Warning Residential property owners in Canada – a new federal tax is being levied through the Underused Housing Tax Act on underused residential properties. Not all residential property owners, however, are subject to the tax. In fact, Canadian citizens and permanent residents can breathe a sigh of relief as they fall within a class of "Excluded Owners" (defined in the Act) and are not subject to the tax. On the other hand, Canadian private corporations, partnerships, trusts, and non-citizens are not included in the definition of an "Excluded Owner." They may be required to pay the tax on residential properties unless eligible for an exemption under the Act.

The federal Underused Housing Tax Act (the "Act") came into effect in June 2022. The Act implements an annual tax payable by registered residential property owners, other than Excluded Owners, equal to 1% of the fair market value or the taxable value of residential properties in cases where the property is considered underused (defined in the Act), subject to certain exemptions. The two main exemptions concern residential property that is the primary residence of the owner or the owner's immediate family members and/or residential property that meets a Qualifying Occupancy Period (defined in the Act). The Act is retroactive to January 1, 2022.

Take, for example, an American citizen named Sam, who is not a permanent resident of Canada. Sam owns a seasonal cottage in Northern Ontario with a fair market value of $1,000,000. The tax will apply to the residential property owned by Sam unless an exemption applies. Sam only visits the cottage for a few weeks of the year and does not otherwise use it or lease it. Let's assume that no exemptions under the Act apply to Sam. Sam will be required to pay an annual tax of $10,000 according to the Underused Housing Tax Act.

Although many Canadians are exempt from the tax, many Canadians may still be subject to certain reporting obligations under the Act. An owner of a residential property other than an Excluded Owner is required to file an annual return with the Canada Revenue Agency for every residential property owned, due on or before April 30 of the following calendar year.

All residential property owners should speak with their accountant or tax professional to ensure they are exempt and/or complying with their obligations under this new 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.