Overview of the tax
Owners of residential properties situated in Canada that were owned on December 31, 2022, must determine if they are required to file Underused Housing Tax (“UHT”) returns and if the UHT is payable. The UHT is an annual tax computed as 1% of the “taxable value” of the underused property, which is the greater of its assessed value for property tax purposes and its most recent sale price on or before December 31st of the year in question. An owner may also elect to utilize the fair market value of the property which would require an appraisal.
If a UHT return is required to be filed for 2022, the filing and UHT payment, if applicable, must be made by April 30, 2023. If a property owner is not an “excluded owner,” it must file a UHT return annually even if not liable for the UHT.
An excluded owner is generally an individual who is a citizen or permanent resident of Canada and directly owns the residential property in question. If a citizen or permanent resident of Canada indirectly owns a residential property through a corporation, partnership, or trust, they will not meet the excluded owner definition and will be required to file a UHT return.
Failure to file a UHT return by April 30th following the reporting year in question will result in a penalty equal to the greater of the following two amounts:
- $5,000 for individuals or $10,000 for affected owners that are not individuals (such as corporations);
- 5 per cent of the calculated UHT, plus an additional 3 per cent of the calculated UHT for each month that the declaration is late.
If the return is still not filed by December 31st following the reporting year in question, the second amount in the penalty calculation above will be computed without the benefit of any UHT exemption being claimed.
There are many exemptions available for owners that result in no UHT liability. For example, the owner may be exempt from UHT if the property is newly constructed, newly acquired, under construction where the property is not substantially complete, held as inventory where the property is substantially complete, uninhabitable due to renovations, rented out continuously for the majority of the year, the primary place of residence of the owner, held in a corporation owned by citizens or permanent residents of Canada, or held through a trust where all of the trust’s beneficiaries are citizens or permanent residents of Canada.
Unfortunately, the current UHT legislation is unclear in many respects making it impossible to assess an owner’s filing requirements in certain situations. Given the severe penalties for failure to file noted above, we recommend that UHT tax returns be filed in situations where the legislation is unclear. We address some common questions that we have encountered at the end of this publication.
More detailed information on the UHT can be found on the Canada Revenue Agency’s website at: https://www.canada.ca/en/services/taxes/excise-taxes-duties-and-levies/underused-housing-tax.html
If you have questions about your UHT obligations or require assistance in filing, please reach out to your TZR Advisor.
Common questions
Question 1 – Does an Underused Housing Tax (“UHT”) tax return need to be prepared for each individual property?
Yes.
Pursuant to subsection 7(1) of the Underused Housing Tax Act (“UHTA”), A person that is 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 calendar year. Consequently, based on the current legislation, a UHT tax return will need to be filed for each residential property owned on December 31, 2022, by an owner other than excluded owner.
Question 2 – Does a UHT tax return need to be filed for a residential property situated in Canada owned at some point in 2022 but was sold prior to December 31, 2022?
No.
Subsection 7(1) of the UHTA provides that a return is only required to be filed by an owner (other than an excluded owner) of one or more residential properties owned on December 31st of the calendar year.
Question 3 – Will UHT tax returns be required to be filed for properties under construction?
Yes, it would be prudent to do so given the uncertainty in the legislation discussed below.
The definition of a “residential property” in the UHTA is as follows:
Residential property means property (other than prescribed property) that is situated in Canada and that is:
- (a) a detached house or similar building, containing not more than three dwelling units, together with that proportion of the appurtenances to the building and the land subjacent or immediately contiguous to the building that is reasonably necessary for its use and enjoyment as a place of residence for individuals;
- (b) a part of a building that is a semi-detached house, rowhouse unit, residential condominium unit or other similar premises that is, or is intended to be, a separate parcel or other division of real or immovable property owned, or intended to be owned, apart from any other unit in the building together with that proportion of any common areas and other appurtenances to the building and the land subjacent or immediately contiguous to the building that is attributable to the house, unit or premises and that is reasonably necessary for its use and enjoyment as a place of residence for individuals; or
- (c) a prescribed property
The UHTA is silent on whether properties under development would be excluded from the definition of a residential property. Given that the term “prescribed property” is not currently defined in the UHTA and the fact that there are tax exemptions listed in Box 670 and Box 675 of the return for properties under development, we recommend that UHT tax returns be prepared for each property under development which was owned on December 31, 2022, by an owner other than an excluded owner.
Question 4 – Will UHT tax returns be required to be filed for condominium units under occupancy but their sale not closed?
Yes, it would be prudent for the builder to do so given the uncertainty in the legislation discussed below.
As discussed in Question 1 above, a UHT tax return would need to be filed for each residential property owned as at December 31, 2022 by an owner other than excluded owner.
In respect to condominium units under occupancy, the determination to be made is who is the owner of the residential property on December 31, 2022. Would the owner be the builder or would it be the ultimate purchaser?
The definition of an owner in the UHTA is follows:
Owner of a residential property means a person that is identified as an owner in respect of the residential property under the land registration system or other similar system applicable where the residential property is located, or that could reasonably be considered to be an owner in respect of the residential property based on such a system.
In most cases, at the time of occupancy but prior to the final closing, the builder would be listed as the owner of the condominium unit in the land registration system. If this is the case, the builder should file a UHT tax return for each condominium unit under occupancy as at December 31, 2022, given that, as noted in Question 3 above, the current legislation is silent on whether properties under development would be excluded from the definition of a residential property.
Question 5 – Is only one UHT return required to be filed for each property owned by a joint venture with a nominee corporation?
Yes, only one UHT tax return would need to be prepared by the nominee corporation for each property owned by the joint venture.
In situations where a residential property’s title is held by a nominee corporation (which is typically a bare trustee corporation) on behalf of the beneficial owner, the corporate trustee would be the owner for UHT purposes. Consequently, the nominee corporation would be the entity required to file a UHT return for each property owned by the joint venture rather than the joint venture participants.
Question 6 – Does a UHT tax return need to be filed if a citizen or permanent resident of Canada holds legal title of a property “in trust” for another person?
Yes, it would be prudent to do so given the uncertainty in the legislation discussed below.
If a citizen or permanent resident of Canada holds legal title of a property “in trust” for another person or entity, which includes situations where an individual is on title simply for mortgage purposes, it appears the person on title would not meet the definition of an excluded owner under the UHTA and would thus have to file a UHT return annually. Although it could be argued that such a person is merely acting as an agent and that you should look through to the status of the true beneficial owner, given that the UHTA is silent on such bare trustee arrangements and the severity of the penalties for failure to file, we would recommend that UHT returns be prepared in these cases.
The above content is for informational purposes only and is general in nature. It is not intended to be advice. No person or entity should act upon the information above without receiving professional advice after all the facts and circumstances specific to their situation are thoroughly reviewed.