In its April 2021 budget the Trudeau government proposed a new tax on vacant residential properties owned by nonresidents. According to the budget document "This will help to ensure that foreign, non-resident owners, who simply use Canada as a place to passively store their wealth in housing, pay their fair share." Finance Minister Chrystia Freeland told reporters at the time "The idea here is that homes are for Canadians to live in, they are not assets for parking offshore money."
The Underused Housing Tax Act passed in June of 2022 and introduced an annual 1% tax on the targeted properties. The tax is retroactive to calendar years commencing January 1, 2022. The Canada Revenue Agency published technical details as well as the form of the return on January 31st, 2023.
Unfortunately, the legislation has a far greater impact than simply taxing "foreign, non-resident owners" who are "parking offshore money" in Canadian residential real estate. Every Canadian partnership, private corporation and trust which holds title to residential properties MUST file a return each year for each property held on December 31of any calendar year. The filing deadline is the same for all entities regardless of their tax year-end date – April 30 of the subsequent calendar year. Failure to file a return results in a minimum penalty of $5,000 for individuals and $10,000 for corporations for each property. The penalty applies even if the property is not subject to the 1% tax. If the property is taxable, a percentage of the tax may be added to the penalty.
In order for a corporation or partnership to file a return, it must first register for an "RU" extension to its Business Number. CRA has indicated that registration will be possible after February 6, 2023. Non-residents who are required to file a return must first obtain an Individual Tax Number from CRA.
Individuals who are Canadian citizens or Permanent Residents as defined in the Immigration and Refugee Protection Act, governments, publicly listed companies, REITs, charities, co-ops, mutual funds, municipal governments, schools and some other entities are exempt from both the requirement to file a return and from the tax itself.
Every Canadian private corporation, partnership and trust holding residential property on December 31 in a year is required to file a return whether or not tax is payable. A corporation is only exempt from taxation if more than 90% of its shares are held by Canadian citizens or residents. In the case of partnerships holding residential property, the exemption is only available if all of the partners are Canadian citizens or residents. Similarly, in the case of a trust, the threshold is that all of the beneficiaries are Canadian citizens or residents. Many trusts, particularly testamentary trusts – trusts created by a will – may have non-Canadian beneficiaries.
Estate trustees must file a return if the estate assets included a residential property on December 31. There is a potential impact on testamentary trusts as the exemption from taxation only applies to the year in which the testator died and the subsequent year. Cottages or other residential property held through a family trust or cottage trust also trigger the filing requirement.
It cannot be over-emphasized that there is no exemption from the penalties for failure to file a return for each residential property so owners of private corporations, partners in partnerships, trustees, and executors need to be vigilant if any of the assets of these entities meet the definition of residential property in the Act.
Residential property is described as follows: residential property means property (other than prescribed property) that is situated in Canada and that is
- (a)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;
- (b)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
- (c)a prescribed property
Whether or not a property is "owned" is based on whether it holds legal title or a lease, it is not based on beneficial ownership.
Whether or not the tax applies depends on a number of factors set out in the Act which determine whether the property is "underused" in the year. It should be noted however that there is no exemption from taxation for properties that meet the statutory definition of residential property and are not vacant, but are used for non-residential purposes such as offices, hotels, or vacation rentals.
If you are an executor trustee or partner or have an interest in a private corporation, partnership or trust that holds residential property you should be prepared to register and file a return, or obtain professional assistance in doing so. Remember that the UHTA is reported on a calendar year basis, so corporations will have to file by the end of April each year even if they have an off-calendar year-end. The filing deadline for this year is May 1st, 2023 as April 30 falls on a Sunday.
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.