Since its launch on January 1, 2022, the Underused Housing Tax (UHT) has left cottagers’ heads spinning as they try to figure out whether it applies to them. The UHT is a federal one per cent tax levied annually on the ownership of vacant or underused housing. Primarily, this applies to foreign owners with properties in Canada that are occupied for less than 180 days per year. However, the complexity of the tax has left some grey areas
After significant advocacy from the Chartered Professional Accountants (CPA) of Canada, the federal government altered the UHT in this year’s fall economic statement, simplifying the tax. But cottagers are still questioning who it affects. To find out all about the UHT, we spoke with John Oakey, the vice president of taxation at the CPA of Canada.
Why was the Underused Housing Tax introduced?
The issue we have in Canada is too many people and not enough homes, and it’s causing a price increase. With all that pressure, the federal government said, okay, we need to do something to increase the supply. If we put a tax in place that is a punitive tax for anybody who is underusing a house—basically leaving the house vacant or not really using it as a residential property—that will incentivize the owner to put the house back into the market so somebody can use it as a residential property. That’s the whole purpose of the UHT, to try to increase the housing supply. And what the federal government did is it designed the UHT to focus on foreign ownership. So, the UHT is designed to apply to non-Canadian citizens and non-Canadian permanent residents.
Why was CPA Canada advocating to change the Underused Housing Tax’s legislation?
Sometimes the government decides to introduce new legislation, but the direction given to the Department of Finance doesn’t accomplish the intended outcome. It’s more of a political maneuver. So, we advocate when things don’t make sense or don’t work. We want to make sure that the legislation as drafted and the administration from the CRA are done within the principles of the Income Tax Act. We try to advocate to make sure that the legislation is in the best interest of the public. So, that’s what we were doing with the UHT. We noticed there were some flaws in the actual legislation that caused a lot of problems.
How did the federal government change the Underused Housing Tax?
The tax addresses foreign ownership of Canadian real estate that is being underused or vacant. The tax is to prevent that from happening or to try to minimize it. But what happened was when the federal government designed the rules, it said if you’re a Canadian citizen or a permanent resident of Canada, you don’t have to pay the tax. So, as a Canadian citizen or a permanent resident of Canada, as long as your name is on the title to the property, you’re good. You can forget that the UHT exists.
The problem they ran into was that only applies to individuals. There are people out there who own properties through a partnership, or a trust, or even have residential properties in a corporation. All of these people, because they indirectly owned their property through a trust, partnership, or corporation, had to file a return and claim an exemption to not pay the tax.
This is where we advocated the government, saying, you’ve designed a system for non-citizens, but the majority of the filing is coming from Canadian citizens who indirectly own their property through a trust, partnership, or corporation. None of them were subject to the tax because they had an exemption as Canadian citizens or permanent residents, but still had to file a return. So, we said, why don’t you get rid of the exemption and just make them an excluded party so they don’t have to file a return. The Department of Finance agreed and that was the change made in the government’s fall economic statement.
What should people be aware of with this change?
The change that the government made is for the 2023 calendar year going forward. It didn’t go backward and make it for the 2022 calendar year. The Canada Revenue Agency delayed the filing of the 2022 UHT return to April 30, 2024 because people were just so confused. But this means any Canadian citizens or permanent residents who own a residential property through a partnership, trust, or corporation still have to file a UHT return for 2022 by next April.
Could the Underused Housing Tax affect cottage owners?
If you’re a Canadian citizen or permanent resident with your name on the cottage’s title then you’re exempt. The only thing that may affect you is if you own the cottage through a partnership, trust, or corporation. Then you may have to file a return for the 2022 calendar year.
If you’re a foreign owner, [like an American who owns a cottage in Canada], you may be affected by the tax. You have to go through the policy to find an exemption to avoid the tax. But that’s what the whole policy was for. It was to get foreign owners to put their houses back into the supply chain.
Could the Underused Housing Tax affect Canadians who rent out a cottage as a short-term rental?
If you’re the owner of the property and you’re a Canadian citizen, then you don’t need to file or pay the tax. What you do with the property is not relevant to the UHT, if you’re a Canadian citizen.
How can property owners find out if they’re affected by the Underused Housing Tax?
The best place to go is the Canada Revenue Agency’s (CRA) website. It has 15 notices that the CRA created when the Underused Housing Tax Act received Royal Assent. It created these notices to try to help people navigate the definitions and the rules. So, that would be the place to go if you have any specific questions on anything.
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