Consultation on the Underused Housing Tax

Budget 2021 announced the government’s intention to implement, effective January 1, 2022, a national, annual 1-per-cent tax on the value of non-resident, non-Canadian owned residential real estate that is considered to be vacant or underused.

This paper provides stakeholders with information about the proposed “Underused Housing Tax” or “UHT”, and requests feedback regarding its key design features. Interested parties are invited to send written submissions on the proposed elements to the Department of Finance Canada, Tax Policy Branch, on or before September 17, 2021, at UHT-TLSU@fin.gc.ca.

Feedback received will be taken into consideration for the purposes of finalizing the design and drafting of legislation in respect of the proposed UHT. It is expected that draft legislative proposals in relation to the UHT regime would be released later this year, with the final legislation subsequently included in a bill to be introduced in Parliament.

Recognizing the growing interest expressed by a number of jurisdictions in Canada with respect to the taxation of non-resident, foreign ownership of underused housing, the Department of Finance invites input from all interested stakeholders with respect to opportunities presented by the implementation of this national tax for the promotion of a coordinated collection and administrative approach in this area.

Overview of the UHT Framework

The UHT would apply to underused housing in Canada owned directly or indirectly, whether in whole or in part, by non-resident, non-Canadians.

Under the proposed framework, the UHT would apply, in respect of a calendar year, to an “owner” of “residential property” in Canada as of December 31 of the calendar year if: (1) the owner is required to file an annual declaration in respect of the property for the calendar year; and (2) the owner is not eligible to claim an exemption in respect of their interest in the property for the calendar year.

The UHT would be calculated by multiplying the “specified value” of the property by the 1-per-cent rate of the UHT. An owner would be liable for the UHT in proportion to their “interest” in the property.

The following are the key definitional parameters of the UHT:

Residential Property

“Residential property” would be defined to include

• Detached homes, duplexes and triplexes; and
• Semi-detached homes, row-house units, residential condominium units and any other similar premises that is, or is intended to be, a separate parcel or other division of real property owned, or intended to be owned, apart from any other unit in a building;

together with any common areas and other appurtenances and the subjacent and immediately contiguous land reasonably necessary for the use and enjoyment as a place of residence for individuals.

Owner of Residential Property

An “owner” of a residential property would be defined as the legal owner of the property (e.g., the person registered on title).

Interest in Residential Property

An “interest” of an owner in a residential property in respect of a calendar year would generally depend on whether there are one or more owners of the property as of December 31 of that calendar year. If a residential property has a single owner, that owner’s interest would be 100 per cent.

If a residential property has multiple owners, the following rules would apply:

• In the case of property held by its owners as joint tenants, each owner would be regarded as having an equal interest in the property; and
• In the case of property held by its owners as tenants-in-common,
  • If each owner’s interest is specified on any instrument evidencing ownership, each owner would be regarded as having that specified interest, and
  • Otherwise, each owner would be regarded as having an equal interest in the property.

Mandatory Declaration by Residential Property Owners

Every owner of a residential property, other than an “excluded owner”, would be required to file an annual declaration with the Canada Revenue Agency (CRA) for each residential property they own. In order to file a declaration with the CRA, certain owners may need to pre-register with the CRA in advance of filing their declaration.

A declaration in respect of a property for a calendar year would be required to be filed on or before April 30 of the following calendar year. This means that an owner’s declaration in respect of a property for the 2022 calendar year would be required to be filed on or before April 30, 2023.

Failure by an owner to file a declaration in respect of a property for a calendar year could result in significant consequences for the owner, as well as penalties and interest. The consequences of failing to file a declaration are discussed in further detail below in the section entitled “Consequences of Failing to File Declaration”.

Excluded Owners

Certain owners of residential property, referred to as “excluded owners”, would be relieved from the declaration requirement. An owner that is, in respect of a calendar year, an excluded owner would therefore not be subject to the UHT in respect of property for the calendar year.

Excluded owners, in respect of a calendar year, would include the following, as of December 31 of the calendar year:

• An individual that is a Canadian citizen or a permanent resident of Canada, except where the individual holds an interest in property
  • as a partner of a partnership, or
  • as a trustee of a trust, but not including a personal representative of a deceased individual or the estate of a deceased individual;
• A corporation incorporated under the laws of Canada or a province and the shares of which are listed on a Canadian stock exchange;
• A registered charity;
• A cooperative housing corporation;
• An Indigenous governing body or a corporation owned by an Indigenous governing body;
• A municipality or a corporation owned by a municipality;
• The government of Canada or an agent of the Government of Canada;
• The government of a province or an agent of the government of a province;
• Certain other public service bodies (e.g., universities, public colleges, school authorities, hospital authorities); and
• A prescribed person or a person of a prescribed class.

Content of Declaration

An owner of a residential property would be required to report, in their declaration for the property, information about the owner and the property, such as:

• The calendar year to which the declaration relates;
• The civic address of the property and other property-related information;
• The legal name of the owner;
• Contact information of the owner;
• The type of owner (e.g., individual other than as a partner of a partnership or trustee of a trust, corporation, partner of a partnership, trustee of a trust);
• The owner’s interest in the property (as a percentage), and if the interest is less than 100 per cent:
  • The form of ownership (i.e., joint tenants, tenants-in-common), and
  • The names of any other owners of the property having an interest in the property of 10 per cent or more;
• The residential property type (e.g., detached home, semi-detached home, row-house unit, residential condominium unit, duplex, triplex);
• The specified value of the property and how it was determined; and
• The exemptions claimed in respect of the property and information related to any exemptions.

UHT Exemptions

An owner of residential property that is not an excluded owner in respect of a calendar year would be subject to the UHT for the calendar year unless the owner qualifies for an exemption in respect of their interest in the property for the calendar year.

This section describes exemptions that are proposed to be introduced under the UHT framework.

Unless otherwise noted, exemptions applicable to an owner that is an individual would also be available, in some cases with modifications, to an owner that is a corporation, a partner of a partnership or a trustee of a trust.

As part of developing the draft legislation for the proposed UHT, consideration will be given to the need for special anti-avoidance rules to prevent the inappropriate use or abuse of the exemption provisions.  

Exemption for Qualifying Occupancy

An owner’s interest in a residential property would be exempt for a calendar year if the owner satisfies a “qualifying occupancy” test in respect of the property for the calendar year. Under the qualifying occupancy test, a property would need to be occupied, in periods of at least one month that total at least 6 months of the year, by any individual that is a “qualifying occupant” in respect of the owner of the property.

A qualifying occupant in respect of an owner of a property would include the following:

• An individual that deals at arm’s length with the owner and the owner’s spouse, if any, and who occupies, for a period of at least one month under a written agreement, a residence that is part of the residential property;
• An individual that does not deal at arm’s length with either the owner or the owner’s spouse, if any, and who occupies, for a period of at least one month under a written agreement at fair rent, a residence that is part of the residential property; and
• Only in the case of an owner that is an individual,
  • An individual that is the owner or the owner’s non-resident, non-Canadian spouse and who occupies, for a period of at least one month, a residence that is part of the residential property while the individual is in Canada for the purposes of work and the occupancy relates to that purpose; or
  • An individual that is the owner’s Canadian spouse, Canadian child or Canadian parent and who occupies, for a period of at least one month, a residence that is part of the residential property.

If a qualifying occupant in respect of an owner of property is the owner or the owner’s spouse, child or parent, the property must be the place in which the individual resides for a longer period in a calendar month than any other place in order for the month to qualify towards the qualifying occupancy test.

Spouses would generally not be permitted to claim an exemption in respect of more than one residential property based on their own occupancy (i.e., as qualifying occupants).

Exemption for Specified Canadian Corporations

An owner’s interest in a residential property would be exempt for a calendar year if the owner is a “specified Canadian corporation” in respect of the calendar year.

A specified Canadian corporation in respect of a calendar year would generally include any corporation that is incorporated under the laws of Canada or a province and that is not one of the following as of December 31 of the calendar year:

• A corporation in respect of which one or more “foreign entities” (i.e., any individual that is neither a Canadian citizen or a permanent resident of Canada or a corporation that is incorporated outside Canada) has ownership or control, directly or indirectly, of shares of the corporation representing either
  • 10 per cent or more of the value of the equity in the corporation, or
  • 10 per cent or more of the voting rights in respect of the corporation;
• A corporation without share capital, in respect of which the chairperson or other presiding officer, or 10 per cent or more of the directors or other similar officers, are individuals that are neither Canadian citizens nor permanent residents of Canada; or
• A prescribed corporation or a corporation of a prescribed class.

Exemption for Property Held by Partner of Specified Canadian Partnership

An owner’s interest in a residential property would be exempt for a calendar year if the owner holds the interest in the property as a partner of a “specified Canadian partnership”.

A partnership would be a specified Canadian partnership in respect of a calendar year if, on December 31 of the calendar year, every member of the partnership was one or more of the following:

• An excluded owner;
• A specified Canadian corporation; or
• A prescribed person or person of a prescribed class.

Exemption for Property Held by Trustee of Specified Canadian Trust

An owner’s interest in a residential property would be exempt for a calendar year if the owner holds the interest in the property as trustee of a “specified Canadian trust”.

A trust would be a specified Canadian trust in relation to residential property in respect of a calendar year if, on the last day of the calendar year, every person with a beneficial interest, in respect of the interest in the residential property held by a trustee of the trust, was one or more of the following:

• An excluded owner;
• A specified Canadian corporation; or
• A prescribed person or person of a prescribed class.

Exemption for Property Not Suitable for Year-Round Use

An owner’s interest in a residential property would be exempt for a calendar year if the property is uninhabitable (e.g., not winterized) or is inaccessible (e.g., access road not winter maintained) for a portion of the year and is therefore not suitable for year-round use.

Exemption for Property Uninhabitable Due to a Disaster or Hazardous Conditions

An owner’s interest in a residential property would be exempt for a calendar year if, due to a disaster or hazardous conditions, the property is uninhabitable for at least 60 consecutive days of the calendar year.

This exemption would be available until the conditions affecting the property are resolved and the property is safe for occupancy, to a maximum of two calendar years.

Exemption for Property Undergoing Major Renovations

An owner’s interest in a residential property would be exempt for a calendar year if, due to a renovation of a residence that is part of the residential property, the residence is uninhabitable for at least four months of the calendar year.

This exemption would be available provided that the work is being diligently pursued without unreasonable delay, other than a delay caused by circumstances beyond the reasonable control of an owner of the property.

This exemption would only be available to be claimed by an owner in respect of a property for a calendar year once every ten years.

Exemption for Year of Acquisition of an Interest in Property

An owner’s interest in a residential property would be exempt for the calendar year in which the owner first acquires an interest in the property.

This exemption would apply, for example, for the calendar year in which an owner acquires an interest in the property by way of sale or in which an owner acquires an interest in the property as a consequence of the distribution of a deceased individual’s estate.

Exemption for Personal or Other Legal Representative of Deceased Individual

If an owner of residential property dies, the owner’s interest in the property would be exempt for the calendar year in which the death occurred and for the following calendar year. This exemption would extend to the personal or other legal representative of the deceased owner (e.g., trustee of the estate of the deceased individual).

Exemption upon Death of other Owner

If an owner of residential property dies, and on the date of death has at least a 25-per-cent interest in the property, any other owner’s interest in the property would be exempt for the calendar year in which the death occurred and for the subsequent calendar year provided that the other owner was an owner of the property on the date of death.

Exemption for Newly Constructed Property

An owner’s interest in a residential property would be exempt for a calendar year if the property is a newly constructed property that was not substantially completed before April 1 of the calendar year due to the property being under construction.

Exemption for New Property Held by a Developer as Inventory for Sale

An owner’s interest in a residential property would be exempt for a calendar year if the property is held by the owner as inventory on December 31 of the calendar year.

This exemption would only be available to be claimed by an owner in respect of a property for the calendar year in which the property first became capable of being occupied.

Calculation and Remittance of UHT

If an owner is not an excluded owner and the owner’s interest in a residential property is not exempt for a calendar year, the owner would be subject to the UHT in respect of the property for the calendar year.

As noted above, the amount of UHT an owner would be required to pay in respect of a property for a calendar year would be determined by multiplying the owner’s interest in the property by the property’s specified value by the 1-per-cent rate of the UHT.

Value on which Tax Applies

The UHT would apply to the “specified value” of property in respect of a calendar year. The specified value of property in respect of a calendar year would be the greater of the following:

• the assessed value of the property applicable in respect of the calendar year (i.e., the value assigned to the property for property taxation purposes); and
• the property’s most recent sale price.

Alternatively, an owner would be permitted to elect to use the fair market value of the property as determined at any time on or after January 1 of the calendar year and on or before April 30 of the following calendar year. An owner electing to use fair market value would be required to obtain an appraisal of the property.

If an owner fails to file a declaration in respect of a residential property for a calendar year, when assessing the owner for UHT and penalties, the CRA would have the discretion to use the fair market value of the property at the time an assessment is issued in calculating the amounts owing.

Payment Due Date

UHT, in respect of an interest in property for a calendar year, would be required to be remitted to the CRA on or before April 30 of the following calendar year.

Enforcement

Consequences of Failing to File Declaration

If an owner of residential property is required to file a declaration in respect of the property for a calendar year and the declaration is not filed by April 30 of the following calendar year, the owner would be liable for a penalty equal to the greater of the following amounts:

• $5,000, if the owner is an individual, or $10,000 if the owner is not an individual; and
• The amount that is the total of
  • 5 per cent of the UHT applicable in respect of the owner’s interest in the property for the calendar year; and
  • 3 per cent of the UHT applicable in respect of the owner’s interest in the property for the calendar year for each calendar month the declaration is past due.

If a declaration in respect of a residential property for a calendar year is not filed by December 31 of the following calendar year, the UHT applicable in respect of the owner’s interest in the property for the calendar year would be determined without reference to the following exemptions:

• Exemption for Qualifying Occupancy;
• Exemption for Property Not Suitable for Year-Round Use;
• Exemption for Property Uninhabitable Due to a Disaster or Hazardous Conditions; and
• Exemption for Property Undergoing Major Renovations.

Additionally, until a declaration in respect of the property for a calendar year is filed by an owner, the assessment period in respect of the calendar year would be unlimited. In other words, the CRA would not become statute-barred from assessing the owner for UHT, penalties and interest owing.

Other Penalties

In addition to the penalties that may apply for failing to file a declaration in respect of residential property for a calendar year, other penalties would be introduced under the UHT framework. For example, penalties would apply for failing to provide required information or records, for gross negligence and for misrepresentations. These details would be included in the draft legislative proposals expected to be released later this year.

Certificates of Compliance

Currently, if a non-resident of Canada disposes or proposes to dispose of taxable Canadian property, the non-resident may request a certificate of compliance from the CRA under section 116 of the Income Tax Act. The non-resident is required to remit to the CRA, as or on account of income tax, 25 per cent of the expected capital gain (or, in some cases an amount that is acceptable to the CRA), before a certificate of compliance is issued. If the non-resident does not obtain a certificate of compliance, the purchaser is required to withhold 25 or, in some cases, 50 per cent of the purchase price (generally 25 per cent for residential property) and remit it to the CRA on account of the non-resident vendor’s liability under the Income Tax Act. The amount withheld must be remitted within 30 days of the end of the month in which the sale closed. The CRA can assess these amounts against a purchaser that fails to comply with these withholding and remittance requirements.

Beginning in 2023, an application for a certificate of compliance with respect to a residential property will prompt a compliance review by the CRA in relation to the UHT. The CRA may verify, for example, whether an applicant for a certificate of compliance had filed all required UHT declarations in respect of the property, whether the applicant was ineligible for any exemptions previously claimed under the UHT in respect of the property, or whether the applicant has amounts outstanding under the UHT. The CRA will not issue a certificate of compliance to an applicant until it is satisfied that the applicant is in compliance with any applicable obligations under the UHT.

Given the potentially significant amounts of tax, penalties and interest that could be applicable in respect of a residential property under the UHT, consideration will be given to proposing to amend the Income Tax Act, to increase the amount of withholding tax that applies in respect of residential property and to ensure that any amount paid as or on account of income tax under section 116 of the Income Tax Act can be used to offset amounts assessed under the UHT.

Application of the UHT in Smaller, Resort and Tourism Communities

In addition to obtaining feedback regarding the key design features of the UHT described in this paper, the government is seeking views on whether special rules should be established in respect of residential properties located in smaller, resort and tourism communities, and if so, what those rules should be. Interested parties are encouraged to send written representations and proposals on this issue.