The Canada Revenue Agency (CRA) started releasing details in February 2023 about the new Underused Housing Tax (UHT), and there were a few surprises in store for many Canadian residential property owners (simply referred to as ‘owners’ hereafter) who thought that the UHT would not affect them.
The exemptions to file a UHT return is limited to narrow situations, and many owners are discovering that, while they may be exempt from the tax itself, they still must file a UHT return to report the exemption applicable to them.
Failing to file can trigger hefty penalties: $5,000 per unreported property for individuals, and $10,000 per unreported property for corporations.
With a filing deadline of April 30th, 2023, it’s important for you to determine if you are affected by this.
Note that this blog is intended for Canadian citizens, and the corporation, partnerships and trust that they 100% controlled. If that's not you, we recommend you contact your accountant.
Did you own residential property?
The first question to ask yourself is whether or not you are legally on the title for any Canadian residential properties, which, for UHT purposes, is defined as :
Duplexes & triplexes
Laneway houses & coach houses
Cottages, cabins and chalets that are not for commercial use
Residential condominium units
Rowhouse units or townhouses
Beware: Be aware of situations where you may not consider yourself to be an owner of the property, but your name is on the title. A common example of this includes co-signing to help your child with their first house or being put on the title of a property owned by a parent for estate administration purposes.
Saving grace: The UHT does not apply to commercial property or raw land.
Are you an excluded owner?
Next, if you did own property, determine if you are an excluded owner. Excluded owners are exempt from filing a UHT return.
The most common type of excluded owner that would be applicable to most of you, reading this blog, is a Canadian citizen or permanent resident. But, you lose that exemption from filing if you are:
an owner in the capacity as a trustee of a trust - meaning you legally own it for the benefit of someone else.
a partner of a partnership.
Beware: A partner in a partnership might sound inconspicuous, but it encompasses more owners than you may think. For instance, do you Airbnb the spare room in your family home? If the related business income is split between you and your spouse, then ta-da!... you may have a partnership with your spouse and need to file a UHT return. Saving grace: If you and your spouse only rent a residential property to a tenant on a long-term basis (i.e. not as a vacation rental), with minimal input besides collecting rent every month, you would not be considered a partnership – and thus you don’t have to file a UHT return. Further down, we will go over more explanations about the difference between a partnership versus co-ownership.
If you determine you are an excluded owner, you do not need to file the UHT return. Good for you! Go grab a coffee and don’t sweat the UHT.
Affected owners - Specified entity exemptions
If you are still reading, then you're an affected owner and need to understand that you likely won’t owe any UHT taxes, but you still need to report the exemption that’s applicable to you or face the hefty penalties listed above for not doing so.
The first set of exemptions is for a specified entity and includes:
(a) Specified Canadian corporation which is a corporation controlled by excluded owners (i.e., a Canadian citizen or permanent resident). If you are our client, and your corporation owns a residential property, you likely qualify for this exemption.
(b) Specified Canadian Partnership, which is a partnership where each member is an excluded owner or a specified Canadian corporation. If you were caught in our Airbnb example above, this would be the exemption that gets you out of the tax.
(c) Specified Canadian trust, which is a trust where each beneficiary is an excluded owner or specified Canadian corporation. If you are our client, and your trust owns a residential property, you qualify for this exemption.
So you determined that you are an affected owner and need to file a UHT-2900 return to report your exemption from the UHT tax as a specific entity.
The good news is that the return is relatively simple to prepare for your situation. We have recorded a video demonstration going over the details, and we encourage you to prepare your return yourself.
Affected owners - Other exemptions
If you did not fit any of the above exemptions, don’t give up quite yet. There are several exemptions that are based on the use of the residential property itself.
You will still need to file a UHT return, but you would be exempt from paying UHT:
The residential property is your primary place of residence, or the primary place of residence of your spouse, common-law partner or child.
Your property was not vacant for at least 180 days in a calendar year, provided a “qualifying occupant” (a defined term) occupies the dwelling.
Tenants are unable to live in your property year-round as it’s inaccessible in certain seasons.
Your property was uninhabitable due to hazardous conditions for at least 60 consecutive days. This is also true if your property was uninhabitable for 120 consecutive days due to renovation or construction.
Your property was built after March of the calendar year and was put up for sale publicly afterwards.
You acquired the property that calendar year.
The owner of the property passed away.
If you do not qualify for the exemptions as a specific entity, the return might be a bit more complex, and we encourage you to contact your accountant if you would like assistance.
If you are a client of Reach CPA, our team will be happy to assist you with the filing if you would like. Our price starts at $750 per UHT return. To do so, please contact us with all information necessary to complete Parts 2 and 5 of the return form for each property you need to report.
Affected owners - no exemption applicable
If you've made it this far and you don’t qualify for any exemption. This means that UHT tax will be payable on the property. We recommend you consult your accountant if this is your situation.
Self Assessment Questionnaire
To help you determine if you’re required to file a declaration and if you owe the tax, we have created this Self Assessment tool. Simply answer the yes or no questions until you conclude. You may arrive at one of these three results:
No declaration is required.
Declaration required, no tax owing.
Declaration required tax owing.
Clarifications of some of the deciding factors for affected owners
Partnership Business Income or Co-Owner Rental Income?
Here is one place where things get a little murky. You may be asking yourself, “If I own a rental property with my spouse, does that make us a partnership?” Well, that depends on how much effort you put into the rental activities, and what your goals for the property are.
First, you need to determine if you are generating income as a rental or a business. This will be driven by the number and types of services you provide to the tenant.
If the only things you provide to your tenants are basic services such as heat, electricity, parking and laundry facilities, your income is from the property as a rental. You are a co-owner.
If you provide any additional services to your tenants such as cleaning, doing the laundry, providing groceries, cooking meals, and/or providing security you may be carrying on a business.
The more services you provide, the more likely your rental operation is a business. This makes you a partner in a partnership in the eyes of the CRA.
Here is further guidance on rental income versus business income from the CRA.
We recognize that this can be a grey area. In the context of the UHT, with such high penalty for failure to file, if the income you generate from your residential property is not clear-cut rental income, we recommend you file the UHT return.
If you're a client and still having trouble deciding if you are an affected owner, or if any exemptions apply to you, reach out for some assistance.