At first glance, the Underused Housing Tax (UHT) appears primarily targeted at foreign owners of Canadian residential real estate. However, due to the broad scope of the legislation, many Canadians may find themselves unexpectedly affected by these new rules. Failing to file a UHT return can result in hefty penalties exceeding $10,000. Read on to learn how the Underused Housing Tax impacts Canadian real estate investors and what you need to know to stay compliant.
What is the Underused Housing Tax (UHT)?
Effective January 1, 2022, the UHT is an annual tax imposed by the federal government on “affected owners” who are not making productive use of the “residential property” they own.
What Qualifies as a Reportable “Residential Property”?
A reportable “residential property” generally includes:
- A detached house or similar building that contains no more than three units.
- A semi-detached house, rowhouse unit, residential condominium unit, or other similar premises.
The tax is typically calculated as 1% of the value of the residential property, and the UHT return and tax liability are due annually on April 30th.
Who is Required to File a UHT Return?
An “affected owner” is required to file a UHT return, even if they do not owe any tax. But who exactly qualifies as an “affected owner”?
An “affected owner” is any owner of a residential property who does not fall under the list of “excluded owners.” Common “excluded owners” include:
- An individual who is a Canadian citizen or permanent resident of Canada (except in certain situations where the individual is a trustee of a trust or partner in a partnership).
- A Canadian corporation whose shares are listed on a designated Canadian stock exchange.
- A registered charity.
While this list is not exhaustive, it’s important to note that privately owned Canadian corporations, trusts, and partnerships are notably absent from the exclusions. These are some of the most common structures that Canadian real estate investors use to hold properties!
The Result: Filing UHT Returns for Canadian Investors
As a result, some Canadian real estate investors will be required to file the new UHT return, even if their property has no foreign ownership.
The minimum penalty for an affected owner who fails to file a UHT return is $5,000 for individuals and $10,000 for corporations and other entities. These penalties apply regardless of whether tax is owed.
UHT for Bare Trusts and Nominee Corporations
For the purposes of the UHT, an affected owner is the titleholder of the residential property. For example, a corporation that holds title to a residential property under a bare trust arrangement may be required to file a UHT return, even though it has no beneficial ownership in the real estate.
Will I Owe Tax if I File an Underused Housing Tax Return?
Not necessarily. There are various exemptions available to affected owners that can eliminate their tax liability. However, to take advantage of these exemptions, you must first file a UHT return.
Some common exemptions include situations where:
- The residential property was purchased during the calendar year.
- The residential property is owned by a Canadian corporation where less than 10% of its shares are owned by foreign individuals or foreign corporations.
- The residential property is rented to an arm’s length individual for an aggregate of at least 180 days during the calendar year, with each period of occupancy lasting at least one month.
How Do I File a UHT Return?
There are three methods to file a UHT return:
- Electronically via the Canada Revenue Agency’s (CRA) “My Account” for individuals or “My Business Account” for corporations.
- Directly on the CRA’s website.
- By mailing a paper return (Form UHT-2900) to the CRA.
If you are filing the UHT return for a corporation, you must first obtain an Underused Housing Tax program account identifier code from the CRA.
This article provides a simplified discussion of the Underused Housing Tax rules. For further details, please consult the CRA’s website or speak with a tax professional to ensure compliance.
