Underused Housing Tax Act

As a part of the 2021 Federal Budget, the Government of Canada announced its intention to implement a national one percent annual tax on the value of residential real estate owned by any non-resident, non-Canadian that is considered vacant or underused. Rules for the Underused Housing Tax (UHT) were enacted on June 9, 2022, and apply to residential properties owned on or after December 31, 2022.

The rules require residential property owners (with some exceptions, as discussed below) to file an annual UHT return (Form UHT-2900), even if only to claim an exemption from the tax. As a result, many Canadian corporations, partnerships, and trusts — including those with no foreign ownership or foreign beneficiaries — that hold residential property are required to file a return for each property annually even where no tax is payable. Significant penalties apply if the UHT return is not filed on time.

Overview of tax and reporting

Every person that is, on December 31, an owner (other than an excluded owner; discussed below) of a residential property in Canada is required to file an annual return for the calendar year and pay a one percent tax on that property for the year. This federal tax is levied in addition to similar vacancy taxes already administered by certain provinces and municipalities.

The return must be filed, and any tax remitted, by April 30 following the calendar year.

Certain characteristics or eligible uses will exempt a residential property from the UHT. These exemptions are discussed below.

A lot of uncertainty remains with respect to how this tax will be administered, and the rules are complex. Further guidance may be released by the Canada Revenue Agency (CRA) before the 2022 returns and taxes are due.

Which owners are excluded from the UHT?

An excluded owner is not subject to the UHT and is not required to file the annual UHT return.

An excluded owner is, on December 31 of a calendar year, one of the following:

• An individual Canadian citizen or permanent resident of Canada
• A publicly traded Canadian corporation
• A person with title to the property in their capacity as trustees of various widely held trusts
• A registered charity
• A cooperative housing corporation
• A municipal organization or other public institutions and government bodies.

All other owners, referred to as affected owners, are required to file an annual return and pay UHT unless they meet an available exemption. Specifically, all private corporations, partnerships, and trusts which own residential property in Canada, as well as individuals who are neither a Canadian citizen nor a permanent resident, are required to file an annual return to either claim an exemption from the tax or to determine the tax payable.

The owner of a residential property is the person identified under the land registration system applicable to where the property is located, as well as certain persons with a life interest or long-term lease (20 years or more) in a residential property or the land it is situated on.

Which properties will be subject to UHT?

Unless an exemption is available, the UHT applies to residential properties located in Canada. Residential property includes:

• detached houses (containing up to three dwelling units),
• semi-detached houses,
• rowhouse units,
• residential condominium units, or
• any other similar premises intended to be owned as a separate unit or parcel.

A dwelling unit is generally a single unit within a residential property that contains its own kitchen, bath, and living area. A residential property can include land considered to be necessary for its use and enjoyment.

What are the available exemptions?

For affected owners, certain characteristics or use of the property may exempt a residential property from UHT for a given calendar year. An annual return must be filed to claim the exemption.

• Primary place of residence. The residential property (or a dwelling unit within) is the primary place of residence for the owner, the owner’s spouse or common-law partner, or the owner’s child. Special rules apply to owners with multiple properties.
• Qualifying occupancy. The property was occupied for at least 180 days in the year, made up of one or more periods that are at least one month by:
  • A third party under a written rental agreement
  • A related person paying fair rent^[1] to the owner
  • The owner’s spouse or common-law partner in Canada under a work permit
  • The owner’s spouse, common-law partner, parent, or child who is a Canadian citizen or permanent resident.
• Limited seasonal access. The property was not suitable for year-round use as a place of residence or was inaccessible during part of the year.
• Disaster or hazardous condition. The property was uninhabitable for at least 60 consecutive days in a calendar year due to disaster or hazardous conditions (limits apply to how many times an exemption can be claimed for the same disaster/condition).
• Renovation or construction. The property was uninhabitable for at least 120 consecutive days in a calendar year due to renovation or where construction of the property was not substantially completed before April of the calendar year.
• Construction of property for sale. The property was substantially completed after March of the year, was offered for sale to the public and was not previously occupied.
• Year of acquisition. The property was first acquired by the owner during the year (by sale or transfer).
• Upon death of owner. This exemption applies to the year in which the owner died as well as the following calendar year. It extends to the personal representative of a deceased individual as well as to surviving owners of jointly owned property of which the deceased owned at least 25 percent.
• Specified Canadian corporation. The property was owned by a Canadian corporation with less than ten percent foreign ownership.
• Partner of specified Canadian partnership. The property was owned by partners of a partnership where all members were either excluded owners or specified Canadian corporations.
• Trustee of specified Canadian trust. The property was owned by a trustee of a trust where all beneficiaries with an interest in the property were either excluded owners or specified Canadian corporations.
• Prescribed area. The property was located in a prescribed area based on census data (determined using this CRA tool) and the owner, spouse, or common-law partner resided in the property for at least 28 days in the calendar year (not required to be consecutive). 

How is the UHT calculated?

The UHT payable is calculated as one percent of the property value multiplied by the applicable ownership percentage.

The property value is the greater of (i) the assessed value for the year for property tax purposes, and (ii) the most recent sale price on or before December 31 of the calendar year. Owners can also make an election to use the fair market value where a written appraisal is obtained to support the value. This election must be filed by April 30 following the calendar year in question.

What happens if an affected owner does not file the annual return?

Failure to file each annual UHT return can result in significant penalties:

• $5,000 for individuals
• $10,000 for owners that are not individuals

Additional penalties and interest apply on outstanding taxes that are not paid by April 30 following the reporting year.

In addition to penalties and interest, failure to file the annual return can result in certain exemptions no longer being available to the owner for that year, resulting in taxes payable. Other penalties may be assessed for failure to provide required information, false statements or omissions, or failure to file under gross negligence.

What else do affected owners need to know?

A sale or transfer by a non-resident person of property located in Canada gives rise to specific tax and reporting requirements, including requesting a certificate of compliance from the CRA under section 116 of the Income Tax Act. Under the new rules, the CRA can decline a request for this certificate where a non-resident vendor has not met its UHT tax and reporting obligations prior to the sale.