We hear a lot these days about the housing crisis. There is no question that there is an affordable housing crisis, but, as usual, governments are overreaching. The abundance of new taxes and new filing obligations is the real housing crisis.
We now have the Prohibition on the Purchase of Residential Property by Non-Canadians Act, and the Underutilized Housing Tax (UHT). In addition, various municipalities, including Ottawa, Toronto and Vancouver, have a vacant housing tax imposed on residential property that is not being occupied as a residence. The tax in Ottawa is the Vacant Unit Tax (VUT).
I do not propose to discuss the Prohibition on the Purchase of Residential Property by Non-Canadians Act. However, attention needs to be paid to the other taxes. Even if no tax is owed under these acts, there are, yet more, filing obligations and severe penalties for failing to file.
Underutilized Housing Tax (UHT)
The Underused Housing Tax is an annual 1% tax on the ownership of vacant or underused housing in Canada that took effect on January 1, 2022. The tax usually applies to non-resident, non-Canadian owners. In some situations, however, it also applies to Canadian owners.
If you are an excluded owner of a residential property in Canada, you have no obligations or liabilities under the Underused Housing Tax Act.
An excluded owner includes, but is not limited to:
an individual who is a Canadian citizen or permanent resident
a Canadian corporation whose shares are listed on a Canadian stock exchange designated for Canadian income tax purposes
a registered charity for Canadian income tax purposes
a cooperative housing corporation for Canadian GST/HST purposes
an Indigenous governing body or a corporation wholly owned by an Indigenous governing body
If you are not an excluded owner you are an affected owner and you have obligations under the Act for your residential property in Canada. An affected owner includes, but is not limited to:
an individual who is not a Canadian citizen or permanent resident
an individual who is a Canadian citizen or permanent resident and who owns a residential property as a trustee of a trust (other than as a personal representative of a deceased individual)
any person – including an individual who is a Canadian citizen or permanent resident – that owns a residential property as a partner of a partnership
a corporation that is incorporated outside Canada
a Canadian corporation whose shares are not listed on a Canadian stock exchange designated for Canadian income tax purposes
a Canadian corporation without share capital
If you are an affected owner, you must file an Underused Housing Tax return for each residential property that you own in Canada on December 31. You must also pay the Underused Housing Tax, unless your ownership qualifies for an exemption for the calendar year. Even if your ownership qualifies for an exemption, you must still file an Underused Housing Tax return for the calendar year.
Your ownership of a residential property may be exempt from the Underused Housing Tax for a calendar year depending on:
the type of owner you are
the availability of the residential property
the location and use of the residential property
the occupant of the residential property
Exemptions based on the type of owner
Your ownership of a residential property may be exempt for a calendar year if you are:
a specified Canadian corporation
a partner of a specified Canadian partnership, or a trustee of a specified Canadian trust
a new owner in the calendar year
a deceased owner, or a co-owner or personal representative of a deceased owner
exemptions based on the availability of the residential property
Your ownership of a residential property may be exempt for a calendar year if the property is:
not suitable to be lived in year-round, or seasonally inaccessible
uninhabitable for a certain number of days because of
a disaster or hazardous conditions
Exemption based on the location and use of the residential property
Your ownership of a residential property may be exempt for a calendar year if the property is:
a vacation property located in an eligible area of Canada and used by you or your spouse or common-law partner for at least 28 days in the calendar year
Exemptions based on the occupant of the residential property
Your ownership of a residential property may be exempt for a calendar year in either of the following situations:
it is the primary place of residence for you or your spouse or common-law partner, or for your child who is attending a designated learning institution
at least 180 days in the calendar year are included in one or more qualifying occupancy periods for your ownership of the residential property
A qualifying occupancy period is at least one month in a calendar year during which one of the following qualifying occupants has continuous occupancy of the residential property
an individual with a written contract who deals at arm’s length with you and your spouse or common-law partner
an individual with a written contract who does not deal at arm’s length with you or your spouse or common-law partner, and who pays at least fair rent for the property
you, or your spouse or common-law partner, who has a Canadian work permit
your spouse or common-law partner, parent, or child who is a Canadian citizen or permanent resident
Penalties for failing to file the return on time
There are significant penalties if you fail to file an Underused Housing Tax return when it is due. Affected owners who are individuals are subject to a minimum penalty of $5,000. Affected owners that are corporations are subject to a minimum penalty of $10,000.
Special rule for individual owners of multiple residential properties
If between you and your spouse or common-law partner you own multiple residential properties, your ownership may not qualify for the exemptions for either primary place of residence or qualifying occupancy unless you file an election with the CRA to designate only one property for the purposes of the exemption.
How much will you owe?
If your ownership of a residential property does not qualify for an exemption from the Underused Housing Tax for a calendar year, you must calculate what you owe for the calendar year.
The tax rate of the Underused Housing Tax is 1%. To calculate what you owe, multiply the value of the residential property by the 1% tax rate. Then multiply that result by your ownership percentage of the property.
What does it mean to you?
When you cut through it all, most Canadians who own and occupy their residential property will have no obligations under the UHT.
Many Canadians will have an obligation to file but will owe no tax. The principal targets will be those who own their property through a corporation or a trust, and those with multiple properties who will have to file the election referred to above.
For those who may owe tax, there is no explanation of the value to be used for the property – is it the MPAC value? A real estate professional’s opinion? A full blown appraisal?
As usual, the Trudeau government has introduced unnecessarily complex legislation with even more filing requirements to solve a problem that is reasonably small in the overall scheme of things.
Vacant Unit Tax (Ottawa)
Ottawa has jumped on the bandwagon with its VUT causing concern among its taxpayers with complex filing requirements that apply to ALL residential property owners.
The VUT apply starting with the 2023 taxation year and apply to non-principal residences vacant in 2022 for at least 184 days. Residential homeowners are required to declare the occupancy of their properties annually.
The tax does not apply to, but a declaration is still required for:
Properties occupied by a family member, friend, or other resident using it as their principal residence
Properties qualifying for one of the available exemptions
Definition of a vacant unit
A unit will be considered vacant if it was not used as a principal residence and has been unoccupied for more than 184 days in the previous calendar year. The tax applies only to properties in the residential tax class (excludes commercial, industrial and multi-residential properties).
All residential property owners are required to submit an annual property declaration starting in January 2023, even if you are using the property as your principal residence. If you own more than one property, you must submit a declaration for each. Eligible property owners will receive reminders to declare each year. The filing date this year is March 16th.
Failure to submit a property occupancy declaration by the due date will result in a $250 fee added to the tax roll. This fee has been waived for 2023.
If no declaration is submitted by the late declaration due date (April 30th), the property will be deemed vacant, and the Vacant Unit Tax will be applied to the roll.
If the residential property has been declared or deemed vacant for more than 184 days in the previous calendar year and does not meet one of the exceptions, then the VUT will be applied to your property. The first year the tax will be payable is 2023, based on the status of the property in 2022. The tax will be calculated at a rate of 1% of the property's assessed value, and the tax will be applied to the Final Tax Bill, which is due on the third Thursday of June (June 15 in 2023).
In determining if there is an exemption for your property, there is a detailed and complex list of exemptions.
For example, in case of a sale of a property the buyer or seller may have to file depending on when the sale took place in the year, and the other will be exempt.
What is not included in the exemptions
In what one might hope is an oversight, if you operate an office or other business out of a residential property, you will be liable for the VUT on the value of that property.
As stated at the outset, the over abundance of rules, regulations, tax obligations and filing obligations is the real housing crisis.
Best wishes for a happy and healthy New Year.