A condominium building.
From Pivot Magazine

Digging into the Underused Housing Tax Act

The federal government deserves some credit for trying to tax vacant homes. But its approach might have been worth a second look

When the federal government’s Underused Housing Tax Act (UHT) came into effect in January 2022, its ostensible purpose was laid out in the 2020 fall economic statement: “The government will take steps over the coming year to implement a national, tax-based measure targeting the unproductive use of domestic housing that is owned by non-resident, non-Canadians, which removes these assets from the domestic housing supply.”

This new one per cent levy, modelled on similar measures enacted in British Columbia and the City of Toronto, also sought to address what some policy-makers assert is a growing problem: foreign investors speculating in real estate. With fierce housing shortages right across Canada, the federal government reckoned it could deploy a national tax-based measure as a means of putting foreign-owned underused dwellings back into the market.

As a general rule of thumb, governments tax for one of three reasons: to raise revenue, to encourage certain activities, or to discourage certain activities. But tax measures can and do fail if their administrative costs exceed the expected revenues, or if they fail to either deter or encourage the desired behaviour.

The question is, does the UHT successfully increase the housing supply in Canada by discouraging underused foreign ownership? And does it do this without unintended consequences or significant costs?

According to Department of Finance data, there are about 16.5 million dwellings in Canada, of which about 422,000 are owned by non-residents. Of those, the Department of Finance, citing StatsCan and B.C. data, estimates 45,000 are vacant or underused, and 30,000 of those would be subject to the tax, which the Parliamentary Budget Office estimates would yield about $600 million in gross revenue over five years.  Sadly, the cost of administering the program has not been factored into the PBO’s estimates, which calls into question the actual contribution to the government’s annual budget.

Here’s the wrinkle. While the federal government is quite explicit in targeting non-Canadian owners, the original design of the UHT reporting system inadvertently applied to Canadian tax filers when the property in question is indirectly owned through a trust, partnership, or a corporation. Although there is a specific exemption allowing these indirect Canadian ownership vehicles to avoid the tax, the system as originally drafted captured these Canadians in the administrative burden designed for non-Canadians.

There are all kinds of scenarios where the reporting burden on Canadians can become extremely onerous. For example, if a Canadian corporate developer is building a condominium complex, and the developer owns each unit (i.e., if they’ve not yet been sold), each condo unit could generate a separate filing. We’ve heard stories where CPAs have clients that have hundreds of filings from a single development project.

Indeed, when we look back at the federal government’s goal in introducing the UHT, it was envisioned as a program for non-Canadians. Under the original regulations, a significant volume of the filing activity was coming from Canadians who indirectly owned their property through a corporation, a partnership or a trust. In the Liberals’ Fall Economic Statement, the government rolled back this reporting burden.

Besides the seemingly unnecessary reporting cost to these exempt filers, there are opportunity costs associated with a tax system that seems to miss the mark in this way. Given a tsunami of new tax legislation, the CRA faces huge operational challenges and limited budgets. Before last fall’s proposed changes, the UHT filing requirement placed an administrative burden on the CRA, and thus draws limited resources away from other important priorities. We’re pleased to see that the government has recognized that the CRA does not have endless resources available to advance a policy objective which may not actually solve the problem that the policy was designed to address.

Canada, of course, is by no means the only large economy facing a dire housing crisis. Nor is it the only jurisdiction that has sought to use its taxing authority to try and get vacant homes back into the active housing stock. Ireland has such a measure on its books. Similarly, the Australian state of Victoria imposes an additional tax on vacant residential land, also to encourage owners to put those properties to work. New Zealand is also actively considering its own tax.

Canadians need to know whether this policy will actually succeed in easing the housing crunch, and the evidence on this point is unconvincing. Even if the UHT succeeded in moving every one of the 30,000 subject vacant homes onto the market, it would increase Canada’s housing stock by less than a fifth of one percent. By comparison, Canada Mortgage and Housing Corp. recently estimated that for the country to provide enough affordable housing to keep up with population growth, we need to add another 3.5 million homes by 2030, bringing the total housing supply to 22 million. That works out to about 48,600 ... per month.

While we should laud governments for trying to tackle the housing crisis, it seems difficult to defend an approach that’s long on administrative costs but very short on results.

More on the UHT

Check out CPA Canada’s extensive tax resources and find out why changes to Canada’s tax system have resulted in a complex system of rules and regulations.

Photo caption: Of the 16.5 million dwellings in Canada, 422,000 are owned by non-residents, according to Department of Finance data (Freepick)