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Canada’s Underused Housing Tax Notices – What You Need To Know

As of January 1, 2022, the Underused Housing Tax Act, or UHT Act, was put into effect in Canada. This new act applies to some non-Canadian and Canadian homeowners with residential properties in Canada. Under this new act these homeowners may now be required to pay a 1% tax on the value of their properties if the home is not being used as their place of residence, rented to tenants, or if it is not being used to its maximum potential. This tax was created to discourage property owners from leaving their homes empty and creating a taxing situation that encourages them to make use of these properties in ways that contribute positively to the economy; such as putting them up for rent. It is important to note, even though not all home owners are subject to this tax, this new legislation requires some of these Canadians,who are not subject to the tax, to file a return.

Over the past few years, finding suitable rental accommodations at reasonable prices has become more and more of a struggle. The Underused Housing Tax has been introduced as one possible solution to this problem .This means that generally this should be good news for Canadians who rent, as it will open up more properties to the market, creating more variety and making the market less competitive. As a property owner, it’s important to read up on the new legislation and understand the implications of this new tax on and how to comply with it. Anyone who fails to comply with the Act by April 30, 2024, is putting themselves at risk of being subject to fines, penalties, and other consequences

Affected Properties

This tax affects detached houses or similar buildings containing up to three dwelling units, semi-detached houses, rowhouse units, residential condominium units and other similar premises, as well as any accessories and related land.

Non-Canadians

For non-Canadian owners of residential property, the UHT Act requires them to file an annual return by April 30 of each year, detailing their ownership and liability to pay the UHT. They must also provide details on their citizenship, property’s value, the amount of UHT due, the location of the property and the date of acquisition.
Canadians

For Canadian owners of residential property, the UHT Act applies to anyone who owns property that is not used as their principal residence, or is “underutilized” to some capacity. These owners must also file an annual return by April 30 of each year. This return will detail their ownership status and determine their liability to pay the UHT. The current value of the property, the amount of UHT due and the date of acquisition must also be provided.

Who Should File

It is important to note, even if you believe that you are not subject to the tax, you still may need to file a return. In particular, some who are exempt from the tax are required to file a return; if they do not, they may be subject to paying penalties. Penalties are not the only consequence that these individuals may face, It can also result in the loss of exemption status, meaning that you would be required to file a return in future years. An experienced bookkeeper and accountant can help advise you on the best course of action for your unique circumstances.

Tax Implications for Joint Owners

According to the Canada Revenue Agency, there are unique tax implications for joint owners of residential rental properties who are also Canadian citizens or permanent residents. For these individuals to be classified as partners in a partnership for tax purposes, they must actively be conducting a business, aiming to generate a profit. It’s important to note that standard rental income, which is typically from residential property rentals, is not classified as business income. Instead, this type of income is categorized as passive income and is considered personal income. Individuals in this situation are not required to file a UHT return. However, if as a part of their business, they provide additional services to their tenants, such as meals, cleaning, laundry, or security, and thereby transform their rental activity into a active business venture, the income generated from these services would be considered self-employment income. As a result, filing a UHT return will be required.

How to Calculate tax

The amount of the tax is 1% of the taxable value of the property, which is usually the assessed value (for local property taxation) or the most recent sale price. If a property owner wants, they can also use the fair market value of the property (based on an appraisal) to calculate the UHT. The UHT is due on April 30 of the year after it is calculated.

Exemptions

Fortunately, the UHT Act does provide certain exemptions for those who may be eligible. These exemptions are based on:
The amount of the tax is 1% of the taxable value of the property, which is usually the assessed value (for local property taxation) or the most recent sale price. If a property owner wants, they can also use the fair market value of the property (based on an appraisal) to calculate the UHT. The UHT is due on April 30 of the year after it is calculated.
What kind of owner you are.

An individual who is A specified Canadian corporation, partner of a specified Canadian partnership, trustee of a specified Canadian trust, new owner in the calendar year, or a deceased owner’s co-owner or personal representative may be exempt.

The availability of the residential property.

If your home is newly constructed, not suitable to be lived in year-round, seasonally inaccessible, uninhabitable for a certain number of days because of a disaster or hazardous conditions or renovations, you may be eligible for an exemption.

Where the residential property is located and what it is used for.

If your property is a vacation home that is located in an eligible area of Canada and it has been used by you or common-law or spouse for a minimum of 28 days in the calendar year, you may be eligible for an exemption.

Who occupies the residential property.

If either you, your spouse or common-law partner, or your child (who is attending a designated learning institution) reside in the property as their primary residence for at least 180 days throughout the year, then you may qualify for an exemption

Penalties and Fines

It’s important to keep in mind that if you fail to comply with the UHT Act by April 30, 2023, you could be subject to fines, penalties and other consequences. The fines will be the greater of the two, either a $5,000 fine for an individual or a $10,000 fine for a corporation, even if no taxes are due or second amount is a combination of two parts – 5% of the tax calculated under section 6, plus 3% of the tax calculated under section 6 multiplied by the number of months since the return was due.

How to Stay Compliant

It is important for all residential property owners to stay up-to-date with the latest on the UHT Act and to familiarize themselves with what is required of them to remain compliant. A great way to make sure you are remaining compliant is to consult a qualified bookkeeper or accountant who will make sure you are filing correctly and are in compliance with all the requirements that apply to you. It is also important to keep detailed records of all transactions related to your residential property, including all documents related to ownership and occupancy of the property, in case of a future audit.

LedgersOnline Can Help

If you’re looking for help understanding and complying with the Underused Housing Tax Act, our team of business bookkeepers at LedgersOnline is here to help. We handle all aspects of your business tax filing, making sure you understand all the implications and take advantage of any exemptions you may be eligible for. The UHT Act is an effective way to tackle the housing shortage in Canada and it can benefit everyone in the long run. Book a call to learn more about our business tax filing services and see how bookkeepers can help your business with expert planning advice and guidance.

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