The Canadian government is one of the most recent jurisdictions to implement a tax on vacant or underused housing in an effort to increase the housing supply. The federal Underused Housing Tax Act (the “Act”) has put into place an annual 1% tax on the value of underused “residential property”. For British Columbians, particularly for those living in Vancouver, a tax on underused or vacant homes is already a familiar concept with the well-established B.C. Speculation and Vacancy Tax and Vancouver’s Empty Homes Tax. However, the federal Underused Housing Tax has some key differences that owners of residential property will want to pay close attention to.
When Does It Come Into Effect
The Act was signed into law on June 9, 2022 and is retroactive to January 1, 2022 with the first filings to occur in the 2022. The annual tax applies to a person who is an owner of “residential property”, on December 31 of the calendar year.
What is a “Residential Property”?
The tax applies to “residential property” in Canada only. This is specifically defined in the Act, and does not include empty residential lots – there must be a structure on the property. The tax applies to land with detached houses or similar buildings with not more than three dwellings such as a duplex, semi-detached houses, residential condo units, row house units or similar. This new tax runs concurrently with other vacant and underused housing taxes, meaning ownership of one property could potentially lead to three separate tax filings under the Speculation and Vacancy Tax, the Vancouver Empty Homes Tax and this tax.
Who Needs to File a Return?
Property owners who are subject to this tax include not just those who are the registered owners of the residential property but also life tenants under a life estate, a life lease holder and a person under a long term lease who has continuous possession of the land for at least 20 years or has an option to purchase the land.
Who is Excluded From the Tax?
Owners who are excluded from this tax and do not have to file a return include Canadian citizens, permanent residents, corporations with publicly listed shares, trustees of a mutual fund trust, trustees of a real estate investment trust or a SIFT trust, registered charities, cooperative housing corporations, municipalities, public colleges, universities, school authorities, hospital authorities or Indigenous governing bodies.
However, some Canadian citizens and permanent residents may still need to file a return if they own land as trustees of a trust (other than those specified above) or as a partner of some types of partnerships. Some Canadian or provincial corporations may also be subject to the tax, if for example, ownership of 10% or more of the issued voting shares of the corporation are held by non-Canadian citizens or non-permanent residents or if a corporation, has 10% or more directors, or other similar officers, who are non-Canadian citizens or non-permanent residents. Many corporations will have to make a determination after a thorough review of their corporate structure.
There are exemptions to this tax. If the home is the primary residence of the owner or their spouse they are exempt from the tax. If the home is the primary residence of the owner’s child who is living there for the purpose of authorized study at a designated learning institution the property is exempt. If you or your spouse own two or more properties you can make an election to have one property designated as your primary residence, but only one election can be made each year. If you and your spouse each own a residential property, your spouse cannot file a primary residence election on one property and you on another – you must file a joint primary residence election on only one property.
Occupancy of the Property
Another important exemption that will apply to many owners of residential property is if the property is occupied. However, the Act carefully defines what types of occupation of the property qualify for an exemption. Exemptions include if the property is occupied by a tenant unrelated to the owner, a related tenant who pays rent that is not below fair market value, if it is occupied by the owner or owner’s spouse who is in Canada on a Canadian work permit or if it is occupied by a spouse, parent or child of the owner who are a Canadian citizen or permanent resident. For any of these to apply the property must be occupied by one or more of the above listed occupants for at least 180 days of a “qualifying occupancy period” in a year. A “qualifying occupancy period” is defined in the Act as a period of at least one month in a calendar year of continuous occupancy.
Exemptions also include cases where the property is uninhabitable as a result of renovation or disaster, in cases where the owner has died, where construction of the residential housing has not been substantially completed by a certain date, where the owner has just purchased the property in that tax year and other similar circumstances. Notably, there has been discussion of the federal government creating further exemptions for vacation property or seasonal property, although this remains to be seen.
It is important to note even if you are exempt under any of the exemptions you still have an obligation to file a tax return.
The potential penalty for not filing a return include fines of $5,000 for an individual, $10,000 for non-individuals like a corporation, 5% of the calculated tax and 3% of the tax multiplied by the number of months the return is overdue and not filed.
The time to start looking at how your property is being managed and occupied and whether an exemption is available to you is now. Further changes to the Act are likely to occur as the Act leaves room for flexibility through the inclusion of prescribed exemptions that can be added at a later date. Owners of residential property will want to ensure they are well aware of any obligations they may have under this new Act and whether they qualify for any exemptions, as tax returns will need to be filed by April 30, 2023 for the calendar year of 2022.
For more information or for assistance with any other real estate matter, please contact any member of our Real Estate team.
This article is intended to be an overview of the law and is for informational purposes only. Readers are cautioned that this article does not constitute legal or professional advice and should not be relied on as such. Rather, readers should obtain specific legal advice in relation to the issues they are facing