Article written by Brad Berry, CPA at MOWBREY GIL, in the Quarterly Canadian Update, a newsletter published by
Canadian member firms
of
Moore North America
. This article on the Underutilized Dwelling Tax Act (UDTA) is part of our mission to be your partner in success by keeping you informed. Are you a residential property owner living abroad? We recommend that you pay close attention to this article to ensure that you don’t end up with CRA penalties on your next annual return.
Underutilized Dwelling Tax Act (UDTA)
On June 9, 2022, Bill C-8 received Royal Assent, giving force of law to the Underutilized Dwelling Tax Act (“UDTA”). This new law requires certain owners of residential buildings in Canada to file returns every year starting in 2022, with the first return due no later than April 30, 2023. TLSU applies an annual tax of 1% on the value of vacant or underutilized residential real estate owned directly or indirectly by non-residents or non-Canadians.
Before you assume that this law doesn’t apply to you, you should know that any owner of a residential building who fails to file a declaration when required to do so must pay a penalty equal to the highest of the following amounts:
- 5,000 if the owner is an individual, or $10,000 if he or she is not;
- 5% of the TLSU, plus 3% of the TLSU for each month the declaration is late.
Needless to say, failure to file could be costly, even if you have no liability under TLSU. So, if you own residential real estate in Canada and are not an “excluded landlord”, you need to make sure you understand your reporting obligations.
TLSU does not apply to “excluded owners”, which includes “an individual who is a Canadian citizen or permanent resident of Canada”.
If you do not meet the definition of “excluded owner”, you must file a return each year, either to apply for an exemption or to pay the amounts due under the TLSU. This includes private taxable Canadian corporations and Canadian citizens or permanent residents who hold an interest in residential real estate as partners in a partnership or trustees of a trust. Failure to file a declaration on your annual return will result in penalties. TLSU requires the filing of a separate declaration for each residential building for the calendar year.
If you are not an “excluded owner”, there are exemptions for :
- corporations, partnerships and specified Canadian trusts;
- the year of an owner’s death when certain conditions are met;
- the year of acquisition in certain situations;
- meeting minimum owner-occupancy requirements;
- residential buildings not suitable for year-round use;
- certain other situations.
Due to the highly technical nature of the definitions, you should discuss these exemptions with your tax advisor before relying on them.
Taxes on underutilized or vacant dwellings can be significant, depending on where your building is located. For example, in 2017, Vancouver introduced the Uninhabited Homes Tax of 3% of the property’s fair market value. The B.C. provincial government has added the tax on real estate speculation and vacant units up to a maximum of 2%. The addition of the 1% TLSU could result in an annual tax of 6% on the fair market value of your property.
If you’re a residential property owner living abroad, even if you’re a Canadian citizen, check with our Canadian tax team to find out what you need to do, depending on your situation. If you’re planning to sell your building, there are other steps you can take. In both cases, your annual tax return could be affected, and the amounts to be reimbursed to the CRA could be relatively high, so plan ahead.
