Draft Legislation Released 

Budget 2021 announced the Government of Canada’s intention to implement a national annual 1% tax on the value of residential real estate that is vacant or underused (the “Underused Housing Tax” or “UHT”). The UHT was proposed to come into effect on January 1, 2022, and would specifically be applicable to real estate which is not owned by Canadian citizens or Canadian permanent residents. Canadian citizens and permanent residents of Canada are not subject to the tax. 

On December 15, 2021, the House of Commons held the first reading of Bill C-8, which includes draft legislation for a new stand-alone tax act: the Underused Housing Tax Act (the “UHTA”). 

Tax Payable under Draft Legislation

The UHT would impose on every owner (other than an excluded owner) of a residential property on December 31 of a calendar year. The UHT is payable on April 30 of the following calendar year. 

The tax will be calculated as 1% of the greater of 

1. the assessed value used for the purpose of property tax and 
2. the residential property’s most recent sale price on or before December 31 of the calendar year, 

Alternatively, a person may elect to use the fair market value of the residential property determined at any time on or after January 1 of the calendar year and on or before April 30 of the following calendar year. This requires the person to establish the fair market value to the satisfaction of the government and will likely only apply where the property has declined in value relative to the assessed value (for example, a property that has been damaged by a fire or a flood). 

Where a personal is co-owner of a property, the tax will be based on the person’s ownership percentage of the property.  For example, a person who owns 50% of a property that is subject to the UHT will pay tax on 1% of 50% of the value of the property. 

Who is exempt from UHT?

An “excluded owner” of a residential property is not liable to pay the UHT or required to file an annual UHT return. An excluded owner includes, but is not limited to, a person that is on December 31 of the calendar year:

• an individual who is a citizen or permanent resident of Canada, except individuals who are holding their interest as a trustee of a trust (other than a personal representative of a deceased individual) or as a partner of a partnership; 
• a corporation incorporated under the laws of Canada or a province whose shares are listed on a designated stock exchange in Canada 
• a person who holds an interest in a resident property as a trustee of a mutual fund trust, a real estate investment trust, or a SIFT trust;
• a Canadian registered charity;
• a cooperative housing corporation, a hospital authority, a municipality, a public college, a school authority, or a university; or
• an Indigenous governing body or a corporation which is wholly owned by such a body.

Other exemptions

An owner of a residential property that is not an “excluded owner” is liable to pay the UHT unless an exemption applies. The most notable exemptions are as follows:

• an owner that is a “specified Canadian corporation”, which generally means a corporation that is incorporated in Canada, except for those corporations with shares representing 10% or more votes and value owned by non-citizen and/or non-permanent residents;
• an owner who holds their interest solely as a partner of a Canadian partnership where each member of the partnership is either an excluded owner or a specified Canadian corporation on December 31 of the calendar year; 
• an owner who holds their interest solely as a trustee of a Canadian trust under which each beneficiary is either an excluded owner or a specified Canadian corporation on December 31 of the calendar year; 
• the residential property is the primary place of residence of the owner who is (a) an individual, (b) the individual’s spouse or common-law partner, or (c) a child of the individual or the individual’s spouse or common-law partner and the child occupies the property for the purposes of certain authorized studies; or
• the property is rented to a tenant and the “qualifying occupancy period” of the tenant is 180 days in the calendar year.
  • The property can be occupied by an arm’s length tenancy, but there must be a written tenancy agreement. Landlords who are not “excluded owners” who do not have written tenancy agreements with tenants should obtain a written agreement with their tenant as soon possible.
  • The property can be occupied by a non-arm’s length tenant, but the rent must be “fair” and there must be a written tenancy agreement. The term “fair rent” is defined to mean the amount determined in prescribed manner or 5% of the assessed value of the property for the year.
  • In measuring occupancy, the minimum increment is 30 days; occupancy for less than 30 consecutive days is not included in the 180 day calculation. This means that a property that is only occupied for shorter periods during the year (for example, only on weekends and for three week increments for vacations) might not meet the test even if the total number of days occupied is more than 180 days). 

If both an owner of a residential property and their spouse or common-law partner are neither citizens nor permanent residents of Canada on December 31 of a calendar year, and their spouse or common-law partner is also an owner of another residential property, certain elections must be filed by April 30 of the following calendar year (or a later day at the CRA’s discretion) to qualify for the primary place of residence exemption and qualifying occupancy exemption. This will prevent a family unit from using exemptions for more than one property. 

Tax Return Filing 

An 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 year. This means that Canadian citizens and permanent residents are exempted from a tax return filing requirement. 

A prescribed return (the “UHT” return) containing certain required information must be filed with the Canada Revenue Agency (“CRA”) on or before April 30 of the following calendar year. Owners must also calculate the amount of tax owing for each residential property that does not qualify for an exemption and make a payment by April 30 of the following calendar year.

Failure to file penalty

An owner of a residential property who is required to file a UHT return and fails to file by April 30 of the following year will be liable to a penalty equal to the greater of

• $5,000 if the owner is an individual or $10,000 if the owner is not an individual, and
• the total of
  • 5 per cent of the UHT payable by the owner in respect of the residential property for the calendar year, and
  • 3 per cent of the UHT payable by the owner in respect of the residential property for the calendar year for each complete month the UHT return is past due. 

If an owner who is required to file a UHT return fails to file by December 31 of the following calendar year, the failure to file penalty would be calculated without the application of certain exemptions which may otherwise apply. This makes the penalty for filing more than 8 months late even more onerous. 

Other penalties

The UHTA also imposes penalties for failure to provide information, gross negligence and false statements or omissions. 

The UHTA contains a general anti-avoidance provision as well as special provisions that aim to deny tax benefits arising from non-arm’s length transactions which attempt to take advantage of prospective amendments to the UHTA. 

What is next?

The draft legislation is currently being considered by Parliament and will presumably become law soon. 

Owners of a residential property who are Canadian citizens and permanent residents are not liable to the UHT and are not required to file a UHT return by virtue of being an excluded owner. Although Canadian corporations, trusts with only excluded owners as beneficiaries, and partnerships owned exclusively by Canadian citizens and permanent residents, are not liable to the UHT due to an available exemption, they are still required to file a prescribed return by April 30 of the following calendar year to claim the applicable exemption. 

Where an owner of a residential property is not an excluded owner, they must file a return and pay any UHT owing (subject to any applicable exemptions that may be claimed in the return) by April 30 of the following year. 

As the UHTA is intended to be effective January 1, 2022, owners that are not excluded owners should begin planning for the tax. This should include documenting unwritten occupancy arrangements in written tenancy agreements to support the eligibility of an exemption. Where an exemption for a primary place of residence is being used, relevant documents (such as utility bills, magazine or newspaper subscriptions, etc. addressed to the relevant occupant at the address of the property) should also be maintained as evidence of occupancy for the relevant time periods. 

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