On January 1, 2022, the Underused Housing Tax Act (the UHT Act) came into force, which requires certain non-Canadian owners (and, in certain circumstances, some Canadian owners) of residential property in Canada to file an annual return to report their ownership and, subject to certain exemptions, pay a 1% tax on the property’s value (the UHT). The filing deadline for the 2022 year is April 30, 2023 and so residential property owners will want to be familiar with their potential filing requirements and liability to pay the UHT, as summarized in this article.

Annual UHT return filing requirements

Unless a person is an “excluded owner” (as discussed below), the UHT Act requires an owner of one or more residential properties in Canada as on December 31 of a calendar year to file, for each such property, an annual return (a UHT Return). This filing requirement applies notwithstanding that no UHT is payable due to the availability of a statutory exemption under the UHT Act, as discussed below.

For these purposes, residential properties include, but are not limited to, detached houses, semi-detached houses, rowhouse units and condominium units situated in Canada.

When is the UHT Return filing deadline?

The UHT Return¹ for a calendar year must be filed on or before April 30 of the following year and must report certain prescribed information, including the citizenship of the owner (if the owner is not a Canadian citizen or permanent resident), the address and type of residential property, the names and ownership percentages of other co-owners of the property and the applicability of any statutory exemptions from the payment of the UHT.

Who is an owner of residential property?

In contrast to most taxing legislation, the owner of a residential property for purposes of the UHT Act is the registered owner of the property (as opposed to the beneficial owner). Accordingly, a nominee or bare trustee corporation that holds legal title to a residential property for the benefit of others, and not the beneficial owner(s) of such property, is required to file the UHT Return.

An owner also includes a person that is a life tenant under a life estate, a person that is a life lease holder and a person that has, under a long-term lease (i.e., a lease for a period of at least 20 years), continuous possession of the land on which the property is situated, but not a person that gives continuous possession of the land on which a property is situated to life lease holders or a person under a long-term lease.

Who does not need to file a UHT Return?

An owner of residential property that is an excluded owner is not required to file a UHT Return and is not liable to pay the UHT. An excluded owner includes (but is not limited to) Canadian citizens and permanent residents (except where the property is held by a Canadian individual as a trustee of a trust or as a partner of a partnership), publicly-traded Canadian corporations, a trustee of a mutual fund trust, real estate investment trust or SIFT trust, registered charities, universities, hospitals and Indigenous governing bodies.

Exemptions from the UHT

Although a person may need to file a UHT Return under the UHT Act, the person may not be liable to pay the UHT pursuant to a number of statutory exemptions. These exemptions may apply depending on the type of owner, the occupant of the property, the availability of the property, or the location and use of the property.

Type of owner

In addition to owners that are excluded owners, the UHT is not payable by “specified Canadian corporations,” meaning Canadian corporations where less than 10% of the voting shares and equity value are owned by non-Canadian individuals or corporations. 

The UHT is also not payable by a person who owns the property solely in their capacity as a partner of a “specified Canadian partnership,” meaning a partnership each member of which is an excluded owner or a specified Canadian corporation, nor by a person who owns the property as a trustee of a “specified Canadian trust,” meaning a trust under which each beneficiary having a beneficial interest in the residential property is an excluded owner or a specified Canadian corporation.

The UHT is also not payable by an individual who died during the calendar year or the previous year (or by their personal representative) or by a person who was a co-owner with a deceased owner.

A person does not have to pay UHT in the year ownership of the property was acquired, as long as the person never owned the property in the previous nine calendar years. The person would still need to file a UHT Return in the year of acquisition.

Occupant of the property

The UHT is not payable where the property is the primary place of residence of the individual owner, their spouse or common-law partner, or their child while the child is a student. It is also not payable where the property is occupied for a period of at least 180 days in the calendar year by an arm’s length individual under a lease, a non arm’s length individual under a lease who pays fair rent, an individual who is the owner or the owner’s spouse or common-law partner who has a Canadian work permit, or a Canadian citizen or permanent resident who is the spouse, common-law partner, parent or child of the owner.

If a non-Canadian individual, together with their non-Canadian spouse or common-law partner, own multiple residential properties, then the UHT may be payable on all such properties except for the one property in respect of which an election is made to designate it as either a primary place of residence or occupied by an individual described above.

Availability of the property

The UHT is not payable if the property is not suitable for year-round use as a place of residence or where it is seasonably inaccessible because public access is not maintained year-round. It is also not payable where the property is under renovations for a period of at least 120 consecutive days in the calendar year, or where a natural disaster or hazardous condition renders the property uninhabitable for a period of at least 60 consecutive days in the calendar year.

In the case of newly constructed properties, the UHT is not payable if construction of the property is not substantially completed before April of the calendar year, or if the property is constructed in the first quarter of the year and it is offered for sale to the public during the year.

Location and use of the property

The UHT is not payable if the property is located in certain prescribed areas of Canada² and that is used as a place of residence or lodging by the owner or the owner’s spouse or common-law partner for at least 28 days during the calendar year.

Calculation of the UHT

The UHT is calculated at the rate of 1% on the taxable value of the property, which is generally the greater of (a) its value as assessed by a government agency (such as the Municipal Property Assessment Corporation in Ontario); and (b) the 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 property at any time on or after January 1 of the calendar year and on or before April 30 of the following calendar year. The fair market value must be supported by a written appraisal and provided to the Canada Revenue Agency upon request.

Penalties

A person who fails to file the UHT Return as required under the UHT Act is subject to a minimum penalty of CA$5,000 if the person is an individual or CA$10,000 in all other cases, and a maximum penalty equal to the total of 5% of the UHT payable plus 3% of the UHT payable for each complete month that the UHT Return is not filed. If the UHT Return for a calendar year is still not filed by December 31 of the following calendar year, then the maximum amount of the penalty is determined as if certain exemptions to the UHT (such as those based on the occupant of the property and the availability of the property) were not available and UHT was otherwise payable.

Tax Avoidance 

The UHT Act contains an anti-avoidance rule that may apply to deny a person a tax benefit (i.e., a reduction, avoidance or deferral of UHT) resulting from an avoidance transaction, if the transaction resulted in a misuse of a provision of the UHT Act, or an abuse of the UHT Act as a whole. Generally, an avoidance transaction is a transaction that results in a tax benefit unless it is undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit.

Other considerations under the Québec private law regime and Bijuralism

The framework of the UHT addresses issues which are specifically related to the Québec private laws such as rent, ownership and property.

As such, it is important to keep in mind that the terminology and meaning of certain Québec rules of property and civil rights enshrined in the Civil Code of Québec, may differ with those in common law. In such cases it may be necessary to refer to Québec provincial rules and concepts which relate to property and civil rights.

The authors gratefully acknowledge the contribution of David Blain, Co-op student.

For more information, please contact a member of our Canadian Tax team.

1. Government of Canada, UHT-2900 Underused Housing Tax Return and Election Form, January 31^st 2023. https://www.canada.ca/en/revenue-agency/services/forms-publications/forms/uht-2900.html↩
2. The Canada Revenue Agency has developed a tool for determining whether a property is located in a prescribed area: https://apps.cra-arc.gc.ca/ebci/sres/ext/pub/ntrUhtExpnTl?request_locale=en_CA↩