In this video, our Indirect Tax leader, Sarah Noftell discusses key points you need to know, including:
0:43: What is the Underused Housing Tax (UHT)?
1:10: What is a residential property?
4:00: Who has to file?
5:09: What are the exceptions?
5:49: Do I need to file a return?
6:16: Who are considered excluded owners or affected owners?
7:49: What are the penalties for not filing?
8:15: Transitional relief for affected owners announced March 27, 2023
8:30: What are the obligations for affected owners?
9:35: Should I file anyway?
10:31 Who are unexpected filers?
11:25 Eligibility for exemption
Hi, I'm Sarah Noftell, Indirect Tax Leader at Grant Thornton in Canada.
Since the federal government introduced the Underused Housing Tax in 2022, a number of questions and misconceptions have come up and we've prepared this video to try to demystify some of those common issues and questions that are being raised.
Because the Underused Housing Tax is so new, there is still a lot of confusion about how the rules apply, who is impacted by the tax, who needs to file versus who has an exemption, and even what types of properties are subject to the tax.
So, let's start with:
What is the Underused Housing Tax?
The Underused Housing Tax (UHT) is an annual tax based on 1% of the value of residential properties in Canada that are considered to be underused or vacant. The tax was first implemented for the 2022 calendar year, with the first filing due on April 30th, 2023.
What is a residential property for UHT?
Residential property is defined specifically for this tax, and it has a different meaning than what we might ordinarily expect and different than what we see in other tax legislation. Specifically, a residential property for UHT purposes is limited to a property that has three or fewer dwelling units. A dwelling unit is basically a residential unit that has a kitchen and a bathroom. So, a large apartment complex, unless it is stratified into separate legal titled units, is generally going to be out of scope for UHT. This is mainly focused at the smaller one-to-three-unit houses.
Common questions around residential property
Some of the common questions that we are receiving around ‘What is a residential property?’, ‘Do I own a residential property for UHT purposes?’, would be things like: “I have a four-unit building, It's not a high rise, is it in scope?” And four units would not be in scope, unless they are separate condo units or stratified units. Another common question we get is: “I am using a house for a purpose other than housing...” So maybe it's a retail location or an office space that is shaped like a house. “...It still has kitchen and bathroom facilities, does that mean that it meets the definition?”
Other common situations that come up would be a cottage, for example, is a cottage a residential property? Under the definition, it could very well be, but it may be excluded if it's used more in a commercial sense as a rental, a short-term rental, or hotel-type property. So, lots of potential confusion just around the definition of residential property. And that's only the starting point. But if we're thinking about an analysis of whether you're impacted by the Underused Housing Tax, this is the place to start. Is the property in question residential property for purposes of this act? A few other things that we would watch for would be partially constructed homes. So are home builders and home developers impacted by the UHT legislation? Quite often they can be, and it may be a question of at December 31st, which is the measurement point for each year. Do they have a house? Is there a substantially constructed home that would be subject to the tax? And if so, do they have a filing and could it be subject to the actual tax? Generally, a newly constructed home will not be subject to the tax but it’s very possible that there would be a filing and an exemption claimed.
Who has to file?
When we're thinking about who exactly has to file...so we've determined that there is a property that requires a filing, and we're trying to understand who exactly is the owner of the property for purposes of UHT legislation, the owner is generally going to be the person who's listed in the property title or registry system. So in the case of properties owned by individuals, the individuals listed are the owners and they may be excluded or they may be affected owners, but those are the owners by definition.
Where it gets a little bit more uncertain is in a bare trust scenario, where maybe one person is listed as the legal owner, but another person has the beneficial interest in the property. And unlike scenarios in income tax and sales tax, where the beneficial owner is typically the one that's reporting things in respect of the property, in this case, it is the legal owner that is making a filing.
And so that is that is a little different from what we might be used to in other scenarios, and just something to watch for; you really have to understand who is listed in the property registry, and that is our owner for UHT purposes.
What are the exceptions?
There are, of course, some exceptions to that basic rule and that would be in cases where there is a very long-term lease so maybe a life lease of property. The lessee in that case would be considered to be the owner rather than the person who legally owns the property. So again, if there is uncertainty around who the owner is for purposes of who has the obligation to do UHT reporting, it’s important to refer back to the reference materials either on our website, through our tax alerts, or through the CRA’s website and the actual legislation.
Do I need to file a return?
Next question that we are commonly receiving is: “Do I have to actually file a return?” So, “I have a residential property, am I a person who needs to file some kind of declaration with respect to that property?”
Now there is a list of excluded owners of property, so even if the property that you own is part of the legislation based on the type of owner that you are, you may not have a filing obligation. And if you have no filing obligation, you have no tax.
Excluded owners: So, the most common excluded owner type would be a Canadian citizen or permanent resident of Canada,as those terms are defined for immigration purposes. So not necessarily your income tax filing position, but your status in Canada generally will drive whether you have this filing obligation. Other excluded owner types would be:
- registered charities,
- Canadian public companies,
- Indigenous groups or corporations owned by Indigenous groups,
- cooperative housing societies, and a few others.
Notably, a nonprofit organization, which holds residential property, is not an excluded owner. They may very well still have an exemption, but an NPO will have to file, whereas a registered charity will not. So, if you're uncertain whether you would be considered an excluded owner of property, because it's new legislation, and there is a lot of complexity here, the best thing to do would be to refer back to the legislation, CRA guidance, or our tax alert, available on our website, to check if the type of ownership that you have might be excluded from filing.
And it's important to understand how you are impacted by this tax, because the penalties for not filing, even if you have an exemption from the actual tax, are substantial. So, one of the reasons that this tax is getting the attention that it is getting, is that the penalties can be quite punitive.
What are the penalties for not filing?
So, for example, an individual with a filing obligation who files late, has a minimum $5,000 penalty, and that is significant for filers who are not individuals, such as a corporation, the minimum penalty starts at $10,000. So, it's important that we understand who is impacted by the tax and who has a filing obligation, as well as who actually has a tax liability.
What are obligations for affected owners?
So, if you're not an excluded owner, you would be referred to for UHT purposes as an affected owner, as in, you are affected in some way by this legislation, whether it's just a filing obligation and declaring an exemption, or an actual tax calculation. Affected owners will have to file for each property that they own. So, this is another area that is a cause of some confusion and questions in that one affected owner might own multiple properties, so they would have a filing for each property, and conversely, one property could have multiple owners and in that case every owner of the property has to make their own declaration. It's important in that case, especially where there are multiple owners of one property, if they're claiming an exemption, they're consistent in their filing positions. You would not want two people filing returns and claiming different exemptions or describing different uses of the same property.
Another question that we have received a few times, and this may be driven by the magnitude of the potential penalties, is: “If there's uncertainty, should I file anyway?” I would say that it's better to get certainty up front whether you have a filing obligation or not. So, referring to the list of excluded owners and the examples given by CRA, the legislation and obviously consulting your tax advisor, we can help guide. Getting the position right the first time would be better because fast forwarding a year, if you have determined that maybe you didn't have a filing obligation after all, undoing the filing and making sure that the CRA is not expecting a second filing in the next year maybe more work than just getting it right the first time.
So, as I said, some unexpected, affected owners, given how the tax was first described as maybe targeting foreign owners of vacant property.
Who are unexpected filers?
Unexpected filers would be Canadian corporations that happen to have houses in them. Maybe it's a farm property that has a house on the property. Maybe it is some rental properties in an investment corporation. They are fully leased out. Those still have filings because they're held in a corporation as opposed to held individually by Canadian citizens.
And so, all of those entities that happen to own those types of residential property do have a filing that they need to make by April 30th. And then, in most cases, they will be eligible for an exemption either based on the occupancy of the properties or if it's fully leased out to a third party for example, or based on the type of owner that they are.
Eligibility for exemption
So there are two categories essentially of exemptions available for affected owners. The way the form flows, the occupancy exemptions come first. So, looking at the actual use of the property, the suitability of the property to be occupied, so maybe it's not a property that you could live in year round in a cold climate, those exemptions come first. And if none of those are applicable, the form then moves into a second category where the exemption is based on the type of property owner.
The properties that are owned by a Canadian corporation, so a specified Canadian corporation controlled at least 90% by Canadian citizens and permanent residents will have a blanket exemption.
It’s still important to look at the use of the property first and declare that type of exemption if it's applicable, but if there's uncertainty or if it's not applicable, then you do have the backup exemption position based on ownership. Same would apply for a specified Canadian partnership. So if all the partners are Canadian citizens or permanent residents, there is an exemption from the actual tax, but you have to file and declare the exemption for it to apply.
Similarly, as I mentioned, nonprofit organizations who own residential property do have to file in respect of each property as long as the nonprofit organization meets the same criteria as other Canadian corporations. So it's controlled by Canadian citizens and permanent residents. There will be an exemption there whether the property happens to be occupied or vacant at the time.
So we've covered a lot of information today relating to the Underused Housing Tax, but remember, this is new legislation and there are still a lot of unanswered questions. It's important to know if you have a filing obligation, whether it's just an exemption filing or you have an actual tax obligation.
So if you have any questions or uncertainty at all, check our tax alert or reach out to your local Grant Thornton advisor.
Read our tax alert on the Underused Housing Tax (UHT) here.