This article appears in the February 2023 issue of Investment Executive. Subscribe to the print edition, read the digital edition or read the articles online.
Clients who own residential property through a trust, a private corporation or a partnership should know they must file a return under the federal government’s new underused housing tax (UHT) regime, even if they owe no taxes.
The penalties for filing after the April 30 deadline (May 1, 2023, for the 2022 tax year) are stiff: at least $5,000 for individuals, and $10,000 for corporations, for each residential property. If tax is payable, penalties may climb higher the later the return is filed, with no cap in the legislation.
“If you just look at the name of the [Underused Housing Tax] Act, it’s going to lead a lot of people astray,” said Mark Potechin, a partner with DLA Piper LLP in Montreal, with some clients unaware of their obligation to file.
Said John Wonfor, partner and national tax office leader with BDO Canada LLP in Toronto: “There are going to be a lot of non-compliant taxpayers the first year.”
Effective for 2022, the UHT is an annual 1% tax on the ownership of vacant or underused housing in Canada. The tax is part of the federal government’s strategy to address housing affordability. The UHT is separate from and in addition to the vacant home taxes introduced in Vancouver in 2017 and in Toronto and Ottawa in 2022.
“Excluded owners,” which include Canadian citizens, permanent residents, listed corporations, REITs and charities, do not have to file a UHT return.
“Affected owners” owning a residential property in Canada on Dec. 31 must file a UHT-2900 Underused Housing Tax Return and Election Form by April 30 of the following year. But the definition of “affected owner” makes the scope of the UHT regime broader than the government’s stated intention of targeting foreign owners.
“Affected owners” include someone who owns an interest in residential property through a partnership or as a trustee of a trust — excluding Canadian executors of estates. Small-business corporations that own residential property also are defined as affected owners.
“There will be many more [clients] who need to file [a UHT return] than will owe tax,” said Robert Davies, a tax manager with Fuller Landau LLP in Toronto.
An affected owner must pay the 1% annual tax on the value of each residential property unless they qualify for an exemption. Exemptions are available, for example, for residential properties that serve as primary residences or meet “qualifying occupancy” requirements; a vacation home located in an eligible area; or a property that is seasonally inaccessible or uninhabitable for part of the year.
A “specified Canadian corporation” also is exempt from tax if foreign owners own or control less than 10% of the shares or votes. A “specified Canadian partnership” or a “specified Canadian trust” is exempt from tax if all partners or beneficiaries, respectively, are excluded owners or are specified Canadian corporations.
Kurt Oelschlagel, national agriculture tax leader with BDO Canada in Hanover, Ont., said that many farms in Canada are held in corporate or partnership structures and are therefore caught under the rules if they hold residential property.
“Where you have a farming corporation that owns five farms, and there’s a house on each farm, that corporation has to file five [UHT] returns, even where all the shareholders are Canadian citizens,” Oelschlagel said. Each return not filed could potentially result in a $10,000 penalty, even though the corporation is exempt from the UHT.
There’s also a filing requirement for any partnership that owns residential property, such as a spousal business partnership that owns a residential rental property, Oelschlagel said. In this case, each legal owner of the residential property would need to file a return.
Clients who own residential property through an alter-ego or joint-partner trust established for probate planning purposes also will have to file a UHT return.
In addition, if any of the trust’s beneficiaries, including contingent beneficiaries who inherit only on the death of a named beneficiary, is not a Canadian citizen or permanent resident, the trust would not be a specified Canadian trust and thus would owe UHT if the property didn’t qualify for another exemption.
To address the issue in future tax years, a client with a trust might consider removing either a non-Canadian contingent beneficiary from the trust if the trust document allows it, or the residence from the trust.
“You’re not going to want to pay the [annual] 1% tax” just to avoid a one-time probate fee, Potechin said.
Noah Sarna, a commodity tax partner with Thorsteinssons Tax Lawyers in Toronto, is one of many tax practitioners who hope the Canada Revenue Agency (CRA) will exercise leniency for the 2022 tax season as financial professionals and taxpayers get up to speed with the new tax.
In a Feb. 1 post on LinkedIn, Sarna called the UHT return “an excessively complex form, demanding more information than necessary in many cases.” The CRA released the return form on Jan. 31.
“The return will take significant training for accounting firms to be able to complete competently,” Sarna wrote. “It arrives during the three busiest months of the year, with other tax changes competing for attention, yet with relatively severe late-filing penalties.”
As of press time, the CRA had not indicated it would offer any relief from penalties in the first year of the UHT. However, a CRA spokesperson stated in an email to Investment Executive that “the underused housing tax penalty framework is currently being developed and more information will be made public once available.”
Furthermore, the legislation governing the UHT allows for a taxpayer to ask the CRA to waive penalties, but the CRA has not detailed the circumstances under which it would do so.
Potechin said the scope of the filing requirement for the UHT is consistent with a broader trend of governments in Canada requiring more information concerning real estate ownership and transactions.
In the years ahead, Potechin believes the CRA may cross-reference data from the expanded trust reporting regime, which will take effect for the 2023 tax year, with information on UHT returns for compliance and enforcement purposes.
When you tie in the expanded trust reporting regime with the UHT, “it becomes relevant, because you have an audit trail and expanded audit risk, which you never had before,” Potechin said.
The UHT, residential property and the 1% tax
For purposes of the underused housing tax (UHT), residential properties include detached and semi-detached homes, townhouses, condo units, duplexes and triplexes, and laneway and coach houses. Residential property does not include hotels, high-rise apartment buildings, quadruplexes, boarding and lodging houses, commercial vacation properties and mobile homes.
If an owner must file a UHT return, and no exemption from the tax is available, they will owe a 1% annual tax on the taxable value of residential property. The taxable value is the amount of the property’s assessed tax value for the year or the most recent sale price, whichever is greater. An owner can file an election between Jan. 1 and April 30 following the tax year to use the property’s fair market value.
If two or more people hold title to a property, each will be responsible for the tax (in proportion to their interest).