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Vacant home tax in Canada – Underused Housing Tax Act (UHTA)

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Written by Brad Berry, CPA from Mowbrey Gil, LLP for the Canadian Overview of Q3 2022. A newsletter published by Canadian member firms of Moore North America. This article about Underused Housing Tax Act is part of our mission to become partner of your success by keeping you informed of the news. You are the owner of a residential property and live outside the country? We recommend to closely read this article, so you do not get unwanted penalties from the CRA next time you file your annual tax return declaration.

Tax on vacant property

The Canadian government’s Department of finance has implemented a vacant home tax in a goal and effort to encourage homeowners to rent out their properties. On June 9, 2022 Bill C-8 received Royal Assent from the government, making the Underused Housing Tax Act (“UHTA”) law. This new legislation, basically a vacant home tax, requires certain owners of residential property in Canada to file returns annually, commencing in 2022, with the first filing deadline coming this April 30, 2023. The UHTA implements an annual tax of 1% on the value of vacant or underused residential property which is not owned (directly or indirectly) by citizens or permanent residents of Canada. If a home is vacant for an extended period of time, the owner may be subject to that vacant home tax.

Before you assume this doesn’t apply to you, be aware that penalties for failure to file a return when required for the vacant home tax is subject to a penalty of the greater of:

  • $5,000 for individual or $10,000 or all others, or
  • 5% of the Underused Housing Tax (UHT) plus 3% of the UHT for each month the return is late.

Needless to say, the failure to file a return could be costly even where there is no UHT liability. Therefore, if you own residential property in Canada and are not an “excluded owner”, you should make sure you understand your reporting and filing obligations.

The UHT doesn’t apply to “excluded owners”. There are a number of persons included in the definition of an “excluded owner” including “an individual who is a citizen or permanent resident”.

Where you do not meet the definition of an “excluded owner”, a declaration must be filed annually to claim an exemption from the UHT, or a return must be filed to pay the UHT tax. This would include privately owned taxable Canadian corporations and Canadian citizens or permanent residents that hold property as a partner in a partnership or as a trustee of a trust. Failure to do so will result in penalties. The UHTA requires the filing of a separate return for each residential property for the calendar year.

If you are not an “excluded owner” there are exemptions for:

  • Specified Canadian corporations, partnerships and trusts;
  • The year of death where certain conditions are met;
  • The year of acquisition in certain situations;
  • Meeting minimum owner occupancy requirements;
  • Property that is uninhabitable for a certain portion of the year or only inhabitable at certain times of the year; and,
  • Limited other situations.

Due to the highly technical nature of the definitions, these exemptions should be discussed with your tax advisor before relying on them.

 

How is vacancy tax calculated?

The amount of vacant or underused housing taxes can be significant, depending on where you own property. For example, in 2017, Vancouver introduced the Empty Homes Tax at 3% of the fair market value of the property, on which the British Columbia Provincial Government piggybacked the Speculation and Vacancy Tax of up to 2%. Adding the UHT of 1% could result in a 6% annual tax on the fair market value of your property.

If you own residential property and live abroad, even if you are a Canadian citizen, do not hesitate to ask any question to our Canadian taxes expert team. If you plan to sell your building, more actions could be taken. In both cases, your annual tax return declaration could be affected and amounts you will need to pay to the CRA could be higher, so be prepared.

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