The government’s Canadian Underused Housing Tax (UHT) Act could impact 2022 farm taxes.
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“The intent is to impose an annual one per cent tax on vacant or underused housing in Canada that’s owned directly or indirectly by persons who are not Canadian citizens or permanent residents,” said Kurt Oelschlagel, BDO partner and national agriculture tax leader.
The definition of permanent residence falls under the Immigration Act concept, added Oelschlagel during a UHT webinar hosted by the Ontario Federation of Agriculture in March.
“If you operate your farm through a Canadian corporation or partnership and it owns a residential property, you will be required to file a UHT return, even if no UHT is owed due to applicable exemptions,” he explained. “Non-filing can result in substantial financial penalties.”
An affected owner could qualify for an exemption from paying the UHT, but the UHT tax return and election form must still be filed for each property they own in a calendar year.
“So, one form for each property in a calendar year, even if the owner qualifies for an exemption,” he said. “That’s important to understand.”
Although the deadline for filing the UHT return and paying the fee is April 30, 2023, the Canada Revenue Agency (CRA) is providing transitional relief this year by waiving penalties and interest if the UHT return is filed, and fees paid by October 31, 2023.
There are some nuances within UHT, like the qualifying occupancy test, that affected owners should be aware of before filing for an exemption.
For a property to meet the qualifying occupancy test, it needs one or more qualifying occupancy periods of one continuous month totalling 180 days a year, by an arm’s length tenant with a lease, non-arm’s length tenant with a lease paying fair rent (approximately five per cent of the annual property value); by an individual, spouse or common-law partner with a Canadian work permit or an individual’s spouse, common-law partner, parent or child who is a Canadian citizen or permanent resident.
For example, suppose a child of the owner, spouse or common-law partner stays in a home while attending post-secondary education. In that case, the house may qualify for an exemption even if they return home for visits during the summer.
“What the CRA will look for when you’re claiming this exemption is to make there is an internet bill that’s coming to that address,” said Jay Tulsani, BDO senior manager of indirect tax. “There’s proper home insurance; there’s proper utility invoicing coming to that address (to qualify for the exemption).”
In addition, if the house title is a 50-50 partnership between spouses, both must file the return based on their ownership percentage and claim an exemption for primary residence because the child is living there.
Oelschlagel said a Canadian corporation carrying a cash crop operation must file a separate UHT return for each residential property owned. If Canadian citizens own the corporation fully, it would be exempt from paying the tax as a Specified Canadian Corporation.
However, the farm could be subject to a $10,000 penalty per property if it does not file a UHT return on time, and this penalty would apply for each year a UHT return is required and not filed by the deadline.
Who is required to file?
“(Required)” indicates required fields
Affected owners include individuals who are not citizens or permanent residents of Canada and who own residential property in Canada, as well as Canadian citizens or permanent residents who own residential property as a partner of a partnership or a trustee of a trust. This also includes corporations incorporated outside Canada, privately held Canadian corporations and Canadian corporations without share capital.
Detached homes, detached homes with up to three units, semi-detached homes, row houses and condominiums are the types of properties subject to the tax.
The UHT on vacant or underused residential property is greater than one per cent of the taxable value of the home or one per cent of the most recent sale price. Owners can also file an election between January 1 and April 30 of the following calendar year to use the property’s fair market value to determine the owing UHT. If two or more individuals hold title to a property, each owner will be responsible for the UHT based on their interest.
Filing requirements and penalties.
All affected owners must file a UHT return, including those who qualify for an exemption, even if they aren’t required to calculate and pay the tax.
Individual owners are subject to a minimum penalty of $5,000, while corporations are subject to a minimum penalty of $10,000 for late filing.
Affected ownership defined
- Specified Canadian corporation: Property owned by a Canadian corporation of which foreign individuals or corporations do not own 10 per cent or more of the votes or equity value.
- Partner of specified Canadian corporation: An owner is exempt if they hold an interest in the property as a partner of a specified Canadian partnership.
- Trustee of specified Canadian corporation: An owner is exempt if they hold the interest in the property as trustee of a specified Canadian partnership.
- Uninhabitable property: An owner is exempt for a calendar year if the property is uninhabitable for a portion of the year and unsuitable for year-round use.
- Ongoing renovations: An owner is exempt for a calendar year if the property is uninhabitable for at least four months of the calendar year due to the continuing renovation of the residence.
- Acquisition of interest: An owner is exempt for the calendar year they first acquire an interest in the property.
- Deceased owner and other owners: If an owner of a residential property dies, their legal or personal representative would be exempt for the calendar year. If an owner of a property dies and has at least 25 per cent interest in the property, the other owner would be exempt for the calendar year and subsequent calendar year.
- Newly constructed property: An owner is exempt if the property is newly built and not substantially completed before April 1 of the calendar year.