Canada: The Underused Housing Tax Act- Filing Requirements That May Be Surprising

The Underused Housing Tax Act ("UHTA") levies an annual tax on individuals who are neither permanent residents of Canada nor Canadian citizens at a rate of 1% on the value of their vacant or underused residential property in Canada that contains less than three units. It also creates a surprising and onerous annual filing requirement for certain Canadian private companies and Canadian resident individuals not liable for the tax. The filing requirements apply to a nominee corporation that owns the residential property in Canada under a bare trust arrangement, and a trustee of a trust that is not a mutual fund trust, real estate investment trust (REIT), or specified investment flow-through (SIFT) trust for Canadian income tax purposes.

Many people hold registered ownership of personal use properties such as homes or cottages through bare trustee corporations for privacy reasons and/or probate planning purposes. Unfortunately, these are caught by the new UHTA obligations.

Unless the trust (outside of the types of trust listed above) falls under another exemption, the trustees of a trust or an estate are required to file a return. While the UHTA defines the "owner" as the registered owner rather than the beneficial owner of a residential property, the beneficial owner of a bare trust is not considered an owner and therefore does not have to file a return. An individual who is neither a citizen of Canada nor a permanent resident and is a beneficiary during their lifetime under an estate or trust such as a spouse or partner of a residence trust is also considered an owner under the UHTA and is therefore required to file a return. Personal representatives of a deceased individual who was an owner of the residential property during the calendar year or previous calendar year are not caught by the UHTA requirement to file a return. The tax is not payable by a trust if it is a "specified Canadian trust," where all the beneficiaries are Canadian citizens, permanent residents, or Canadian corporations with less than 10% foreign ownership.

Where the new UHTA rules apply, the corporation will have to file an annual return for certain residential real estate it owns in Canada, and determine whether it is liable for the 1% tax. Affected property owners must file a return and pay the related tax by April 30, 2023 for any qualifying property they owned on December 31, 2022. If the UHTA rules apply and the return is not filed by April 30, the owner could face penalties of a minimum of $5,000 for an individual and $10,000 for an owner who is not an individual. This new federal tax obligation is in addition to any applicable provincial and municipal vacant and unused home taxes.

The "Underused Housing Tax Return and Election Form" can be found here. If an individual or corporation owns more than one residential property in Canada that is caught by the UHTA rules, they must file a separate return for each property.