What is it?
As usual with any legislation passed by these Federal Liberals the devil is in the details which they go to lengths to hide. The Underused Housing Tax Act, which governs the UHT, received royal assent on June 9, 2022. The UHT took effect on January 1, 2022 so this is the first real tax filing year that it will affect us. It was intended to slow the housing bubble, specifically in Toronto and Vancouver by penalizing non Canadian buyers, however it’s implementation has been applied universally across Canada to foreign buyers and to Canadian citizens.
While exempt from tax, you still have to file a costly Return.
The UHT does not apply to Canadian individuals and there are exemptions for Canadian trusts, corporations, and partnerships – however there’s a catch. The partnerships, trusts and corporations must still file a return every year even though they are exempt from the tax.
How does this affect me?
This is the catch! Despite not needing to pay a tax, a return must be filed every year which is expensive (accounting fees of $500 to $,1800 per property per owner per year) and has a failure to file penalty of $5,000 for an individual and $10,000 for a non-individual per year. Some examples of those needing to file include a parent co-signing on their child’s house purchase, parents putting their children on the title to their house to make the inheritance easier, a person recently divorced, a builder building spec houses, or a family farm corporation or partnership with, for instance, outbuildings for their staff.
What are some real world examples?
Scenario #1: Parents (Husband and Wife) co-sign for their adult son and adult daughter’s homes. This is known as a bare trust. Bare trusts exist when there is a separation between legal ownership (land title) and beneficial ownership. The beneficial owner is the individual who lives in the house, pays the mortgage, and controls the use of the home. If a husband and wife are both co-signers on their adult children’s homes, the kids live in them but the parents don’t, the parents would never think to file a return. In this case the parents are both considered trustees of a bare trust and if they don’t file a return, the CRA comes after them and the penalty is $5,000 each, per home for a total of $20,000.
Scenario #2: Older parents who put their adult children on their title to make disposition easier upon their death. This is another common example where the adult children are the trustees of a bare trust and would need to file under the UHT. With the new rules it’s the accounting fees mentioned above for filing, or a $5,000 per year penalty if you miss filing, plus a 1% penalty of the value of the house as you lose your exemption if you fail to file the UHT by December 31 of the following year. If a family doesn’t know about this and doesn’t file for 10 years, when Mom and Dad die leaving a house worth $500,000, the penalty is $50,000 ($5,000 x 10 years, plus interest which is currently 8%) plus the tax of $5,000 per year (1% of $500,000) for the value of the property (plus interest). The family owes roughly $100,000 in penalties and taxes plus interest against the $500,000 gross on the house.
Scenario #3: A builder operating a partnership as husband and wife currently has ten spec homes for sale. Although they’re not taxed for the “underused” home, they each must separately file, and file for each home. The cost is the accounting fees for each filing so for ten homes it’s twenty filings at a total cost to each partner of somewhere between $10,000 and $36,000 (10 houses x $500 x husband and wife = $10,000 or 10 houses x $1,800 x husband and wife = $36,000). It’s important to note that the filing costs are the same for the scenario’s 1 and 2 above as well.
Are there other issues?
The form for this filing was only released on January 31, 2023, and it must be filed by April 30 every year, and with such a short timeframe, Lawyers and Accountants are scrambling to understand the interpretations of the rules, which even Revenue Canada can’t fully explain because they haven’t had enough time to flesh out the intent. And even worse, we’ve been told that because this timeframe is in the middle of tax season, and with sketchy directions from the CRA, many Lawyers and Accountants are declining this work leaving people scrambling for help, and liable for penalties and fines. Even worse yet, many individuals will miss filing altogether as they are unaware of this requirement and may be subject to penalties as described in the scenarios above.
Why would the Liberals do this?
In the recent past the Liberals have floated the idea of taxing the gains on your principal residence when you sell it, and the UHT and the filing mechanism may be a precursor to that. Today only the Municipal government has information about your residence(s) as they apply your property taxes. By asking you to fill out a tax form even though you don’t have any tax liability, the Liberals get your information in anticipation of that fateful day when you do get your Capital Gains taxed. Of course they’re not saying that’s why they want your information, but it is.
What should you be demanding?
This whole issue can be easily solved by simply amending the Legislation to remove the bare trust carve out from excluded owners when the title holders and the beneficial owners are all Canadian Citizens or permanent residents. Because after all it’s the foreign owners that they’re ostensibly after so they should leave Canadians alone. If they can’t or won’t do this, then at a minimum they should provide for the consolidation of UHT filings for individuals or corporations that have multiple properties so that people are not having to pay Lawyers and Accountants for doing multiple filings. The same thing should be done for a couple who have a partnership in a rental property, it’s a waste to make them both file.