Underused Housing Tax: Property Owners Beware!

On June 9, 2022, Bill C-8 received Royal Assent, causing Canada’s proposed underused housing tax (“UHT”) to be in force as of January 1, 2022. The UHT specifically targets foreigners who own vacant or underused residential property in Canada.

The UHT generally applies to a person who is the owner of a residential property in Canada on December 31 of the calendar year, if (i) the owner is not an “excluded owner”; and (ii) the owner is not eligible to claim an exemption in respect of their interest in the property. Where the UHT does apply, the rate is equal to 1% of the “taxable value” of the property, which is the greater of the assessed property tax value for the property, determined by the applicable province, or the most recent sale price. Owners can also elect to be taxed on the fair market value if they so choose.

In addition to the tax rate, registered owners of residential real estate in Canada (other than “excluded owners”) will be required to file an annual return by April 30. Every person that fails to file a return as and when required under the UHT is liable to a penalty equal to the greater of:

(a) $5,000 if the person is an individual or $10,000 if the person is not an individual, and

(b) the amount that is the total of:

(i) 5% of the tax payable by the person in respect of the residential property for the calendar year, and

(ii)  3% of the tax payable for each complete month from the date on which the return was required to be filed.

An excluded owner includes individual owners of real estate who are Canadian citizens or permanent residents and certain public corporations, which are Canadian incorporated companies listed on a designated stock exchange in Canada. 

However, the definition of “excluded owner” does not include private Canadian corporations, or wholly owned subsidiaries of public corporations who are “excluded owners”. While these entities may not be subject to the UHT, they will still be required to file an annual return even if they qualify for an exemption to the UHT.

It should be noted that the owner is the registered titleholder of the property, and not the beneficial owner of the property.

There are a number of exceptions to the UHT, including if:

• The owner is a “specified Canadian corporation”, a partner of a “specified Canadian partnership”, or a trustee of a “specified Canadian trust”. This generally includes private corporations, partnerships and trusts the interests in which are entirely or nearly entirely held by an excluded owner. While a foreign individual can hold less than 10 per cent of the votes or value in a private corporation and have the corporation still qualify as a “specified Canadian corporation”, any interest of a foreign individual in a partnership or trust would mean such partnership or trust does not meet the requirements for these definitions;
• The residential property is used as a primary place of residence by the owner or certain family members for the calendar year;
• The property is leased on a long-term basis, for at least 180 days in the calendar year;
• The property is not suitable for year-round use as a place of residence or seasonally inaccessible;
• The residential property is uninhabitable for a specified number of days due to disasters or hazardous conditions beyond the reasonable control of an owner or due to renovations;
• The owner of the property acquired the property in the calendar year; or
• The owner of the property died in the calendar year or in the previous calendar year.
• The federal government has also stated its intention to include certain other exemptions for vacation or recreational properties. We assume that various changes and additions will be made by way of prescribed regulation.