Understanding the Underused Housing Tax

For years, housing advocates across Canada have argued that property speculation and overseas investment were a major factor driving up home prices. While academics and industry stakeholders have debated the degree to which that is the case, the federal government took action to address the issue earlier this year by introducing the Underused Housing Tax. The law is intended to help mitigate the negative market impacts of foreign buyers purchasing residential homes for investment purposes, neither renting nor selling them, and essentially removing those homes from an increasingly limited housing supply.

How the tax works

The Underused Housing Tax, which took effect January 1^st, 2022, introduced an annual 1 per cent levy on the ‘specified value’ of a vacant or ‘underused’ residential property owned in whole or in part by non-resident, non-Canadian citizens. The properties to which the tax applies include:

Detached homes, duplexes and triplexes
Semi-detached homes
Row house units
Residential condominium units

The tax does not apply to:

Residential properties that are uninhabitable for at least 120 consecutive days in a calendar year due to ongoing renovations
Residential properties whose owner has died during the calendar year or the previous calendar year
Vacation properties that are located in rural areas and used personally by the owner, owner’s spouse, or common-law partner for at least four weeks in a calendar year

An owner’s interest in a residential property would determine the share of the Underused Housing Tax they pay each year. If the property has a single owner, for example, the owner would be responsible for paying 100 per cent of the tax. If the residential property has multiple owners who are joint tenants, they would be considered to have equal interest in the property and pay an equal share of the tax; tenants-in-common would either have equal interest in the property or a proportional interest, as specified in co-ownership documents.

The most significant administrative requirement of the Underused Housing Tax for non-Canadian/non-resident homeowners is the annual mandatory declaration requirement. Beginning in the 2022 tax year, owners of residential property—other than excluded owners, see below—will be required to declare each of their residential property holdings to the Canada Revenue Agency. Pre-registration with CRA may be required to make the annual declaration, and the first declaration must be filed on or before April 30^th, 2023. Failure to make a declaration could result in interest payments and fines of as much as $5,000 for individual owners and $10,000 if the owner is not an individual, plus:

5 per cent of the UHT applicable in respect of the owner’s interest in the property for the calendar year; and
3 per cent of the UHT applicable in respect of the owner’s interest in the property for the calendar year for each calendar month the declaration is past due

Additional penalties for non-compliance and gross negligence could apply. The Underused Housing Tax assessment period would be unlimited until a qualifying homeowner’s declaration is filed, meaning there is no statute of limitations on potential outstanding tax, penalties and interest levied for a calendar year.

There is a long list of excluded owners that will be exempt from making the annual declaration, including:

Canadian citizens and permanent residents
Corporations listed on a Canadian stock exchange
Registered charities
Cooperative housing corporations
The government of Canada or an agent of the Government of Canada
Provincial governments
Municipalities
Indigenous governing bodies or corporations owned by Indigenous governing bodies
Public institutions such as hospital and school authorities, universities and public colleges
A prescribed person or a person of a prescribed class

Partnerships, private corporations and trusts are required to file an Underused Housing Tax return if they own a residential property. There are many circumstances in which non-Canadian/non-resident homeowners are exempted from making the annual declaration. They include:

Qualifying occupancy—Owners who meet the ‘qualifying occupancy’ test for a calendar year would need to occupy their residential property “… in periods of at least one month that total at least 6 months of the year, by any individual that is a “qualifying occupant” in respect of the owner of the property.” If so, the owner’s interest in their residential property would be exempt from the Underused Housing Tax for a calendar year. As per the CRA’s directive, a qualifying occupant in respect of an owner of a property would include:

“An individual that deals at arm’s length with the owner and the owner’s spouse, if any, and who occupies, for a period of at least one month under a written agreement, a residence that is part of the residential property
An individual that does not deal at arm’s length with either the owner or the owner’s spouse, if any, and who occupies, for a period of at least one month under a written agreement at fair rent, a residence that is part of the residential property
An individual that is the owner or the owner’s non-resident, non-Canadian spouse and who occupies, for a period of at least one month, a residence that is part of the residential property while the individual is in Canada for the purposes of work and the occupancy relates to that purpose; or
An individual that is the owner’s Canadian spouse, Canadian child or Canadian parent and who occupies, for a period of at least one month, a residence that is part of the residential property”

Other exemptions include:

Specified Canadian corporations
A partner of a specified Canadian corporation
A trustee of a specified Canadian corporation
Circumstances where a property is uninhabitable
Circumstances where a property is undergoing renovations
An acquisition of interest
Circumstances where a primary or other owner dies in a calendar year
When a newly constructed property is not substantially completed before April 1^st of the calendar year

The efficacy of the Underused Housing Tax remains to be seen. Canada’s housing crisis is a complex issue with a multitude of contributing factors. But for non-Canadian citizens or residents, the only priority is compliance, in order to mitigate the risk of costly penalties and interest.

Armando Iannuzzi, Co-Managing Partner

For more information on the Underused Housing Tax, contact a member of our team today