Finance has provided additional details for the 1% Underused Housing Tax on non-resident, non-Canadian owned residential real estate in Canada that is considered to be vacant or underused. Legislation to implement the Underused Housing Tax Act (UHT Act) is included in Bill C-8, which received first reading on December 15, 2021. The new annual tax applies beginning on January 1, 2022, and certain residential property owners in Canada will be required to file UHT returns for the 2022 calendar year by April 30, 2023.
The UHT Act clarifies certain aspects of the Underused Housing Tax, and provides details on the legislative regime, some of which was outlined in Finance's public consultation on the proposed tax that ended in December 2021. However, because the legislation contains references to certain "prescribed" entities and property, Finance may release regulations to further clarify how these rules will apply.
The 2021 federal budget announced a new 1% Underused Housing Tax to come into effect on January 1, 2022. Finance subsequently released a consultation paper in August 2021 that provided an overview of the proposed tax, including potential exemptions, compliance obligations and details on how to calculate the tax. The consultation ended in December 2021. For more details, see TaxNewsFlash-Canada 2021-21, "2021 Federal Budget Highlights".
In the 2021 federal Fall Economic Update, Finance announced a new exemption for the Underused Housing Tax for certain owners' primary place of residence. Finance also noted that it plans to bring forward further exemptions for certain vacation/recreational properties, which would apply to an owner's interest in a residential property for a calendar year if the property is located in certain non-urban areas and is personally used by the owner (or the owner's spouse or common-law partner) for at least four weeks in the calendar year. Finance released draft legislative proposals to implement the UHT Act alongside the Update, which are included in Bill C-8 that received first reading in the House of Commons on December 15, 2021.
Underused Housing Tax
Under the UHT Act, the 1% Underused Housing Tax applies each year to every person that is an owner (other than an excluded owner) of a residential property in Canada as of December 31 of the calendar year.
To calculate the Underused Housing Tax, the owner must generally multiply the assessed value of the property by 1%. The owner may elect to use the fair market value, instead of the assessed value, of the property as determined any time from January 1 of the calendar year to April 30 of the following calendar year. If there are multiple owners of one property, each owner would be liable for this tax in proportion to their "ownership percentage" in the property.
The Underused Housing Tax rules do not apply to "excluded owners", which include:
- Individuals that are Canadian citizens or permanent residents of Canada (unless they hold the property interest as a partner in a partnership or as a trustee of a trust)
- Corporations incorporated in Canada or a province whose shares are listed on a Canadian stock exchange for which a designation is in effect under section 262 of the Income Tax Act
- Registered charities
- Cooperative housing corporations, municipalities, colleges and universities
- Trustees of mutual fund trusts, real estate investment trusts (REITs) or specified investment flow-through (SIFT) trusts (as these terms are defined in the Income Tax Act).
In addition, the rules provide other exemptions from the Underused Housing Tax, including for:
- Specified Canadian corporations (i.e., a corporation incorporated (or continued) in Canada), depending on the status of direct and indirect shareholders or for a corporation without share capital, the residence status of the chairperson and certain directors
- Specified Canadian partnerships and specified Canadian trusts, depending on the status of direct and indirect partners or beneficiaries, respectively
- Where the owner meets a minimum "qualifying occupancy" test
- Where the owner dies
- Where a dwelling unit within the property is uninhabitable for a period of at least 120 consecutive days in the calendar year as a result of a renovation without unreasonable delay, and this exemption was not used for any of the nine prior calendar years
- Where construction of the property is not substantially completed before April of the calendar year
- Where construction of the property is substantially completed after March of the calendar year, the property is offered for sale to the public during the calendar year and has never been occupied by an individual during the calendar year
- Property that is newly acquired in certain circumstances
- Property that is not suitable for year-round use as a place of residence
- Property that is the primary place of residence of:
- The owner
- The owner's spouse or common-law partner, or
- The child of the owner or the owner's spouse or common-law partner if the child occupies the property for the purposes of certain authorized studies.
Affected owners are required to remit this tax on or before April 30 of the following calendar year. This new tax generally requires owners (other than excluded owners) to file an annual prescribed return with the CRA for each Canadian residential property they own, beginning with the 2022 calendar year (which would be due on or before April 30, 2023).
The UHT Act also contains anti-avoidance rules, along with administration- and enforcement-related rules (including penalties and interest for failing to file required UHT returns).
For more information, contact your KPMG adviser.
Information is current to January 17, 2022. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's National Tax Centre at 416.777.8500