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First of all… Don’t shoot the messenger! This update may tell you things you would rather not hear, and you may even find it upsetting. However, the consequences of remaining ignorant may be extremely painful (minimum $5,000 penalties). Therefore, we urge you to give this matter your diligent attention.

Introduction

You may have seen a few headlines or read articles about Canada’s new Underused Housing Tax (UHT). If so, you likely glanced over the headlines, perhaps read an article or two somewhat absentmindedly and concluded that “this doesn’t apply to me” because it seemed aimed at foreign investors in Canada’s housing market. We were of the same opinion until the legislation was introduced and the CRA began to release guidance.

While it may be true that the legislation is aimed at foreign investors, the reality is that it casts a very wide net, and many of our clients may be required to file a UHT return (UHT-2900), even though they may not be subject to the tax itself. The consequences for not filing, or even filing late, are significant, with penalties STARTING at $5,000 for individuals and $10,000 for non-individuals (partnerships, trusts, corporations, etc.)  And the deadline is not very far away. The government, in their wisdom, has decided that April 30 would be an appropriate deadline. We can only assume that the CRA is concerned that there should never be an underemployed accountant in Canada, lest they stage a protest or something. So keep the beancounters busy, say they, lest idle minds, thumbs and fingers find mischief.

What is the UHT?

Let’s talk just a little bit about what the UHT is and the purpose behind it. As part of the 2021 Federal Budget, the Government of Canada announced its intention to implement a national one percent tax on the value of any residential real estate considered vacant or underused and owned by non-resident, non-Canadians. This was in reaction to the rapidly rising cost of housing in Canada, particularly in Canada’s larger urban areas. There was a perception that foreign investors and vacant owners helped drive this rapid rise. In other words, the intention was to help curb the increase in housing costs and make housing more affordable for Canadians. The rules (contained in the UHT Act) were enacted in 2022 and apply to residential properties owned on or after December 31, 2022.

If an owner and property are not exempt, a tax of one percent of the property’s assessed value is payable annually.  We do not expect that many readers of this article will be subject to the tax itself, but many may be surprised to find that they have an obligation to file a return.

Who is affected?

Of course, foreign investors are affected. That is who this tax was designed to affect. So what is the problem? It turns out that unless a specific exclusion applies to you as a residential property owner, you must file a UHT return, even if only to claim an exemption to the tax. Put another way; you are subject to the tax unless you inform the CRA otherwise or meet a narrow set of exemptions. This is true even if there is no foreign ownership whatsoever. In some cases, it applies even if the registered owners of a residential property are Canadian citizens, full-time residents of Canada, the sole occupants, and this is the only home they own. Therefore, anyone who owns a residential property must take the time to carefully determine whether they are obligated to file and then conduct themselves accordingly.

Who is exempt?

Excluded owners are exempt from any UHT obligations.

An excluded owner is, on December 31 of a calendar year, one of the following:

• An individual Canadian citizen or a permanent resident of Canada
• Publicly-traded Canadian corporations (shares traded on a stock exchange)
• A person who holds title to a property because they are acting as a trustee of various widely held trusts (does not apply to the more common testamentary trusts, family trusts, inter vivos trusts, etc.)
• Registered charities
• Co-operative housing corporations
• Municipalities, public institutions, and government bodies

At first glance, the first line excludes most of our clients.  However, important distinctions and differences exist between the treatment of property held by an individual, co-owners, and partnerships.  Partnerships are not exempt.  Co-owners may be, depending on various circumstances.

Take, for example, a married couple who own and operate a farm.  Each spouse has been including 50% of their net farm income in their personal tax returns.  Their home is located on their farmland, and the title to that land is held jointly.  Both spouses are Canadian citizens, and they live together.  It seems clear that a partnership exists, but is the home part of the partnership?  Guidance from the CRA is unclear.

For a more in-depth discussion, see the TaxTips.ca discussion on this subject.  There is significant uncertainty about this particular topic and how the CRA intends the UHT Act to apply to various scenarios.  If you are unsure whether or not you are exempt, file a return rather than risk a penalty.

If I ignore it, will it go away?

Ignoring this issue could become very painful for you.  There are no provisions for filing late, and unlike penalties for late-filed income tax or HST returns, the penalty for a late-filed UHT return is a fixed amount, applicable whether or not tax is owed.  And it is significant.  Individuals are subject to a $5,000 penalty, and corporations, partnerships and trusts face a $10,000 bill.  These are minimums.  In addition to these amounts, you could lose any exemption to which you were otherwise entitled and be subject to a surcharge on top of the tax. So you don’t want to forget about this one.

Significant pressure is being brought to bear on the government to try to influence changes to the legislation. Unfortunately, as enacted, the legislation seems to be more of a paper-shuffling exercise than a meaningful effort to reduce housing costs.  However, until and unless things change, we must play with the cards we’ve been dealt.  In this game, you can’t just lay down your cards and walk away.

What do I do next?

We have built a UHT Decision Tool to help you determine whether or not you have filing obligations.  We urge you to use this tool to help you decide your next steps.  The tool can be accessed here.

We also suggest that you take time to review the information compiled at TaxTips.ca on this subject. This website does an excellent job of thoroughly addressing complex tax matters in simple, relatively easy-to-understand terms.  We realize you have better things to do with your time, but you owe it to yourself to ensure you do not risk a penalty.

Finally, do not leave a decision on this matter to the last minute.  The UHT form is nine pages long, including three pages of complex terms and instructions.  It is not something that you can hurry through.