The recently enacted Underused Housing Tax Act[i] (UHTA) applies a one per cent tax on the ownership of vacant or underused housing in Canada. Per the Canada Revenue Agency’s (CRA) published notification[ii] on Jan 17, 2023, “the vast majority of Canadian owners of residential property are excluded owners and, therefore, do not have any obligations and liabilities under the UHTA. However, the underused housing tax is payable by certain Canadian owners of housing in limited situations.”
With the UHTA coming into effect for 2022, there may be a few Canadian trusts and estates that currently fall into one of these limited situations resulting in a filing requirement and possible tax under the UHTA.
Every person, including trusts, that owns residential property on December 31 must pay a 1 per cent tax (UHT) on either the fair market value or taxable value of the residential property. Excluded owners and persons available to claim one of the enumerated exemptions (exempted persons) will not be subject to the UHT. It should be noted that although both excluded owners and exempted persons are not required to pay the UHT, exempted persons are required to file a declaration with CRA to claim their specific exemption or face steep penalties. UHT returns, declarations and payment of tax must be filed by April 30 each year.
An excluded owner, as defined in the UHTA, encapsulates Canadian citizens and Canadian permanent residents that are identified as an owner[iii] in respect of the residential property on December 31. An excluded owner includes an executor of an individual’s estate. The determination of ownership of the residential property is based on provincial land registration systems.
Specifically excluded from the definition of an excluded owner are trustees that own the residential property on behalf of the beneficiaries of a trust.
Since trustees are specifically excluded from the definition of excluded owner, any transfer of a residential property from a Canadian citizen or permanent resident to a trustee of a trust would automatically result in the loss of “excluded owner” status. In order to avoid the UHT on the residential property held in the trust, the trustee would need to file a declaration with CRA to claim one of the enumerated exemptions. Although more than one exemption could apply depending on the circumstances, there is an exemption that specifically deals with specified Canadian trusts.
A specified Canadian trust[iv] is a trust where all the beneficiaries are excluded owners or specified Canadian corporations[v], and a specified Canadian corporation, in general terms, is a Canadian corporation with less than 10 per cent foreign ownership.
Executors are not excluded from the definition of excluded owner like trustees. Therefore, a transfer of a residential property from a deceased Canadian citizen or permanent resident to the executor may not result in a loss of “excluded owner” status. As long as the executor was a Canadian citizen or permanent resident on December 31 and identified as the owner of the residential property then they would be considered an excluded owner resulting in no UHT and no filing requirement. Of course, if the executor is not a Canadian citizen or permanent resident, then they would not be an excluded owner. In that situation, the executor would need to file a declaration to claim one of the exemptions under the UHTA, otherwise be subject to the UHT.
Although an executor that is a Canadian citizen or permanent resident would be considered an excluded owner, if the executor cannot be identified as the owner of the residential property on December 31 the avoidance of the UHTA may be in jeopardy. The UHTA looks to the person identified as, or could reasonably be considered to be identified as, an owner in the applicable land registry system. It is very plausible that delays in estate administration could result in the deceased remaining the identified owner under the applicable land registry system.
It is yet to be determined how the CRA will interpret the definition of owner in the UHTA leading to more questions than answers. Will CRA consider the deceased person to remain as the identified owner as documented in land registry system on December 31? Will the CRA interpret the executor as reasonably being considered the identified owner on December 31 even though not documented in the land registry system?
Another check to the checklist
No doubt, many more questions will materialize over the next few months as we approach the inaugural April 30 deadline.
One might consider it prudent to add a new line item to the checklist to account for the Underused Housing Tax Act when setting up a trust or drafting a will. The potential tax and penalties for non-compliance are material.
[i] The Underused Housing Tax Act received royal assent on June 9, 2022. The underused housing tax took effect on January 1, 2022. The first filing due date is April 30, 2023 for any residential property owned on December 31, 2022.
[ii] UHTN1 Introduction to the Underused Housing Tax
[iii] Owner of a residential property means a person that is identified as an owner in respect of the residential property under the land registration system or other similar system applicable where the residential property is located, or that could reasonably be considered to be an owner in respect of the residential property based on such a system.
[iv] specified Canadian trust, in respect of a calendar year and a residential property, means
- (a)a trust under which each beneficiary having a beneficial interest in the residential property is, on December 31 of the calendar year, an excluded owner or a specified Canadian corporation; or
- (b)a prescribed trust.
[v] specified Canadian corporation, in respect of a calendar year, means a corporation that is incorporated or continued under the laws of Canada or a province other than a corporation that is, on December 31 of the calendar year
- a corporation in respect of which the following persons have ownership or control, directly or indirectly, of shares of the corporation representing 10% or more of the value of the equity in the corporation or carrying 10% or more of the voting rights under all or under some circumstances:
- an individual who is neither a citizen nor a permanent resident,
- a corporation that is incorporated or continued otherwise than under the laws of Canada or a province, or
- any combination of individuals or corporations referred to in subparagraphs (i) and (ii);
- a corporation without share capital having
- a chairperson or other presiding officer who is neither a citizen nor a permanent resident, or
- 10% or more of its directors who are neither citizens nor permanent residents; or
- a prescribed corporation