A CPA can help clients identify ownership situations that are subject to the UHT rules and any payment requirements (Getty Images/Weekend Images Inc.)
Since the federal government announced the new underused housing tax (UHT) as part of the 2021 federal budget, there have been questions around who it applies to. In a nutshell, the UHT is described as a one-percent tax on the value of non-resident, non-Canadian owned residential real estate that is considered to be vacant or underused.
While the tax is generally aimed at non-residents of Canada, many may not know that there are situations where the rules could apply to Canadian citizens or Canadian residents (referred to as Canadians henceforth), cautions Bruce Ball, FCPA, CPA Canada’s vice-president of taxation. “They generally won’t have to pay the tax, but they do have to file a return and claim an exemption,” he says.
WHAT IS THE UHT?
It’s essentially a housing tax imposed by the federal government on people who are non-residents, where a property is not being used in a certain way, says Ball. [Read CPA Canada’s tax blog on the requirements and exemptions of the UHT.]
The UHT rules include an annual reporting requirement and a tax liability that is calculated at one per cent of the residential property’s value. Residential property owners can be categorized into three groups: owners with no UHT reporting or tax obligation; owners required to file a UHT return and pay tax; and owners required to file the return but with no tax payable due to an exemption. Where a return is required to be filed or a payment is due, the due date is April 30 (although the deadline for 2022 returns will be May 1 since April 30 falls on a Sunday).
WHO DOES IT APPLY TO?
If a non-resident owns residential property and it’s vacant or underused, they might owe tax under the UHT. However, the government’s efforts to impose the UHT on non-residents can unfortunately also affect Canadians, says Ball.
“You can’t assume that the UHT only applies to non-residents and you don’t have to worry about it. If an individual holds residential property otherwise than in their own name, they may be required to file or risk a $5,000 or higher penalty,” he says.
Ball cites an example in which a property being used by an individual who was mentally ill where his brother holds title to the property in trust. “Even though the individual was living there full time and the brother is Canadian, a UHT return would still have to be filed because the property was held in trust by the brother,” he explains. In this case, an exemption will be available, but the brother will still have to file a return.
Other areas of concern involving Canadians include farm properties, vacation properties held in a trust and trusts that are used as will substitutes. In all of these scenarios, tax may not be payable given underlying Canadian ownership, but a penalty will apply if a return including an exemption claim is not filed.
One particular question that is arising is around group ownership of residential properties, says Ball. “Do they hold the property as co-owners, or as a partnership? This may not be a critical factor for personal income tax purposes, but for the UHT, it could determine whether there is a filing requirement or not. So, it’s critical to figure that out and you should document why it is or is not a partnership.”
WHO HAS TO FILE?
According to Ball, the confusion surrounding the UHT rules stems partly from the fact that there will be some groups that don’t have to file at all, and some groups that have to file but not pay tax. “Individual Canadians who own property directly are ‘excluded owners’ and do not have to file,” he says.
Apart from individual Canadians, excluded owners also include publicly traded Canadian corporations, certain trusts (a mutual fund trust, real estate investment trust, or specified investment flow-through trust or an estate controlled by the executor), registered charities, cooperating housing corporations, municipal organizations and other public institutions and government bodies, Indigenous governing bodies or corporations, or “prescribed persons” not yet defined by regulation.
WHAT ARE THE EXEMPTIONS?
It gets more complicated in other ownership scenarios as they will not be excluded owners. As discussed, for indirect ownership scenarios involving a corporation, trust or partnership where the underlying ownership is Canadian, a return is required and an exemption for a specified Canadian corporation, specified Canadian trust or specified Canadian partnership will generally be available (in Part 6 of the UHT form).
Non-resident owners will generally have to file the UHT return and will either qualify for an exemption, or failing that, be subject to the tax. Exemptions from the tax that will assist non-residents include those for whom the residential property is their primary place of residence, or that of their spouse/partner or a child studying at an educational institution for the year. Other exemptions include those based on the availability, location or use of the residential property.
HOW CAN MY ACCOUNTANT HELP?
CPAs can help identify ownership situations that are subject to the UHT rules, and ensure their clients understand potential any filing and/or tax implications implications.
“Many Canadian property owners don’t understand the UHT or in some cases, even know it exists,” says Ball. He advises property owners to take steps to educate themselves on whether they may be holding a property that will be subject to the rules.
“It’s essential that you get up to speed on the UHT to ensure that you don’t end up paying unnecessary penalties” says Ball. “Talking to your accountant is a good place to start.”
Stay on top of the UHT requirements and exemptions with CPA Canada’s tax blog. Learn how CPA expertise can help clients maximize the principal residence exemption. Plus, be on the lookout for these three types of real-estate fraud.