Executive summary
On 9 June 2022, Canada’s Bill C-8, Economic and Fiscal Update Implementation Act, 2021, received Royal Assent and was enacted. Bill C-8 implements certain measures announced in the federal economic and fiscal update tabled on 14 December 2021, as well as Canada’s new underused housing tax.
More specifically, Part 2 of the bill enacts the Underused Housing Tax Act (UHT Act), which implements an annual 1% tax on the value of vacant or underused residential property directly or indirectly owned by nonresident non-Canadians, effective 1 January 2022. The UHT Act sets out rules for establishing a residential property owner’s liability for the tax, reporting and filing requirements, as well as various administrative and enforcement measures. As outlined in Budget 2021, the stated purpose for introducing a national underused housing tax was to ensure that nonresident owners who were using Canada as a place to passively store their wealth in housing pay their fair share.
The new tax, which will be administered by the Minister of National Revenue, is modelled to some extent on the speculation and vacancy tax imposed by the province of British Columbia for 2018 and later calendar years. It should be noted that while the UHT Act is now in force, some details of the tax remain to be fleshed out by regulation, such as prescribed properties to be included or excluded from the tax and certain prescribed persons to be treated as owners for purposes of the rules.
Detailed discussion
Framework
In general, the underused housing tax applies on a calendar year basis (beginning with 2022) to a person who is the owner of residential property in Canada, on 31 December of the particular calendar year, if the following conditions are met:
The owner is not an excluded owner.
The owner is not eligible to claim an exemption in respect of their interest in the property.
Residential property generally includes:
Detached homes and similar buildings with up to three dwelling units (such as a duplex or triplex)
Semi-detached homes, row-house units, residential condominium units and any other similar premises
It also includes that proportion of any common areas (if applicable) and any other appurtenances to the building (such as a shed, cabin, pool house or studio) 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.1
An owner of a residential property is a person identified as such for the property under the applicable land registration system or other similar system where the property is located (i.e., the legal title holder). It also includes a person that meets one of the following conditions:
Is a life tenant under a life estate in respect of the residential property
Is a life lease holder in respect of the residential property
Has, under a long-term lease (20 years or more, or a lease that contains an option to purchase the land), continuous possession of the land on which the residential property is situated
Is a prescribed person (to be defined by regulation)
The tax does not apply to excluded owners of residential properties. The UHT Act defines an excluded owner of a residential property for a calendar year as a person that is, on 31 December of the calendar year, one of the following:
An individual who is a Canadian citizen or permanent resident of Canada,2 except to the extent the individual owns the property in their capacity as a trustee of a trust (other than a personal representative in respect of a deceased individual) or as a partner in a partnership
A publicly listed corporation incorporated under federal or provincial law
A person that owns residential property in their capacity as a trustee of a mutual fund trust, a real estate investment trust (REIT), or a specified investment flow-through trust, as those terms are defined under the Income Tax Act (Canada)
A registered charity, as defined under the Income Tax Act (Canada)
A cooperative housing corporation, as defined under the Excise Tax Act (Canada)
A municipality or para-municipal organization, as those terms are defined under the Excise Tax Act (Canada)
A hospital authority, public college, school authority or university, as those terms are defined under the Excise Tax Act (Canada)
An Indigenous governing body or a corporation wholly owned by such a body
A prescribed person (to be defined by regulation)
Note that the excluded owner definition does not include private taxable Canadian corporations, partnerships nor trusts, and may not include closely held subsidiaries of a public corporation; it is anticipated that the compliance obligations of a larger number of real estate investment entities (that are not currently structured as REITs) may need to be evaluated for requirements to comply with the UHT Act.
Application of the tax
The tax applies at the rate of 1% to the residential property’s taxable value. Unless an amount is prescribed by regulation, a residential property’s taxable value for a calendar year is the greater of:
The property’s assessed value for property tax purposes
The property’s most recent sale price on or before 31 December of the calendar year
However, a person may elect to use the property’s fair market value as the tax base, as determined at any time on or after 1 January of the calendar year and on or before 30 April of the following calendar year (and in a manner that is satisfactory to the Minister). The election must be filed with the Minister on or before 30 April of the following calendar year, or any later day the Minister may allow. It is unclear how the “satisfactory” conditions will play out in practice, given the Minister’s discretion.
The tax is pro-rated in accordance with the residential property owner’s ownership percentage in respect of the property for the year.
Exemptions
An owner that is not an excluded owner (as described above) is required to pay the tax, unless the owner qualifies for one of the following exemptions in the calendar year.3
Primary place of residence
An owner who is an individual is exempt from the tax for a calendar year if a dwelling unit that is part of the residential property is the primary place of residence of:
The owner or the owner’s spouse or common-law partner
An individual who is the child of the owner or the owner’s spouse or common-law partner, but only if the child occupies the residence for the purpose of authorized study at a designated learning institution
If an individual who is neither a citizen nor a permanent resident owns two or more residential properties, the individual may elect to designate one of the properties as their primary residence for the year. An individual who fails to file the election cannot claim this exemption. If an individual and their spouse or common-law partner both own one or more residential properties and neither individual is a citizen or permanent resident, they must file a joint election to designate one of the properties as a primary residence in order to claim the exemption. Only one single or joint primary residence election may be filed. The election to designate a primary residence must be filed on or before 30 April of the following calendar year, or any later day the Minister may allow.
Qualifying occupancy
A qualifying occupancy exemption applies for a calendar year if the property is occupied by one or more qualifying occupants in relation to the owner for at least 180 days of the year. To satisfy this test, only days that fall into a qualifying occupancy period in the year are counted.
A qualifying occupancy period means a period of at least one month in the calendar year during which a qualifying occupant has continuous occupancy of a dwelling unit that is part of the residential property.4
A qualifying occupant includes:
An arm’s-length tenant (under an agreement evidenced in writing)
A non-arm’s length tenant who is given occupancy in exchange for consideration that is not below the fair rent for the property
An individual who is the owner or the owner’s spouse or common-law partner and is in Canada to pursue authorized work under a Canadian work permit
An individual who is a spouse, common-law partner, parent or child of the owner and who is a citizen or permanent resident
A prescribed individual (to be defined by regulation)
However, if the owner or the owner’s spouse or common-law partner owns multiple properties and has filed the primary residence election (described above), the owner and their spouse or common-law partner will be excluded as qualifying occupants of the other properties for purposes of the qualifying occupancy exemption. In addition, any calendar months during which the only qualifying occupants of the residential property are the owner and/or the owner’s spouse, common-law partner, parent or child, and each of those individuals resides at another property for an equal or greater number of days than they reside at the particular residential property, will be excluded from a qualifying occupancy period.
Specified Canadian corporation
An owner that is a specified Canadian corporation is not required to pay the tax. In general, this includes a corporation incorporated under federal or provincial law, but does not include a corporation that on 31 December of the calendar year is:
A corporation for which ownership or control of shares representing 10% or more of the equity or voting rights in the corporation is held by individuals who are neither Canadian citizens nor permanent residents of Canada or foreign corporations.
A corporation without share capital, for which the chairperson or other presiding officer, or 10% or more of the directors or other similar officers, are individuals who are neither Canadian citizens nor permanent residents of Canada.5
Specified Canadian partnership
A person that is an owner of a residential property solely in their capacity as a partner of a specified Canadian partnership is not required to pay the tax. A specified Canadian partnership is a partnership for which each member is either an excluded owner or a specified Canadian corporation on 31 December of the calendar year.6
Specified Canadian trust
A person that is an owner of a residential property solely in their capacity as a trustee of specified Canadian trust is not required to pay the tax. A specified Canadian trust is a trust under which each beneficiary (having a beneficial interest in the residential property) is either an excluded owner or a specified Canadian corporation on 31 December of the calendar year.7
Seasonal residence
The tax does not apply in respect of a residential property if it is not suitable for year-round use as a place of residence, or if the property is seasonably inaccessible because public access is not maintained year-round.
Disaster or hazardous condition
The tax does not apply in respect of a residential property that is uninhabitable for at least 60 consecutive days in the calendar year as a result of a disaster or hazardous condition caused by circumstances beyond the owner’s reasonable control. This exemption can only be used in respect of the same disaster or hazardous condition for up to two calendar years. A disaster includes an earthquake, fire, flood, landslide or any other natural disaster or dangerous event. Hazardous conditions generally include any condition that is hazardous to the health or safety of the property’s occupants, such as a structural defect or contamination by a dangerous substance.
Renovations
The tax does not apply in respect of a residential property that is uninhabitable for at least 120 consecutive days in the calendar year due to renovations, as long as:
Any work relating to renovation is carried out without unreasonable delay.
This exemption did not apply in respect of the property for any of the nine prior calendar years.
Year of acquiring an interest in property
An exemption applies for the calendar year in which a person first becomes an owner of a residential property, as long as the person never owned the property in the prior nine calendar years.
Death of owner
An exemption applies in respect of a residential property for a calendar year if the owner died during the calendar year or the previous calendar year. This exemption extends to the personal representative of the deceased individual (e.g., the executor of the individual’s will or the administrator of the individual’s estate), provided they did not previously own the property in the calendar year or the prior calendar year.
Death of other owner
If an owner of a residential property dies and that individual’s ownership percentage on the date of death was at least 25%, any other owner’s interest in the property is exempt for the calendar year in which the death occurred and the subsequent calendar year, as long as they were an owner of the property on the day the individual died.
New buildings
An exemption applies in respect of a residential property for a calendar year if construction of the property is not substantially completed (i.e., generally 90% or more) before April of the calendar year. As well, the UHT Act provides an exemption for new property held by a developer as inventory for sale. Specifically, the tax does not apply to a residential property for a calendar year if the following conditions are met:
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.
The property is not occupied by an individual as a place of residence or lodging during the calendar year.
Vacation/recreational properties
The tax does not apply to a residential property if it is located in a prescribed area and any prescribed conditions are met.
As part of the federal economic and fiscal update tabled on 14 December 2021, the Government indicated it would provide an exemption for vacation and recreational properties. This exemption would apply to a property that is:
Located in an area of Canada that is not an urban area within either a census metropolitan area or a census agglomeration having 30,000 or more residents.
Used personally by the owner (or the owner’s spouse or common-law partner) for at least four weeks in the calendar year.
However, the details of this exemption have not yet been confirmed by regulation.
Anti-avoidance
The UHT Act contains a general anti-avoidance rule that is similar to that found in other federal tax legislation such as the General Anti-Avoidance Rule in the Income Tax Act (Canada). As well, the UHT Act contains a more specific anti-avoidance provision that applies to deny a tax benefit arising from a transaction or series of transactions that are undertaken to take advantage of a parameter change (i.e., a change to the tax rate or a defined term in the UHT Act).
Returns and remittances
An owner (other than an excluded owner) of one or more residential properties on 31 December of a calendar year is required to file a return for each residential property unless the owner is a prescribed person or the property is a prescribed property. A return for a calendar year is due on or before 30 April of the following calendar year. As a result, a return for the 2022 calendar year must be filed on or before 30 April 2023. The return must be made in prescribed form containing prescribed information and must indicate the amount of tax (if any) that is payable.
Tax for a calendar year is also due on or before 30 April of the following calendar year. Therefore, tax for the 2022 calendar year must be paid to the Receiver General on or before 30 April 2023. Payments of CA$50,000 or more under the UHT Act must be made at a financial institution such as a bank (which includes an authorized foreign bank), a credit union or a trust corporation. Late payments are subject to interest, compounded daily.
Penalties
A person who fails to file a return on time is liable to a penalty equal to the greater of the following amounts:
- CA$5,000, if the owner is an individual, or CA$10,000, if the owner is not an individual; and
- The total of:
- 5% of the applicable tax for the property for the calendar year
- 3% of the applicable tax for each complete calendar month the return is late
For the purpose of determining the penalty, if a person fails to file a return for a calendar year by 31 December of the following calendar year, the applicable tax is calculated on the basis that certain exemptions are not available (e.g., the primary place of residence and qualifying occupancy exemptions).
As the UHT Act is a comprehensive and self-contained piece of legislation, it also contains various administrative provisions dealing with record retention, objections and appeals, audit enforcement action, computations of arrears interest, and other similar administration comparable to those in the Income Tax Act (Canada) and the Excise Tax Act (Canada).
Implications
Under Canada’s new underused housing tax, foreign owners of residential property situated in Canada (whether owned directly, or indirectly through a partnership or trust) will be required to meet an annual return filing requirement for each Canadian residential property they own, thus creating an additional compliance burden. It is important to recognize that the ownership of real estate through a closely held entity, Canadian or foreign, will not provide an exclusion from the compliance obligations.
Unless the owner is an excluded owner, the annual filing requirement applies even if no tax is payable for the year; for greater certainty, this extends the annual filing obligation to the various persons and entities that are not excluded owners but that may satisfy one or more of the tax exemption criteria. It will also be necessary for foreign owners to assess on an annual calendar year basis if they satisfy any of the available exemptions from the tax (such as the primary residence exemption). Failure to file a return by the due date may result in penalties including the loss of certain exemptions from the tax if the return is not filed by the end of the following calendar year.
Nonresident owners should also be alert to similar taxes imposed at the provincial or municipal level. For example, the city of Vancouver imposes an “empty homes” or vacancy tax, which is in addition to the speculation and vacancy tax levied by the province of British Columbia. As well, the province of Ontario announced in its 2022 Budget that it would engage with Ontario municipalities that are considering the implementation of vacant homes taxes. The stated purpose of this collaboration is to help maximize the impact of such taxes on provincial housing supply and ensure a consistent approach throughout the province.
For additional information with respect to this Alert, please contact the following:
Ernst & Young LLP (Canada)
- Jeremy Shnaider, Toronto
- Gabriel Baron, Toronto
- Chris Jerome, Ottawa
- Dean Radomsky, Calgary
- Sanjaya Ranasinghe, Calgary
- Perry Yuen, Vancouver
For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.
