Canada's implementation of the Underused Housing Tax (UHT) can have significant implications for owners of residential rental properties, especially if a bare trust agreement is utilized.
While the UHT primarily targets foreign real estate investors by imposing a 1% annual tax on foreign-owned residential properties considered underused or vacant, Canadians owning rental property now have a bureaucratic maze to navigate.
We’ve compiled some answers to common questions. For more comprehensive details, we’ve also included links to additional government resources below.
Note: Given the complexities and nuances of the UHT legislation, we strongly recommend you seek advice from professional accountants or tax advisors. We also suggest you consult with the legal professionals who facilitated their property purchases to clarify any details about ownership status, including the existence of any trust agreements.
Q: What is the Underused Housing Tax (UHT)?
A: The UHT is a tax imposed by the Canadian government targeting residential properties that are considered underused or vacant. It primarily affects non-Canadians and non-permanent residents who own residential properties in Canada. However, certain situations require Canadian citizens and residents to file a UHT return to claim exemptions.
Q: What are the penalties for failing to file a UHT return?
A: Failing to file a UHT return can result in substantial penalties. Initially, the penalty for not filing on time was set at a minimum of $5,000 per year, per individual, per property. However, recent amendments propose reducing this minimum penalty to $1,000 for subsequent years. The size of these penalties underscores the importance of filing even when no tax is due.
Q: How long must a property be rented out to not be considered vacant for UHT purposes?
A: For UHT purposes, a residential property must be rented out for at least 180 days in a calendar year, in periods of at least one month each, to not be considered vacant.
Q: Under what conditions related to property availability is the UHT not payable?
A: Properties unsuitable for year-round residence, undergoing renovations for 120+ days, rendered uninhabitable for 60+ days by disaster, or newly constructed and not sold within the year, are exempt.
Q: How does a property’s location affect UHT exemptions?
A: Properties located in designated areas used by the owner or their family for at least 28 days a year are exempt. The CRA provides a tool to determine if a property is in a prescribed area (see link below)
Q: How do proposed amendments affect the filing requirements for Canadian homeowners?
A: Proposed amendments aim to simplify the filing requirements for Canadian homeowners by exempting them from filing a UHT return for the 2023 fiscal year and beyond. However, Canadians must still file for the 2022 fiscal year to avoid penalties.
Q: Who is exempt from filing a UHT return?
A: Those exempted from filing a UHT return include:
- Canadian citizens and permanent residents, unless acting as trustees or partners.
- Canadian corporations with publicly traded shares.
- Trusts and partnerships with all members qualifying as excluded owners.
- Registered charities, educational and medical institutions, municipalities, cooperative housing corporations, and Indigenous governing bodies.
Q: Who needs to file a UHT return?
A: While the UHT mainly targets foreign owners, Canadian citizens, permanent residents, and corporations may also need to file a UHT return in order to claim any exemptions. This includes Canadians who own rental properties, especially if ownership structures involve partnerships or trusts.
Q: What constitutes a partnership for UHT purposes?
A: The determination of whether a couple owning rental property constitutes a partnership for UHT purposes is complex but critical for UHT exemption purposes and requires careful consideration of both the legal and tax implications:
- Legal definition: From a legal perspective, a partnership exists when two or more persons carry on business together with the aim of earning a profit. This definition can vary slightly between provinces, and the determination is highly dependent on specific facts, including how the property is managed, the intention behind its ownership, and whether income or losses are shared.
- Tax implications: For UHT purposes, if a couple or a group owning a rental property is deemed to be a partnership, they may have to file a UHT return to claim any exemptions. The complexity arises because there isn't a straightforward definition of partnership in the context of the UHT or the Income Tax Act that applies universally.
- Professional advice: Given the complexities involved, it's advisable to recommend that your clients seek professional advice from tax experts or legal advisors. These professionals can assess the specifics of the ownership structure, review any existing agreements, and advise on the best course of action, including how to present the relationship in tax filings to meet UHT requirements.
- CRA guidance: Although the CRA has indicated it will not provide rulings on the existence of a partnership, you and your clients can refer to other CRA resources for guidance on filing UHT returns (again, see link below
- Precautions: Brokers should also inform their clients about the potential legal consequences of identifying as a partnership, including joint liabilities. This status could impact how debts and obligations related to the property are handled, affecting both partners' financial and legal responsibilities.
Q: How does having parents as co-signors, on or off the title, affect UHT filing requirements?
A: If parents co-sign a mortgage and are listed on the title, they're considered owners, potentially affecting the UHT filing status depending on other exemptions. If off the title, and a bare trust agreement exists where the child is the beneficial owner, this arrangement must be disclosed in the UHT return.
Q: What relief is the CRA offering for bare trusts that miss the 2023 T3 Return filing deadline?
A: For the 2023 tax year only, the CRA is providing penalty relief to bare trusts that file late due to uncertainty about new requirements, excluding cases of gross negligence. The deadline for trusts with a tax year ending on December 31, 2023, is extended to April 2, 2024.
Q: How can you as mortgage brokers assist your clients regarding the UHT?
A: As mortgage professionals, you can play a crucial role by informing your clients about the UHT filing requirements, potential exemptions, and the importance of compliance to avoid penalties. In all cases, you should also recommend that the client seek legal or tax advice given the complexity involved, particularly in determining partnership status.
Additional Resources:
This information is being provided for educational purposes and at very high level. Please consult with a tax expert and/or a lawyer as it may relate to your specific circumstances.