As a non-resident in Canada, if you own property here, you must know about the Underused Housing Tax in detail. 2022 is about to end and the taxation procedures for real estate segments in Canada are about to begin. Real Estate Taxes will be due on December 31. Therefore, we have come up with this article to facilitate your process of understanding the Underused Housing Tax in Canada.
The Canadian government declared its plan to enact a nationwide one percent annual tax on the value of any non-resident, non-Canadian owner’s unoccupied or underutilized residential real estate as part of the federal budget for 2021. To this aim, on June 9, 2022, the Underused Housing Tax Act (the Act) was passed. This act will be applicable to residential buildings as of December 31, 2022.
- What is the Underused Housing Tax (UHT) in Canada?
- Residential Property in Canada
- Excluded Owners of Residential Property in Canada
- Content of Declaration for Residential Property in Canada
- Calculation and Remittance of Unused Housing Tax in Canada
- Enforcement Procedure of Unused Housing Tax in Canada
- Frequently Asked Questions (FAQs)
What is the Underused Housing Tax (UHT) in Canada?
The UHT would be applicable to vacant homes in Canada. This is valid for residential properties that are directly or indirectly held, in whole or in part, by non-resident foreigners.
Under the fulfillment of the following conditions, the UHT would apply, in respect of a calendar year. It is applicable to an “owner” of “residential property” in Canada as of December 31 of the calendar year.
- the owner must file an annual declaration in relation to the property for the calendar year; and,
- the owner cannot claim an exemption in relation to their interest in the property for the calendar year.
The “specified value” of the property would be multiplied by the UHT’s 1% rate to determine the UHT. According to their “interest” in the property, an owner would be responsible for the UHT.
The following are the main UHT definitional criteria:
Residential Property in Canada – Legal Definition
The definition of “residential property” is as follows:
Any similar property that is, or is intended to be, a separate parcel or other division of real property owned, or designed to be held, apart from any other unit in a building, along with any common areas and other appurtenances, and the adjacent and immediately contiguous land reasonably necessary for the use and enjoyment as a place of residence.
Owner of Residential Property in Canada
The legal owner of a residential property would be considered the property’s “owner” (e.g., the person registered on title).
Residential Property Interest
“Interest” in a residential property typically relies on the number of owners as of December 31 of that calendar year. If there is only one owner of a residential property, the owner would have a 100% ownership interest.
The following guidelines would apply if there are multiple owners of residential property:
- Each owner will have an equal interest in a property held by its owners as joint tenants., and,
- When it comes to a property that is owned by tenants-in-common:
- Each owner will have that specified interest if each owner’s interest is stated on any document proving ownership, and,
- Otherwise, it would be assumed that each owner has an equal stake in the property.
Mandatory Declaration by Residential Property Owners
Every homeowner, excluding “excluded owners,” would have to submit an annual declaration to the Canada Revenue Agency (CRA). Some owners may need to pre-register with the CRA in order to file a declaration with the CRA before filing their statement.
The Owner must submit the declaration for a property for a calendar year on or before April 30 of the subsequent year. Therefore, a property owner must file the statement for the calendar year 2022 on or before April 30, 2023.
There could be serious repercussions, as well as fines and interest otherwise. Especially, this is applicable to an owner who neglects to submit a declaration regarding a property for a calendar year. Learn more on “Consequences of Failing to File Declaration,” in the section below.
Excluded Owners of Residential Property in Canada
The “excluded owners” group of residential property owners would be exempt from the declaration obligation. An owner who is an excluded owner for the purposes of a calendar year would not be charged UHT with regard to the property for the year.
As of December 31 of the calendar year, the following would be considered excluded owners with respect to that calendar year:
- A person who is a Canadian citizen or a permanent resident of Canada, unless the person has an interest in the property:
- As a partner of a business partnership, or,
- As a trustee of a trust, but excluding the personal representative of a decedent or the decedent’s estate.
- A company with a share listing on a Canadian stock exchange in accordance with the laws of Canada or a particular province.
- A registered charity;
- A cooperative housing corporation;
- An Indigenous governing body or a corporation owned by an Indigenous governing body;
- A municipality or a corporation owned by a municipality;
- The government of Canada or an agent of the Government of Canada;
- The government of a province or an agent of the government of a province;
- Certain other public service bodies (e.g., universities, public colleges, school authorities, hospital authorities); and
- A prescribed person or a person of a prescribed class.
Content of Declaration for Residential Property in Canada
An owner of a residential property must include information about the owner and the property in their declaration for the property, such as:
- The year of the declaration that it applies to;
- The property’s civic address and other relevant information;
- The owner’s full legal name;
- The owner’s contact information;
- The type of owner (e.g., individual other than as a partner of a partnership or trustee of a trust, corporation, partner of a partnership, trustee of a trust);
- The owner’s interest in the property (as a percentage), and if the interest is less than 100 percent:
- The form of ownership (i.e., joint tenants, tenants-in-common), and
- The names of any other owners of the property having an interest in the property of 10 percent or more;
- The residential property type (e.g., detached home, semi-detached home, row-house unit, residential condominium unit, duplex, triplex);
- The specific value of the property and the process of its determination; and
- The exemptions claimed in respect of the property and information related to any exemptions.
Calculation and Remittance of Unused Housing Tax in Canada
An owner would be liable for the UHT in relation to the property for the calendar year if they are not excepted owners and their investment in a residential property is not exempt.
As mentioned above, the amount of UHT an owner would be liable to pay in respect of a property for a calendar year would be calculated by multiplying their interest in the property by the stipulated value of the property and the UHT rate of one percent.
The “specified value” of property in respect of a calendar year would be subject to UHT. A property’s specified value for a calendar year would be the higher of the following:
- the assessed value of the property applicable in respect of the calendar year (i.e., the value assigned to the property for property taxation purposes); and
- the property’s most recent sale price.
An owner could also decide to utilize the property’s fair market value, which was established between January 1 and April 30 of the next year’s calendar, whichever comes first. A property appraisal would be necessary if the owner decided to use fair market value.
When assessing an owner for UHT and penalties after they fail to file a declaration for a residential property for a calendar year, the CRA is free to determine the amounts owed by using the property’s fair market value at the time the assessment is made.
Tax Payment Date
UHT would need to be paid to the CRA by April 30 of the following year in relation to an interest in property for a calendar year.
Enforcement Procedure of Unused Housing Tax in Canada
Failure to file a Declaration of Ownership of Residential Property
Suppose a homeowner who owns a residential property is required to file a declaration regarding the property for a calendar year but fails to do so by April 30 of the following year. In that case, the homeowner may be subject to a fine equivalent to the larger of the following amounts:
- $5,000 or $10,000 depending on whether the owner is an individual or a business, and,
- The sum of the following amounts:
- For the calendar year, 5% of the UHT is applicable to the owner’s interest in the property, and,
- For every month the declaration is past due, 3 percent of the UHT that would have been applicable to the owner’s stake in the property for the entire calendar year would be owed.
If a declaration for a residential property for a calendar year is not submitted before December 31 of the following year, the following exemptions will not be taken into consideration when determining the UHT applicable to the owner’s stake in the property for the calendar year:
- Exemption for Qualifying Occupancy;
- Exemption for Property Not Suitable for Year-Round Use;
- Exemption for Property Uninhabitable Due to a Disaster or Hazardous Conditions; and
- Exemption for Property Undergoing Major Renovations.
The assessment period for the calendar year would also be indefinite until an owner files a declaration in relation to the property for that year. In other words, the CRA would not lose the ability to charge the owner with owing UHT, fines, and interest.
Other penalties would be added under the UHT framework in addition to those that could be imposed for failure to file a declaration in relation to residential property for a calendar year. Penalties could be imposed, for instance, for misrepresentations, gross carelessness, or failing to produce requested records or information. The draught legislative measures that are anticipated to be published later this year would contain these specifics.
Certificates of Compliance
Currently, under section 116 of the Income Tax Act, a non-resident of Canada who disposes of or plans to dispose of taxable Canadian property may get a certificate of compliance from the CRA. Before issuing a certificate of conformity, the non-resident must pay 25% of the anticipated capital gain (or, in some situations, an amount the CRA deems appropriate) to the CRA as or on account of income tax.
The purchaser is required to withhold 25 or, in some cases, 50 percent of the purchase price (typically 25 percent for residential property) and remit it to the CRA on account of the non-resident vendor’s liability under the Income Tax Act if the non-resident does not obtain a certificate of compliance. Within 30 days of the month in which the sale concluded, the sum withheld must be paid out. If a buyer disregards these withholding and remittance rules, the CRA may impose these sums against them.
Certificates on Compliance 2023
A compliance examination of the UHT by the CRA will be triggered by a certificate of compliance application for a residential property starting in 2023. The CRA may check things like whether a candidate for a certificate of compliance submitted all necessary UHT declarations regarding the property, whether they were ineligible for any exemptions they had previously requested under the UHT regarding the property, or whether they still owe money under the UHT. Until the CRA is certain that the application is in conformity with all applicable responsibilities under the UHT, it will not grant the applicant a certificate of compliance.
Consideration will be given to a proposal to amend the Income Tax Act, increase the amount of withholding tax that applies in respect of residential property, and ensure that any amount paid as or on account of income tax under section 116 of the Income Tax Act can be used to offset amounts assessed under the UHT given the potentially significant amounts of tax, penalties, and interest that could be applicable in respect of a residential property under the UHT.
However, you should not worry about defaulting in the process. It is because, if you are following a reliable Real Estate News Source in Canada and/or connected with your Community in Canada, you will receive the deadline intimations automatically.
Frequently Asked Questions (FAQs)
What is an Underused Housing Tax?
The Canadian government declared its intention to enact a national one percent annual tax on the value of any unoccupied or underutilized residential property owned by non-residents or non-Canadians as part of the 2021 Federal Budget.
Can Taxes on rental properties in Canada be avoided?
The good news is that by deducting depreciation and rental charges like maintenance, upkeep, and repairs, you can lower the amount of income taxes you owe on rental revenue. However, you have to pay capital gains tax on the sale of a rented property.
Which Canadian Province has the lowest Property Tax?
British Columbia has the lowest taxes of any province. So, this province is your best option if you’re looking for Canada’s lowest property taxes. In comparison to New Brunswick, which has the highest property taxes in Canada, Quebec’s property tax is also rather modest.
What is the Tax Rate on a House in Canada?
Every Canadian municipality sets its own annual property tax rate. This percentage typically ranges from 0.5% to 2.5%. Note that the amount of property taxes you will have to pay is unrelated to the size of your property, how much you paid for it, or your income.
Do non-residents pay capital gains tax on property sold in Canada?
Taxes on capital gains on the sale of Canadian real estate are due from non-residents of Canada. The CRA may impose severe fines for failure to do so.