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The application of Canada's Underused Housing Tax Act (UHTA) has resulted in a substantive amount of change in the first year of enforcement, as the Canada Revenue Agency (CRA) has exercised its administrative powers twice to extend and waive interest and penalties on late-filed returns by taxpayers.¹ Furthermore, in the 2023 Fall Economic Statement tabled on 21 November 2023, the government released draft legislative and regulatory proposals, with accompanying explanatory notes, for the UHTA in an attempt to relieve some of the burden faced by many Canadian property owners not otherwise targeted by the underused housing tax.¹ Interested parties are invited to provide their feedback with respect to these proposed amendments by 3 January 2024.

This Tax Alert provides a brief overview of the main draft legislative and regulatory proposals released in the 2023 Fall Economic Statement.

Updates to the definition of "excluded owner"

The most significant proposed amendment to the UHTA would add to the definition of "excluded owner" trustees of a specified Canadian trust, partners of a specified Canadian partnership, and specified Canadian corporations. As a reminder, an excluded owner is not required to pay tax under the UHTA nor is it required to file an annual underused housing tax return.

Prior to this proposed amendment, these categories of owners were required to file an annual return for each residential property owned and claim an exemption from the underused housing tax despite being exclusively or primarily Canadian owned and controlled. This annual filing obligation to mitigate both the underused housing tax and the significant penalties for failure to file each return created a significant administrative burden on a group of owners not likely intended to be targeted by the UHTA.

Although the proposed amendment is a welcome change, it would only come into force for 2023 and subsequent calendar years. No retroactive relief was proposed for these owners (who are currently categorized as "affected owners") of residential property in respect of their obligations for the 2022 calendar year.

Due to the proposed updated definition of "excluded owner," the exclusion-from-tax provision for trustees of specified Canadian trusts, partners of specified Canadian partnerships and specified Canadian corporations would be repealed for 2023 and subsequent calendar years.

Update to "specified Canadian partnership" and "specified Canadian trust" definitions

The definitions of "specified Canadian partnership" and "specified Canadian trust" have been expanded to include a broader range of Canadian ownership structures, effective for 2023 and subsequent calendar years.

Under the existing UHTA, a specified Canadian partnership is generally a partnership for which each member is either an excluded owner or a specified Canadian corporation on 31 December of the calendar year. Under the proposed amendments, this definition would be expanded to include another partnership or a trust, each member or beneficiary of which is such a person.

Under the existing UHTA, a specified Canadian trust generally includes a trust under which each beneficiary (having a beneficial interest in the residential property) is either an excluded owner or a specified Canadian corporation on 31 December of the calendar year. Under the proposed amendments, this definition would be expanded to include another partnership or another trust, each member or beneficiary of which is such a person.

Owners with multiple capacities

Another significant proposed amendment addresses situations in which a person may have multiple capacities with respect to the ownership of a property and potentially multiple underused housing tax filing obligations and/or exemptions. In Question 3.2 of Underused Housing Tax Notice UHT15N, Questions and Answers About the Underused Housing Tax, the CRA stated that taxpayers could opt to declare only one exemption or declare all the applicable exemptions when filing a paper return by mail; however, for electronic returns, affected owners would only be permitted to declare one exemption.

This discrepancy between paper and online returns created uncertainty with respect to underused housing tax filings; in response, the government has proposed to add section 4.1 to the UHTA to specifically address instances where a person has multiple capacities applicable to their ownership of residential property. More specifically, proposed section 4.1 provides that if a person is an owner of a residential property in more than one capacity, the person is treated as if the person were a separate person in each capacity in which the person is an owner of the residential property. To illustrate this situation, the explanatory notes provide an example in which an individual who is neither a citizen nor permanent resident of Canada owns residential property in their individual capacity and in their capacity as a trustee of a specified Canadian trust. The individual would be considered an excluded owner in their capacity as trustee of a specified Canadian trust, but an affected owner in their capacity as an individual; as such, the individual would be required to file an annual return and potentially be subject to the applicable tax (if an exemption was unavailable) based on their ownership percentage in the residential property.

Proposed section 4.1 of UHTA would apply retroactively to 1 January 2022; other technical amendments to the UHTA in respect of filing and payment requirements have been amended to adopt the new principle.

Reduction in minimum failure-to-file penalties

Another welcome proposal is the reduction of the minimum failure-to-file penalty from CA$5,000 to CA$1,000 per property for individuals and from CA$10,000 to CA$2,000 per property for a person who is not an individual. This proposal would apply retroactively to 1 January 2022.

The total assessable failure-to-file penalty continues to be equal to the greater of the minimum amount as computed above, and the total of:

• 5% of the applicable tax for the property for the calendar year
• 3% of the applicable tax for each complete calendar month the return is late

The percentages computed above are applicable on the gross amount of underused housing tax prior to certain exclusions. The list of exclusions would be expanded by the legislative proposals to include eligible vacation properties in respect of annual returns for the 2023 and subsequent calendar years.

Given the magnitude of the total penalty amount, which is computed for each property, taxpayers are advised to file their annual returns on a timely basis.

Exclusion for certain residential condominium units

Proposed amendments to the Underused Housing Tax Regulations (the Regulations) would exclude certain types of condominium apartment rental arrangements from the definition of residential property if all of the following conditions are met:

• The residential condominium unit is part of a building containing four or more residential condominium units.
• The person is the owner of all or substantially all of the residential condominium units in the building.
• All or substantially all of the residential condominium units are held by the person for the purposes of providing individuals continuous occupancy of a residential condominium unit as a place of residence or lodging for a period of at least one month.

This proposal would apply retroactively to 31 December 2022.

Absent this proposed amendment, condominium buildings in which a person owned all or substantially all of the separately titled units would have significant filing obligations that are inconsistent with other owners of multi-unit residential buildings.

Expansion of prescribed condition for tax exemption

Subsection 2(3) of the Regulations has commonly been referred to as the vacation property exemption because relief provided in this subsection applies if (1) the affected owner holds more than one residential property; (2) the additional residential property is located within a prescribed area (generally outside a census metropolitan area or a census agglomeration having 30,000 or more residents); and (3) the affected owner (or the owner's spouse or common-law partner) uses the property as a place of residence or lodging for at least 28 days during the calendar year. Proposed amendments to the Regulations would ensure that the vacation property exemption can be claimed by an individual or a spouse for only one residential property for a calendar year, effective for 2024 and subsequent calendar years.

In addition, the prescribed conditions for an exemption from tax would be expanded to include a property held by an affected owner (referred to as an "operator") that carries on a business in Canada, where the particular residential property is held during the year primarily to provide a place of residence or lodging for an officer, employee or contractor (or subcontractor) engaged to render services at that location. An example of this could be an owner of several bed and breakfasts where it is necessary for the staff to reside in the residential property in order to perform their employment duties. The exemption would apply for residential properties located anywhere in Canada other than in a population center within either a census metropolitan area or a census agglomeration having 30,000 or more residents. The proposal would apply to the 2023 and subsequent calendar years.

Next steps

The chart below illustrates obligations under the UHTA.

For an overview of who is affected by the UHTA and the resulting implications, see EY Global Tax Alerts, Canada's Underused Housing Tax Act — 2022 filing deadline fast approaching; no extensions announced for 2023, dated 9 October 2023, and 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.

Affected taxpayers will want to consult real estate counsel to review the proposed amendments to the UHTA and identify all instances of Canadian residential property ownership, including bare trust and nominee ownership arrangements. Although the penalties for a failure to file an annual UHTA return may be reduced, they remain significant; as such, care must be exercised to ensure exposure to penalties and interest is minimized.