The Underused Housing Tax (the “UHT”) is a new annual 1% tax payable by an “owner” (other than an “excluded owner”) of “residential property”. A “residential property” includes, among other things, a detached house, a duplex, a triplex, a row-house unit or townhouse, a residential condominium unit, and a cottage, cabin or chalet used for non-commercial purposes.
When considering the UHT, the first step is to determine whether an owner, which looks to the individual or corporation registered on the land title and not beneficial ownership, has an obligation to file a return (a “UHT Return”) under the Underused Housing Tax Act (the “Act”). An owner that is required to file a UHT Return is referred to as an “affected owner”. The requirement to file a UHT Return, and the penalties for failing to file on time, were the subject of a previous article. However, having an obligation to file a UHT Return does not necessarily mean that an affected owner will actually need to pay the UHT.
This article highlights the four broad categories of exemptions that may apply to exempt an owner from having to pay the UHT. However, importantly, this will not relieve an affected owner from having to file a UHT Return.
There are numerous specific exemptions available, each with complex requirements. This article provides a broad overview of the exemptions and affected owners should to refer to the Act for details.
Exemption category #1: Type of owner of the property
Certain exemptions are available based on the type of owner of the residential property. These are summarized below.
- New Owners. There is an exemption available to new owners, meaning persons that acquired the residential property in a year and were never owners of that residential property in any of the prior nine years.
- Deceased Owners & Personal Representatives. An exemption is available if the affected owner dies during the year or the prior year. Exemptions may also be available for a personal representative of a deceased individual, provided certain conditions are met.
- Specified Canadian Corporations. Where the owner is a corporation, there is an exemption from paying the UHT if the corporation is a “specified Canadian corporation”. Very generally, more than 90% of the corporation must be Canadian owned and controlled, which is much higher than the threshold for a Canadian‑controlled private corporation (CCPC).
- Certain Partners and Trustees. Where the person is the owner of residential property solely in their capacity as a partner of a “specified Canadian partnership” or in their capacity as a trustee of a “specified Canadian trust”, a tax exemption should be available. Very generally, a “specified Canadian partnership” and a “specified Canadian trust” refers to a partnership or trust where all of the members or beneficiaries, as the case may be, are either excluded owners or a specified Canadian corporation as of December 31.
Exemption category #2: Availability of the property
Exemptions may apply based on the availability of the residential property. These are summarized below.
- Properties Undergoing Construction. If the residential property was under construction during the calendar year, there are two different exemptions that could apply. First, an exemption is available where the construction of a residential property was not substantially complete before April of the particular calendar year. Second, an exemption is generally available where, among other things, the construction of a residential property was substantially complete before April of a particular calendar year, and the property was offered for sale to the public during that calendar year.
- Lack of Year-Round Suitability / Inaccessibility. If the residential property is not suitable for year-round use, or is inaccessible because there is no year-round public access, the affected owner will likely be exempt from the UHT in respect of that particular property.
- Property Uninhabitable. An exemption may be available if the residential property is uninhabitable as a result of a disaster or hazardous conditions, or major renovations, for at least 60 or 120 consecutive days, respectively.
Exemption category #3: Occupant of the property
Exemptions may apply based on the occupant(s) of the residential property. These are summarized below.
- Primary Place of Residence. If a residential property is owned by an individual, and the property is that individual’s primary place of residence for the year (or the primary place of residence of that individual’s spouse, common-law partner, or child, in certain circumstances), an exemption from the UHT may be available.
- Qualifying Occupancy. An exemption may be available if one of the following individuals occupies the residential property for a continuous period of at least one month, and for a total of at least 180 days in a year:
- An individual that deals at arm’s length with the owner and that occupies the property under a written agreement.
- An individual that does not deal at arm’s length with the owner, occupies the property under a written agreement, and pays fair rent for the property. The term “fair rent” is defined in the Act and means 5% of the taxable value of the residential property for the calendar year.
- An individual that is the owner, or their spouse or common-law partner, that occupies the property for the purposes of pursing work in Canada under a work permit.
- An individual that is the owner, their spouse, their common-law partner, their parent or their child, who is a Canadian citizen or permanent resident.
If an affected owner and their spouse or common-law partner own multiple residential properties, they may not qualify for the “primary place of residence” exemption or the “qualifying occupancy” exemption unless they file an election with the Canada Revenue Agency to designate only one property for the purposes of these exemptions.
Exemption category #4: Location and use of the property
Lastly, an exemption may be available if the residential property is in a rural area of Canada (referred to by the Canada Revenue Agency as an “eligible area”) and used by the owner, or their spouse or common-law partner, for at least 28 days in the year. The Canada Revenue Agency developed an online tool (the “underused housing tax vacation property designation tool”) to determine whether a particular property is located in an eligible area of Canada for purposes of this exemption. Note that this exemption is not available if the owner of the residential property is a corporation.
Does an exemption apply?
The Act is structured in a manner such that it requires a wide variety of owners to file a UHT Return even though the affected owner may not have to pay the UHT in respect of a particular residential property. A particular residential property is only exempt from the UHT if the conditions for any one of the tax exemptions are satisfied. As noted above, there are numerous exemptions available, each with complex requirements. Further, there are many interpretive issues that have yet to be resolved through guidance from the Canada Revenue Agency.
If you have any questions about whether an exemption to pay the UHT for a particular affected owner or residential property is available, please contact a member of the Miller Thomson LLP Commodity Tax Group.