, 2023, provided the non-Canadian becomes liable or assumes liability under the agreement in question before this date.39
There are exceptions to the prohibition available under the Prohibition Act. Under subsection 4(2) of the Prohibition Act, exempt are:40
- a temporary resident under the Immigration and Refugee Protection Act;
- a refugee;
- the spouse of a Canadian citizen, permanent resident, person registered as an Indian under the Indian Act who purchases residential property with such person; or
- a person of a prescribed class of persons in the regulations.
On March 27, 2023, the Government of Canada announced amendments to the Prohibition Act and Regulations, which came into force on that day.41 The amendments will:
- allow persons who hold a work permit42 or who are authorized to work in Canada under the Immigration and Refugee Protection Regulations to purchase residential property;43
- repeal subsection 3(2) of the Regulations, so vacant land can now be purchased by non-Canadians, regardless of how it is zoned;
- create an exception for non-Canadian controlled entities formed under the laws of Canada or a province and who are publicly traded in Canada (for example real estate investment trusts or limited partnerships);44 and
- provide an exception which allows non-Canadians to purchase residential property for development purposes such as commercial, industrial, or residential or any combination thereof.45
Under subsection 6(1) of the Prohibition Act, every person who contravenes this prohibition, and every person that counsels, induces, or aids and abets a non-Canadian to purchase, directly or indirectly, any residential property, is guilty of an offense and liable on summary conviction of a fine of not more than $10,000. If a corporation or entity commits an offense, an officer, director, agent, senior official, or other individual authorized to exercise managerial functions on behalf of the entity is a party to and liable for the offense, whether or not the corporation or entity has been prosecuted or convicted.46
While there are non-urban regions where non-Canadians can purchase residential property in Canada over the next 2 years, lawyers and advisors who work in the residential property space should proceed cautiously while this prohibition is in place. The Prohibition Act punishes anyone who aids or abets or attempts to aid or abet in the contravention of the act,47 including legal counsel and other professionals who work on real estate transactions. Liability is not limited to the non-Canadian purchaser.
The Prohibition Act makes it clear that a sale of residential property to a non-Canadian does not render the sale invalid and the sale remains legally binding despite the violation.48
The Prohibition Act does provide the superior court of the province in which the residential property to which a contravention relates is situated with the power to order that the property is to be sold49 in a manner following conditions set out in the Regulations.50 If a sale is ordered, the non-Canadian cannot recover more than what was paid for the property and therefore cannot make a profit off of the ordered sale
Many provinces are also enacting legislation which impose additional taxes to the purchase of residential property within their borders. Some of these taxes are specific to non-Canadians, while others apply more broadly. British Columbia and Ontario have both also enacted legislation with provides for additional taxes on vacant residential units in certain regions in each province. It is clear that on both a federal and provincial level the various governments are using taxes as one of many means to combat the current housing crisis in Canada.
1. Underused Housing Tax Act, SC 2022, C.5, S. 10.
2. Prohibition on the Purchase of Residential Property by Non-Canadians Act, SC 2022, C.10. C. 235.
3. Underused Housing Tax Act, S. 6.
4. Underused Housing Tax Act, S. 6(3).
6. Underused Housing Tax Act S. 6; Filings and taxes are due by April 30 of the following calendar year, with the first filings and taxes due on April 30, 2023. April 30, 2023, falls on a Sunday, so CRA has confirmed that the return, payments, and elections are made on time if they receive them by May 1, 2023.
7. Underused Housing Tax Act, S. 2.
8. We note that the UHTA does not indicate "Part IX" prior to the Excise Tax Act reference but we understand that this should be the case, as such terms are defined under Part IX of the Excise Tax Act.
9. Underused Housing Tax Regulations, 2022, c. 19, s. 116.
10. Underused Housing Tax Act, S. 6(7).
11. A partnership where all owners and members are either excluded owners or specified Canadian corporations, or a prescribed partnership. Underused Housing Tax Act, S. 2.
12. A trust where each beneficiary having a beneficial interest in the property is an excluded owner of a specified Canadian corporation, or a prescribed trust. Underused Housing Tax Act, S. 2.
13. A corporation that is incorporated in Canada that is more than 90% Canadian-owned and controlled. Underused Housing Tax Act, S. 2.
14. Underused Housing Tax Notice UHTN13 Exemptions for New Residential Properties.
15. Interpretation Letter, Underused Housing Tax (March 10, 2023).
16. Underused Housing Tax Act, S. 6(8).
17. Underused Housing Tax Act, S. 6(9).
18. Underused Housing Tax Act, S. 6(1) and 6(9).
19. Underused Housing Tax Act, S. 6(1)(a).
20. Underused Housing Tax Act, S. 6(10), (11), (12), and (13).
21. Underused Housing Tax Act, S. 2.
24. This is a new addition to the business number suffix, such as RT for GST/HST and RP for payroll. As with other suffixes, just having a business number alone does not permit a taxpayer to use these program accounts, and the taxpayer must specifically apply to be registered for these accounts.
25. Underused Housing Tax Act, S. 47.
26. Underused Housing Tax Act, S. 49.
27. Underused Housing Tax Act, S. 50.
28. Underused Housing Tax Act, S. 52. Under section 52 of the UHT Act, a return, application, form, certificate, statement, invoice or answer are all referred to as a "return".
29. Underused Housing Tax Act, S. 53 to 61.
30. Interpretation Letter, Underused Housing Tax (March 10, 2023).
31. Budget Implementation Act, SC 2022, c. 10, s. 236 and 237(2).
32. The Prohibition on the Purchase of Residential Property by Non-Canadians Regulations, S. 1 defines "control" with respect to a corporation or entity as:
(a) direct or indirect ownership of shares or ownership interests of the corporation or entity representing 10% (previously 3%) or more of the value of the equity in it, or carrying 10% (previously 3%) or more of its voting rights; or
(b) control in fact of the corporation or entity, whether directly or indirectly, through ownership, agreement or otherwise.
The amendments to the Regulations which were announced on March 27, 2023, increased the corporation foreign control threshold from 3% to 10%.
33. Prohibition of the Purchase of Residential Property by Non-Canadians Act, S. 2.
34. Amendments to the Prohibition Act and Regulations were made by the Government of Canada on March 27, 2023, which came into force on that day. The definition of "prescribed entity" under s. 2 of the Regulation, which was previously defined as "an entity formed under the laws of Canada or a province that is "controlled" by an entity that is a non-Canadian", was clarified.
35. The amendments now create an exception for non-Canadian controlled entities formed under the laws of Canada or a province and who are publicly traded in Canada (for example real estate investment trusts or limited partnerships). It is now clarified that they entities may benefit from the exception under the Prohibition Act afforded to non-Canadian controlled corporations incorporated under the laws of Canada or a province and who are publicly traded in Canada.
36. Prohibition of the Purchase of Residential Property by Non-Canadians Act, S. 2; Prohibition on the Purchase of Residential Property by Non-Canadians Regulations, S. 3(2) previously defines prescribed real property or immovable as "land that does not contain any habitable dwelling, that is zoned for residential use or mixed use, and that is located within a census agglomeration or a census metropolitan area, is a prescribed real property or immovable", but the amendments repealed that subsection, so vacant land can now be purchased by non-Canadians.
37. Prohibition on the Purchase of Residential Property by Non-Canadians Regulations, S. 1 and 3; https://www.statcan.gc.ca/en/subjects/standard/sgc/2021/introduction
39. Prohibition of the Purchase of Residential Property by Non-Canadians Act, S. 4(5).
40. Prohibition of the Purchase of Residential Property by Non-Canadians Act, S. 4(2); The prescribed class of persons discussed in S. 4(2)(d) of the Act are outlined in section 6 of the Regulations.
42. Work permit holders must have 183 days or more of validity left on their permit at the time they purchase property. They may not purchase more than one residential property.
43. Prohibition on the Purchase of Residential Property by Non-Canadians Regulations, S. 5(b).
44. Prohibition on the Purchase of Residential Property by Non-Canadians Regulations, S. 2(b).
45. Prohibition on the Purchase of Residential Property by Non-Canadians Regulations, S. 4(2)(e).
46. Prohibition of the Purchase of Residential Property by Non-Canadians Act, S. 6.
47. Prohibition of the Purchase of Residential Property by Non-Canadians Act, S. 6(1).
48. Prohibition of the Purchase of Residential Property by Non-Canadians Act, S. 5.
49. Prohibition of the Purchase of Residential Property by Non-Canadians Act, S. 7.
50. Prohibition on the Purchase of Residential Property by Non-Canadians Regulations, S. 7.
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