October 9, 2023
Canada's Underused Housing Tax Act — 2022 filing deadline fast approaching; no extensions announced for 2023
Canada's Underused Housing Tax Act (UHTA) will soon be entering its second year of enforcement. The first UHTA filing and payment deadline for affected owners for the 2022 calendar year, extended by the Canada Revenue Agency (CRA) to 31 October 2023, is fast approaching.
Although the CRA will waive penalties and interest for the 2022 calendar year if UHTA returns and payments are received before 1 November 2023, there is currently no indication that a delayed filing timeline will be provided for the 2023 calendar year. The UHTA filing and payment deadline for affected owners of residential property is 30 April 2024 for the 2023 calendar year.
This Tax Alert serves as a reminder that the UHTA contains broad annual filing requirements for affected owners and that significant late-filing penalties of at least CA$5,000 for individuals and CA$10,000 for affected owners that are not individuals (e.g., corporations) apply for each residential property, even if no underused housing tax is owing.
For an overview on who is affected by the UHTA and the resulting implications, see EY Global Tax Alert, Canada's Underused Housing Tax Act: Canadian entities may be required to file new tax returns, dated 15 March 2023. For EY's complete summary of the UHTA released when the legislation first became law, see EY Global Tax Alert, Canada's new Underused Housing Tax Act receives Royal Assent, dated 29 June 2022.
Refresher: What is the UHTA?
The UHTA has remain unchanged since coming into effect on 1 January 2022. The primary purpose of the legislation is to levy a tax on non-Canadian nonresidents' direct and indirect ownership of certain residential properties situated in Canada that are considered vacant or underused. However, Canadian individuals and entities may also qualify as affected owners and thus have annual UHTA filing obligations, even if no tax is ultimately due.
Broadly speaking, the UHTA categorizes owners of residential property situated in Canada as either "affected owners" or "excluded owners." Affected owners of residential property must file an annual UHTA return and may also be liable for a 1% tax on the residential property's taxable value unless one of several exemptions applies. On the other hand, excluded owners are exempted from both the annual UHTA return filing obligation and the 1% tax.
Properties covered by the UHTA are "residential properties," generally meaning detached houses or similar buildings (containing not more than three dwelling units), or a part of a building that is a semi-detached house, row-house unit, residential condominium unit or other similar premises. Owners of high-density rental real estate such as apartment buildings should be unaffected; however, owners of stratified properties with separate titles will be impacted. The UHTA could therefore also extend to include Canadian real estate developers as affected owners who own completed but unsold inventory on 31 December that meets the "residential property" definition, or Canadian investment funds that own pools of residential property.
Generally speaking, an owner is a person identified in respect of the residential property in the applicable land registration system where the residential property is located. An "excluded owner" generally includes publicly listed corporations, registered charities and individuals who are citizens or permanent residents of Canada, but generally excludes individuals acting in their capacity as a trustee or as a partner in a partnership. Privately owned Canadian resident corporations, personal trusts and partnerships that are owners of residential property do not qualify as excluded owners and therefore must file an annual UHTA return for each residential property owned; however, certain exemptions from the imposition of the 1% tax may be available. Determining whether an exemption from the 1% tax is available for certain complex real estate ownership structures may require consultation with a tax advisor.
The graphic below illustrates certain obligations under the UHTA.
What are the next steps?
Owners of Canadian residential property should consult with their real estate counsel to identify all instances of Canadian residential property ownership, including bare trust and nominee ownership arrangements, and discuss recommended approaches to ensuring compliance with the UHTA.
As noted above, a failure to file the UHTA return by 31 October 2023 exposes an entity to a minimum penalty of CA$10,000 per return, even if an exemption eliminates liability for the UHTA tax.1 Because a separate UHTA return is required for each property owned, the exposure for noncompliance could be multiplied by the number of properties owned.
For additional information with respect to this Alert, please contact the following:
Ernst & Young LLP (Canada), Toronto
Ernst & Young LLP (Canada), Montreal
Ernst & Young LLP (Canada), Ottawa
Ernst & Young LLP (Canada), Waterloo
Ernst & Young LLP (Canada), Saskatoon
Ernst & Young LLP (Canada), Calgary
Ernst & Young LLP (Canada), Edmonton
Ernst & Young LLP (Canada), Vancouver
Published by NTD's Tax Technical Knowledge Services group; Carolyn Wright, legal editor
1 The minimum penalty for individuals is CA$5,000 per return.