Understanding Canada's Underused Housing Tax Act

On June 9, 2022, Bill C-8 received Royal Assent. Amongst other things, that Bill enacted the Underused Housing Tax Act (the “UHTA”), retroactive to January 1, 2022. The UHTA implements an annual tax of one percent on the value of vacant or underused residential property directly or indirectly owned by certain non-resident non-Canadians. It sets out rules for the purpose of establishing owners’ liability for the tax. It also sets out applicable reporting and filing requirements. Finally, to promote compliance with its provisions, the UHTA includes modern administration and enforcement provisions aligned with those found in other taxation statutes. The federal government’s objective with the UHTA is to curb real estate speculation.

Overview

Beginning 2022, the UHTA applies on a calendar year basis in respect of “residential property”, which includes detached houses (containing up to three dwelling units), semi-detached houses, row houses, residential condominium units and similar buildings or premises.‎

The tax

Specifically, the underused housing tax is imposed on every person who, on December 31 of a calendar year, is an “owner” (other than an “excluded owner”) of a residential property. The amount of tax imposed is:

• one percent of the “taxable value” of the residential property (being the most recent sale price before year end or the assessed value for property tax purposes, whichever is greater), or
• one percent of the fair market value, if the appropriate election is filed.

The amount of tax is prorated for owners based on their ownership percentage of the residential property.

The owner

Under the UHTA, the term “owner” means the person identified as the legal title holder of the property, and includes a life tenant, a life leaseholder, or a person with a “long-term lease” of at least 20 years or which contains an option to purchase the land. The definition excludes a person that gives continuous possession of the land to persons with a life lease or a long-term lease as described above. Thus, in a life lease or long-term lease situation, it is the tenant rather than the landlord that is considered to be the “owner” for purposes of the UHTA.

Excluded owners

As noted above, “excluded owners” are not subject to the underused housing tax. The definition of this term describes a number of categories of persons. Most significantly, Canadian citizens and permanent residents of Canada are “excluded owners” and are not subject to the underused housing tax, unless such persons own the property in their capacity as trustees of a trust or as partners in a partnership. Thus, the tax is directed at non-resident non-Canadians owning property in Canada.

Other “excluded owners” include government entities, Indigenous governing bodies, public corporations listed in Canada, registered Canadian charities, Canadian cooperative housing corporations, hospital authorities, municipalities, para-municipal organizations, educational institutes, and persons that own residential property in their capacity as trustees of a mutual fund trust, ‎a real estate investment trust (REIT), or a specified investment flow-through trust.

An individual who owns residential property in the capacity as a trustee of a trust or as a partner in a partnership, even if such person is a Canadian citizen or permanent resident of Canada, is not an excluded owner. However, an individual who is a Canadian citizen or permanent resident of Canada ‎who owns residential property in their capacity as a personal representative of a deceased individual is an excluded owner.

Additionally, it should be noted that private Canadian corporations are not included in the definition of excluded owner.

Obligations of representatives

A “representative” is defined to mean a person, other than a trustee in bankruptcy or a “receiver” (also defined), that is administering, winding up, controlling or otherwise dealing with any property, business, estate or succession of another person. A representative could include, for example, the trustee of a trust or a personal representative of the deceased individual’s estate.

Every representative (and receiver) that controls property of another person ‎that is required to pay any amount under the UHTA must, before distributing the ‎property to any person, obtain a certificate from the Minister of National Revenue certifying that payment (or acceptable security) has been provided to cover all amounts payable by the other person under the UHTA in respect of the calendar year during which the distribution is made or in any previous calendar year. Any representative (or receiver) that distributes property without obtaining the ‎certificate is personally liable for the payment of those amounts to the extent of the value of the property distributed.‎

Exemptions

An owner that is not an excluded owner must pay tax, unless the owner qualifies for an exemption. Below is a list of some of the key exemptions.

Qualifying occupancy

An exemption may apply to the owner of a residential property for a calendar year if the number of days during the calendar year that are included in a “qualifying occupancy period” is 180 days or more.

A qualifying occupancy period is defined to mean a period of at least one month in a calendar year during which one of the following individuals (other than certain excluded or prescribed individuals) has continuous occupancy of a dwelling unit that is part of the residential property:

• an arm’s length tenant (under a written tenancy agreement);
• a non-arm’s length tenant who gives consideration that is ‎not below the “fair rent” (absent a prescribed amount, this means five percent ‎of the greater of the municipal tax value and the property’s most recent sales price);
• an individual who is the owner or the owner’s spouse or common-law partner and is in ‎Canada to pursue authorized work under a Canadian work permit; or
• an individual who is a spouse, common-law partner, parent or child of the owner and who ‎is a citizen or permanent resident.

In other words, the application of the qualifying occupancy exemption appears to require that the number of one-month blocks during which an individual listed above has continuous occupancy must represent in aggregate 180 days or more of a calendar year. This means occupancy for a few days here and there which are not continuous and do not comprise a one-month block are unlikely to count towards the 180-day threshold.

Note that this exemption is unavailable for a particular residential property where the owner or the owner’s spouse or common-law partner own multiple properties and have filed the primary residence election (described below) in respect of a different residential property. Additional limitations regarding the qualifying occupancy period may apply where the only individuals who have continuous occupancy of a dwelling unit are the owner or a spouse, common-law partner, parent or child of the owner, if each of those individuals resides at a place other than the residential property for an equal or greater number of days than the number of days that they reside at the residential property.

Primary place of residence

An exemption may apply to the owner of a residential property for a calendar year if a dwelling ‎unit that is part of the residential property is the primary place of residence of the owner, the owner’s spouse or common-law partner. This exemption also extends to a child of an owner and their spouse or common-law partner if that child occupies the residence for the purpose of authorized study at a ‎designated learning institution.

Note that an individual who is neither a Canadian citizen nor a permanent resident of Canada and who owns two or more residential properties must elect to designate only one of the properties as their ‎primary place of residence for the calendar year, and this exemption will apply only in respect of the designated property. Where an individual and their spouse or common-law partner each own one or more residential properties, a joint election must be made and only one of those properties may be designated under the election.

Specified Canadian partnership

An exemption may apply to an owner who owns residential property solely in their capacity as a partner of a partnership that is a “specified Canadian partnership” in respect of the calendar year. Under the current legislation, a specified Canadian partnership is defined to mean a partnership for which each member is, on December 31 of the calendar year, an excluded owner or a specified Canadian corporation (see below).

Draft amendments to the UHTA, published August 9, 2022 (the “Draft Amendments”), propose to amend the definition of a specified Canadian partnership in order to address the circular problem that arises where an individual who is a Canadian citizen or permanent resident holds residential property in their capacity as a partner of a partnership but is not an excluded owner for that same reason. The Draft Amendments propose that, specifically for the purposes of the term “specified Canadian partnership”,  the carve out from “excluded owners” for partners of a partnership be removed.

This amendment will be deemed to have come into force on January 1, 2022

The Minister may in the future prescribe certain partnerships to be specified Canadian partnerships under regulations to the UHTA.

Specified Canadian trust

An exemption may apply to an owner who owns residential property solely in their capacity as the trustee of a trust that is a “specified Canadian trust” in respect of the calendar year. A specified Canadian trust is defined to mean a trust under which each beneficiary having a beneficial interest in the residential property is, on December 31 of the calendar year, an excluded owner or a specified Canadian corporation (see below).

The Minister may in the future prescribe certain trusts to be specified Canadian trusts under regulations to the UHTA.

Commentators have suggested that the UHTA is, to some extent, modelled on the Speculation and Vacancy Tax Act (British Columbia) (the “BC Spec Tax”). However, there appears to be one important difference with the treatment of contingent beneficiaries of a trust. The definition of “beneficial owner” under the BC Spec Tax excludes beneficial interests that are contingent on the death of another individual. Conversely, the definition of specified Canadian trust in the UHTA does not carve out contingent interests, which suggests that each beneficiary, including contingent beneficiaries, must be an excluded owner ‎or a specified Canadian corporation in order to qualify for the specified Canadian trust exemption under the UHTA. Thus, non-resident contingent beneficiaries may not cause a trust to be subject to the BC Spec Tax but may result in the trust being liable for tax under the UHTA.‎

Specified Canadian corporation

Corporations that are “specified Canadian corporations” in respect of the calendar year are exempt from the underused housing tax. A “specified Canadian corporation” is defined to mean a corporation incorporated or continued under federal or provincial law, but does not include:

• a corporation for which ownership or control of shares representing ten percent or more of the ‎equity or voting rights in the corporation is held by any combination of:
  • individuals who are neither Canadian citizens nor permanent residents of Canada, or
  • foreign corporations; or
• a corporation without share capital for which the chairperson or other presiding officer, or ‎‎ten percent or more of the directors, are individuals who are neither ‎Canadian citizens nor permanent residents of Canada.

Exemptions with respect to deceased individuals or personal representatives

An exemption will apply to an individual who has died in the year or the prior calendar year.

The term “personal representative” is defined under the UHTA to mean, in respect of a deceased individual, the executor of the individual’s will, the liquidator of the individual’s succession, the administrator of the estate of the individual or any person that is responsible under the appropriate law for the proper collection, administration, disposition and distribution of the assets of the estate or succession of the individual.

An exemption will apply to a personal representative in respect of a deceased individual if the deceased individual was an owner of the residential property during the calendar year or the prior calendar year, and the personal representative was not otherwise an owner of the residential property in either of those years. This exemption will be relevant where, for example, residential property is transmitted to a personal representative in that capacity pending distribution to beneficiaries or sale to a third party, and that personal representative is not otherwise an excluded owner.

Additionally, an exemption will apply to a person who is an owner of residential property at the date another owner of the property has died and that other  individual has died ‎during the calendar year or the prior calendar year and was an owner of at least 25 percent of the residential property at the time of death. This exemption is relevant where, for example, the deceased individual and another individual were the registered owners of the residential property in joint tenancy, and following the deceased individual’s death the residential property passed to the other individual by the right of survivorship.

Additional exemptions

Additional exemptions may apply for residential properties that are:

• Not suitable for year-round use, or are seasonally inaccessible;
• uninhabitable for at least 60 consecutive days in the calendar year as a result of natural disasters or hazardous conditions (this exemption is only available if it did not apply in respect of the same disaster or hazardous condition for more than one prior calendar year);
• uninhabitable for at least 120 consecutive days in the calendar year due to renovations, so long as certain conditions are met (this exemption is only available if it did not apply for any nine prior calendar years);
• acquired by the owner in that calendar year and such person was never an owner of the property in the nine prior calendar years; or
• under construction provided certain conditions are met.

Vacation/recreational properties

The federal government indicated its intention in the Economic and Fiscal Update 2021 (released December 14, 2021) to bring forward an exemption for vacation/recreational properties, which would apply to an owner’s interest in a residential property for a calendar year if the property is:

• located in an area of Canada that is: not within certain metropolitan or densely populated areas; and
• personally used by the owner (or the owner’s spouse or common-law partner) for at least 28 days during the calendar year.

Details of this exemption have been proposed in draft regulations to the UHTA, published August 9, 2022.

Requirement to file returns

It is important to note that any owner (other than an excluded owner) of one or more residential properties on December 31 of a calendar year is required to file a return ‎for each residential property for the calendar year, even if the owner is not liable to pay any tax under the UHTA due to an exemption. There are no current prescribed exceptions to this filing requirement.

The return in respect of a calendar year must be filed with the Minister of National Revenue in prescribed manner by April 30 of the following calendar year. Any tax payable under the UHTA in respect of the calendar year must also be indicated on the return and must be paid to the Receiver General by April 30 of the following calendar year.

A person who fails to file a return when required is liable to ‎a penalty equal to the greater of:

• $5,000 if the person is an individual or $10,000 if the person is not an individual, and
• the amount that is the total of
  • five percent of the tax payable, and
  • ‎three percent of the tax payable for each calendar month the return is ‎late.

The UHTA also contains various administrative provisions dealing with computation of interest, records and information retention, assessments, objections and appeals, as well as a number of anti-avoidance provisions.

Normally the Minister of Revenue has four years to assess the tax for the date it became payable. This time limitation will not apply if the UHTA return has not been filed.

If a person fails to file a return by December 31 of the following year in respect of which the tax applies, the penalty will be calculated as if some of the exemptions do not apply.

Serious consequences may result for intentional non-compliance with the requirements under the UHTA, including imprisonment in some circumstances.

Section 116 clearance certificates for non-residents selling Canadian Real Estate

Under existing section 116  of the Income Tax Act, if a non-resident disposes of or plans to dispose of, taxable Canadian property, the non-resident can obtain a special certificate from the Minister of Revenue, i.e the Canada Revenue Agency. The certificate, which is also provided to the purchaser, confirms that the non-resident vendor has made arrangements relating to the payment of tax resulting from the disposition. Without such a certificate, the purchaser may be required to remit a percentage of the purchase price to the Receiver General on account of the non-resident's tax liability.

Proposed changes to section 116 provide that Canada Revenue Agency may decline to issue the section 116 clearance certificate if the required UHTA return has not been filed or the tax has not been paid.

For more information or assistance with this matter, please do not hesitate to contact any member of our Tax and Estates practice. ‎