The federal government’s new underused housing tax (UHT) may be aimed primarily at non-residents of Canada, but others may also be caught. Find out more about the UHT and when it applies.

Updated to include a link to form UHT-2900, Underused Housing Tax Return and Election Form as well as other new information published by the Canada Revenue Agency.

February 9, 2023 – Updated to include new information provided by the Canada Revenue Agency included in the publication in Underused Housing Tax Notices 6 to 11. Also adds a new section, “Partnership versus co-ownership considerations”.

In Budget 2021, the federal government announced plans for an annual one per cent tax on the value of residential real estate that is:

owned by any non-resident, non-Canadian, and,
considered vacant or underused.
The UHT Act was enacted on June 9, 2022, with effect from January 1, 2022. While the budget suggested that only non-residents would be affected, the scope of the final legislation is broader, as we explain later in this blog. For example, where a property is held in trust for Canadian resident beneficiaries, there may be a requirement to file a return (form UHT-2900, Underused Housing Tax Return and Election Form) even though no non-residents have an interest in the property and no tax is payable.

In this blog, we highlight the UHT’s key elements and answer some top questions you might have about the new tax. See also the Canada Revenue Agency (CRA)’s new UHT webpage, which includes the new UHT return, technical guidance and other information, and which, as we understand, the CRA will update with new information going forward. We will update this tax blog when new information is provided, and we will alert you regarding these updates via our Canadian Tax News page.

Finally, this blog only covers the national UHT. Some provinces and municipalities impose similar vacancy taxes, and you should review these rules also if you or your client has affected properties in these locations.

WHAT IS THE UHT?
The UHT is intended to apply to underused housing in Canada owned directly or indirectly and wholly or partly by non-resident, non-Canadians. UHT obligations apply for calendar years (beginning with 2022) to affected owners of residential property1 in Canada on December 31 of the relevant year.

The UHT rules have two requirements: an annual reporting requirement and, for some of these filers, a tax liability for UHT. The tax is calculated by multiplying the residential property’s value by the 1 per cent tax rate. It must be paid to the CRA by April 30 of the following calendar year, when the annual return is also due.

The UHT rules categorize owners of residential property in three broad groups:

owners with no UHT reporting or tax obligation (referred to in the UHT legislation as “excluded owners”)
owners required file the UHT return and pay tax (referred to by the CRA in their guidance as “affected owners”)
owners required to file the UHT return but with no tax payable (also “affected owners”)
Which owners are excluded?
Excluded owners who are exempt from any UHT obligations include (as of December 31 of a calendar year):

individual Canadian citizens or permanent residents2 of Canada (“Canadian individuals”), unless they would be exempt as an owner in their capacity as a trustee or partner (excluding personal representatives of a deceased individual)
publicly traded Canadian corporations
persons with title to property in their capacity as a trustee of a mutual fund trust, real estate investment trust or specified investment flow-through trust (SIFT)
registered charities
cooperative housing corporations
municipal organizations and other public institutions and government bodies
an Indigenous governing body or a corporation
“prescribed persons” (not yet defined by regulation at the time of writing)
Which owners must file the UHT return and pay the tax?
Affected owners of residential property who must file a return and pay the tax include:

individuals who are not Canadian citizens or permanent residents who do not qualify for an exemption
private corporations, including Canadian controlled private corporations (CCPC), partnerships and trusts (other than estates) that own3 residential property in Canada and are not eligible for an exemption
Which owners must file the UHT return but are exempt from the tax?
This subset of affected owners is generally eligible for one of the available exemptions, but they still need to file the annual return to claim the exemption for a calendar year.

WHAT ARE THE EXEMPTIONS?
Affected owners must first determine whether they qualify for one of the following exemptions from the tax. If they do not, the UHT will be payable.

Exemptions based on qualifying occupancy
An owner of a residential property may be exempt for a calendar year in the following situations.

Primary place of residence – The residential property is the primary place of residence of:
the owner or their spouse or common-law partner (referred to as “spouse” in this blog), or
a child of the owner or owner’s spouse who occupies the residential property for authorized study at a designated learning institution.
Qualifying occupants – The residential property is occupied by one or more qualifying occupants in relation to the owner for at least 180 days of the year (counting only the days of the qualifying occupancy period in the year).
Primary place of residence

The CRA’s UHT Notice 6 Exemption for Primary Place of Residence provides guidance on how to determine whether a residence will be considered the primary place of residence for UHT purposes.

The CRA indicates that where an owner has more than one place of residence, the place of residence that is first in order of importance to the owner is their primary place of residence. A place of residence that is not first in order of importance to them is a secondary place of residence. In addition, if the owner is not a citizen or a permanent resident of Canada and their primary place of residence is outside Canada, any residential property that they own in Canada is generally considered to be a secondary place of residence, unless it can be proved otherwise. The CRA notes that while there is some similarity to the term principal residence used under the Income Tax Act, the determination of whether a home is a principal residence is not necessarily an indicator of whether a residential property is an individual’s primary place of residence for purposes of the UHT.

Finally, the CRA states that their guidelines and criteria under the goods and services tax/harmonized sales tax (GST/HST) to determine whether an individual’s residence is their primary place of residence may be used for the underused housing tax.

Qualifying occupants

A qualifying occupancy period means a period of at least one month in the calendar year during which a qualifying occupant continuously occupies a dwelling unit that is part of the residential property.

In UHT Notice 7, Exemption for Qualifying Occupancy, in general, if an individual has the right to occupy a dwelling unit for a period on a continuous basis (that is, without interruption throughout the period), the individual has continuous occupancy of the dwelling unit for the period.

An individual’s continuous occupancy for a period is not necessarily interrupted by the individual’s physical absence from the dwelling unit at a time in the period if both of the following apply:

the individual still has the right to occupy the dwelling unit throughout their physical absence
the right to occupy the dwelling unit is not given to another individual for any period during the physical absence
The CRA indicates that their guidelines and criteria under the GST/HST to determine whether an individual has continuous occupancy of real property will be used for the UHT.

The CRA states that each affected owner of a residential property must separately determine whether they have one or more qualifying occupancy periods for their ownership of the residential property. A qualifying occupant in relation to the owner includes:

an arm’s length tenant, under a written agreement
a non-arm’s length tenant who is given continuous occupancy of the dwelling unit under a written agreement for a fair amount of rent4
an individual owner or their spouse who is in Canada to pursue authorized work under a Canadian work permit and who occupies the dwelling unit for that purpose
a spouse, parent or child of the owner who is a citizen or permanent resident
Multiple residential properties

If either (or both) the owner and their spouse own multiple residential properties, their ownership may not qualify for the exemptions for either primary place of residence or qualifying occupancy unless they file an election with the CRA to designate only one property to qualify for the primary residence exemption or to be considered for the qualifying occupancy exemption. The election is included in Section 3 of the UHT return and must be filed by April 30 of the following year. Where the owners own the property jointly, they must also make the election jointly. Only one election for a calendar year can be made by the owner and their spouse, and they can only designate one residential property in the election. An owner and their spouse cannot designate different residential properties for the two exemptions.

Where an owner or their spouse elect to designate one of the multiple properties as a primary residence, they cannot be qualifying occupants of any other properties they may own.

Exemptions based on a property’s limited availability
An exemption may be allowed if the residential property’s availability is limited for any of the following reasons.

Limited seasonal access – The property is not a suitable residence year-round or not accessible during part of the year.
Disaster or hazardous condition – The property is uninhabitable for at least 60 consecutive days in the calendar year due to as disaster or hazard caused by circumstances beyond the owner’s reasonable control, and the property was not exempt in a previous year for the same reasons.
Renovation – The property qualifies for the exemption for residential properties that are uninhabitable for at least 120 consecutive days in the calendar year due to a renovation done without unreasonable delay, and the property was not exempt in a previous year for the same reasons.
Under construction – The property was not substantially completed (generally, 90 per cent or more) before April of the calendar year, or it was substantially completed in January, February or March, offered for sale to the public during the year, but never occupied by an individual.
Year of acquisition – The owner first acquired the residential property during the year and did not own the same property during any of the nine preceding years.
Exemption based on type of owner
The following types of owners are exempt from UHT:

deceased owners and their personal representatives (exempt in the year of owner’s death of the owner or the following year)
surviving joint owners with at least 25 per cent interest in the property (exempt in the year of the deceased owner’s death)
specified Canadian corporations, which are generally Canadian corporations having less than 10 per cent of their votes or equity value owned by foreign individuals or corporations
persons who own the property solely in their capacity as a partner of a specified Canadian partnership, which is one that has, on December 31, only excluded owners or specified Canadian corporation as partners
a person who owns residential property solely in their capacity as a trustee of a specified Canadian trust, which is a trust that owns a residential property where each beneficiary with an interest in the property is, on December 31, an excluded owner or specified Canadian corporation.
Exemption based on prescribed area and condition or person
Recreational and other properties in less densely populated areas may be exempt from the UHT if the residential property is:

located in a prescribed area of Canada, and
used personally by the owner, the owner’s spouse or both for at least 28 days during the calendar year.
You can find out whether a residential property is in a prescribed area of Canada using the CRA’s Underused housing tax vacation property designation tool. The determination is based on periodically updated census data, so you should check whether an area qualifies as a prescribed area for UHT purposes each year.

Finally, “prescribed persons” are also exempt under the UHT legislation, but no regulatory definition of this term has been released to date.

HOW IS THE UHT CALCULATED?
The UHT formula is one per cent of the property’s value multiplied by that person’s ownership percentage. Where property is held jointly (i.e. no percentage is listed in the land registry), the ownership percentage is based on the number of owners.

There are two ways to determine the value of a residential property:

Taxable value, which is the greater of:
the assessed tax value for the year under the related property tax assessment, and
the most recent sale price on or before December 31 of the calendar year, or
Fair market value, which can be used if the owner files an election with the CRA to use that method for the property (the election is included on form UHT-2900).
Note that where the tax is not based on the most recent sale price, that price is still required to be disclosed on the form. Also, it should be kept in mind that the form requires the disclosure of the owners who own 10 per cent or more of the property and their ownership percentage.

To elect to use fair market value, the CRA states that the owner must get a written appraisal report for the property prepared by an accredited member of the Appraisal Institute of Canada (or a comparable body), operating at arm’s length from the owner.