In June 2022, the Underused Housing Tax (UHT) Act received Royal Assent and is now law. It implements an annual 1% tax on the value of vacant and underused residential properties directly or indirectly owned by those who are not permanent residents or Canadian citizens. It became effective Jan. 1, 2022, and the first tax return for year-end Dec. 31, 2022, is due at the end of April 2023.
How does the UHT impact your farming operation?
If you operate your farm through a Canadian corporation or Canadian partnership and it owns a residential property, you will be required to file a UHT return even if no UHT is owed due to applicable exemptions noted below. If you do not file, the late filing penalty will apply.
Let's look at the example of a Canadian corporation carrying a cash crop operation. The corporation is 100% owned by Canadian citizens and possesses several residential homes on its farms. This corporation is required to file a UHT return. It would be exempt from the UHT as a Specified Canadian Corporation, but the UHT return must still be filed to claim the exemption. It could be subject to a $10,000 penalty if it does not file a UHT return on time. This penalty would apply for each year a UHT return is required and not filed by the April 30 deadline.
The following is a general overview of the UHT.
Types of properties included in the UHT
- Detached homes
- Detached homes with up to three units (e.g., duplex, triplex)
- Semi-detached homes
- Row houses
Types of properties excluded from the UHT
- Residential properties: Uninhabitable for at least 120 consecutive days in the calendar year due to renovations.
- Residential properties: Exemption for a calendar year if the owner died during the calendar year or the previous calendar year.
- Vacation properties: Located in rural areas and used personally by the owner, owner's spouse, or common-law partner for at least four weeks in the calendar year.
The above is not an all-inclusive list.
Who qualifies for the Underused Housing Tax?
The UHT Act would apply to underused housing owned directly or indirectly, in part or whole, by non-resident, non-Canadians. It is essential to note that the immigration concept of permanent residency should be applied, not the income tax concept of residency. An individual resident in Canada for income tax purposes may not be a permanent resident or a Canadian citizen.
Who is excluded from the UHT?
The following are referred to as “excluded owners” and are not required to file a UHT return.
- Canadian citizens and permanent residents of Canada
- Corporations listed on a Canadian stock exchange
- Registered charities
- Cooperative housing corporations
- Indigenous governing bodies or corporations owned by Indigenous governing bodies
- Municipalities or corporations owned by municipalities
- Government of Canada or an agent of the Government of Canada
- Universities, public colleges, school authorities, hospital authorities
Private corporations, partnerships, and trusts are not excluded owners and, therefore, are subject to filing an annual UHT return if they own a residential property, even if there is no UHT owing.
Who is exempted from paying the UHT?
An owner who is not an excluded owner must pay the tax unless they qualify for the following exemptions:
- Qualifying Occupancy: The property needs to be occupied by a qualifying individual (described below) in periods of at least one month and that total at least six months (180 days) of the year. To meet the qualifying occupancy test, one of the following individuals must occupy a dwelling unit that is part of a residential property during the relevant period:
- An individual who deals at arm's length with the owner and any spouse or common-law partner of the owner, under an agreement evidenced in writing.
- An individual who does not deal at arm's length with the owner or with any spouse or common-law partner, and who is given continuous occupancy of the dwelling unit under an agreement in writing, and for consideration that is not below the fair rent for the residential property.
- An individual who is the owner or the owner's spouse or common-law partner, who is in Canada for the purpose of pursuing authorized work under a Canadian work permit, and who occupies the dwelling unit in relation to that purpose; or
- An individual who is a spouse, common-law partner, parent, or child of the owner and who is citizen or permanent resident.
- Specified Canadian corporation: The property is owned by a Canadian corporation of which foreign individuals or corporations do not own 10% or more of the votes or equity value.
- Partner of specified Canadian corporation: An owner would be exempted if they hold an interest in the property as a partner of a specified Canadian partnership.
- Trustee of specified Canadian corporation: An owner would be exempted if they hold the interest in the property as trustee of a specified Canadian partnership.
- Uninhabitable property: An owner would be exempt for a calendar year if the property is uninhabitable for a portion of the year and unsuitable for year-round use.
- Ongoing renovations: An owner would be exempt for a calendar year if the property is uninhabitable for at least four months of the calendar year due to the continuing renovation of the residence.
- Acquisition of interest: An owner would be exempt for the calendar year they first acquire an interest in the property.
- Deceased owner and other owner: If an owner of a residential property dies, their legal or personal representative would be exempt for the calendar year; If an owner of a property dies and has at least 25% interest in the property, the other owner would be exempt for the calendar year and subsequent calendar year.
- Newly constructed property: An owner would be exempt if the property is newly constructed and not substantially completed before April 1 of the calendar year.
Owners who do not qualify as excluded owners must file a UHT return if they own a residential property and claim the exemption, even if no UHT is payable.
How much is the UHT?
The UHT on vacant or underused residential property is 1% of the home's taxable value or 1% of its most recent sale price, whichever is greater. Owners can also file an election between Jan. 1 and April 30 of the following calendar year to use the property's fair market value (FMV) to determine the owing UHT and if they can obtain an appraisal. If two or more individuals hold title to a property, each owner will be responsible for the UHT based on their ownership interest.
What are the UHT filing requirements and penalties?
Failure to file a UHT return by April 30 of the following year, when required, could result in a penalty of at least $5,000 for individuals and $10,000 for other entities, such as Canadian corporations, partnerships, and trusts.
If an owner qualifies for an exemption but is not an excluded owner, the UHT return still must be filed, even if an exemption applies and no UHT is owed. The penalty for late filing will apply.
What should farm owners do next?
The UHT has received little attention since it became law, as many Canadians believe it simply does not apply to them—but the law affects a broad range of property owners. Countless numbers of farm corporations and farm partnerships across this country will have an obligation to file a UHT return, even if they owe no UHT. Non-filing can result in substantial financial penalties.
If you are concerned the UHT may apply to your farm operation, contact your advisors for guidance.
Kurt Oelschlagel, FCPA, FCA, TEP
National Agriculture Tax Leader
The information in this publication is current as of December 2, 2022
This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.