Article written by Stewart Bullard, CPA of DMCL, in the Quarterly Canadian News, a newsletter published by
Canadian member firms
of
Moore North America
. This article on the new tax on underutilized dwellings (TLSU) is part of our mission to be your partner in success by keeping you informed.
At first glance, you probably rightly assumed that the Government of Canada’s new Underutilized Dwelling Unit Tax (UDUT ) didn’t apply to you. We don’t want to be the bird of ill omen, but the name of this tax is misleading; under this law, many more people will have reporting obligations than the “underutilized” label implies.
The Underutilized Dwelling Tax Act has a surprisingly broad scope, and the minimum amount for the late-filing penalty is $5,000. Let’s take a look at the details of this new tax and determine whether filing a TLSU return by April 30 and paying the tax are necessary, so you know what obligations apply to you during tax season.
What is TLSU?
TLSU was initially announced as part of the 2021 federal budget. On June 9, 2022, the rules were promulgated and came into force for the 2022 calendar year. TLSU imposes a 1% tax on the assessed value of a property, and TLSU returns for 2022 must be filed by April 30, 2023.
The assessed value of a residential property is the higher of its assessed value and its most recent selling price. It is also possible to opt to use the fair market value as determined.
While many people don’t have to do anything and very few have to pay a tax, a surprising number of people will have to file an annual TLSU return to claim an exemption, including:
- A partner who holds the legal title of a partnership;
- Non-residents owning rental property in Canada;
- Trust trustees;
- Companies;
- Landlords with long-term leases or leases with an option to purchase; and
- A life estate holder.
How does TLSU work?
Every owner of a residential building is subject to the TLSU, unless :
- He is an “excluded owner”; or
- An exemption applies.
If the owner of the residential property is an excluded owner, he or she is exempt from TLSU and does not have to file any returns.
If the owner of the residential property is not an excluded owner, he or she must submit a
TLSU declaration and :
- Request a waiver; or
- Calculate and pay tax.
What is an “owner” (i.e. the person/entity who may be required to file a TLSU return)?
An owner is generally defined as the person who is registered as the legal titleholder of a residential property; however, it also includes a person who :
- Is a life estate holder with respect to the residential property;
- Is a holder of a life lease on the residential property; or
- Continuous possession of the land on which the residential property is located, under a long-term lease.
Can a person who rents a residential building be a landlord?
Yes, a person who rents a residential building can own the property if he or she has continuous possession of the land on which the residential building is located under a lease, permission or similar agreement:
- Provides for continuous ownership of the fund for a period of at least 20 years; or
- Which includes an option to purchase the fund.
What is an “excluded owner” (i.e. a person/entity exempt from filing a TLSU declaration)?
Is considered an “excluded owner” of a residential building for a calendar year, any person who, on December 31 of a calendar year, is :
- An individual who is a citizen or permanent resident; however, this person will not be an excluded owner if he or she holds legal title as a
- A trustee of a trust (e.g., family trust, alter ego trust, joint spousal trust, bare trust), unless the trust is an estate of a deceased individual; or
- A partner in a partnership;
- A provincially or federally incorporated corporation whose shares are listed on a designated Canadian stock exchange (i.e. TSE, TSX-V Levels 1 and 2, M-X, CNSX or NEO); or
- A registered charity within the meaning of subsection 248(1) of the Income Tax Act.
Most corporations will not be excluded owners, including private corporations (whether incorporated in Canada or abroad), corporations incorporated abroad and subsidiaries of a corporation whose shares are listed on a designated Canadian stock exchange.
What is a residential building?
Residential real estate generally refers to properties located in Canada that are :
- A single-family home or similar building, comprising no more than three “living quarters”; or
- A part of a building that is a semi-detached or row house, a condominium unit or 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, separately from any other premises in the building.
A living space is a dwelling that contains a private kitchen, a private bathroom and a private living area.
What exemptions can be claimed in a TLSU declaration?
A number of exemptions are possible, depending on factors such as the condition of the building, the use to which the property is put, the capacity in which the person “owns” the building, the length of ownership, etc.
For a complete list of exemptions, please refer to the TLSU notices page on the CRA website.
A declaration must be filed to claim either of these exemptions. Talk to your CPA to determine if you qualify for an exemption and to get help preparing your TLSU return.
What happens if I don’t file a TLSU declaration?
There are significant penalties if you fail to file an annual return by the due date. Owners are subject to a minimum penalty of :
- 5,000 if the owner is an individual or $10,000 if the owner is a corporation; or
- 5% of the TLSU, payable for the building, plus 3% of the TLSU, payable for each month the
declaration is late.
Like many other tax measures, TLSU is not exactly what it seems at first glance; its far-reaching requirements could affect you and your residential property. Ask your CPA to help you determine your TLSU obligations to avoid unpleasant surprises.
