1. Underused Housing Tax (Part II)
The federal underused housing tax (the "Tax") is a new annual 1% tax on the value of non-resident, non-Canadian-owned residential real estate that is considered to be vacant or underused, retroactive to January 1, 2022. Non-Canadian entities can include a corporate or partnership entity that has 10% foreign ownership.
Filing Requirements
All owners except excluded owners1 (the "Affected Owners"), are now required to file Form UHT-2900 annually (the "Return") with the CRA for each residential property that they own in Canada as of December 31st. The Return must be filed by April 30th of the following calendar year.
Unless they qualify for a specific exemption, the Affected Owners must then pay the Tax for that calendar year. Note that even if an Affected Owner qualifies for an exemption, they still must file the Return by the deadline to claim such exemption. Failure to file the Return on time has significant monetary penalties.
Builders, please take note that Canadian corporations are not excluded owners and therefore must file a Return by April 30th for inventory homes even if they have no tax liability as noted below.
Exemption for Newly Built Homes not yet Occupied
The ownership of residential property is exempt from the Tax for a calendar year if:
- the construction of the residential property is not substantially completed before April of the calendar year; or
- the construction of the residential property is substantially completed in January, February or March of the calendar year, the residential property is offered for sale to the public during the calendar year and the residential property had never been occupied by an individual as a place of residence or lodging during the calendar year.
According to CRA guidelines, substantial completion of a residential property means that construction is at a stage of completion (generally 90% or more) that allows an individual to reasonably inhabit the property.
To learn more about this topic, Leor Margulies, the head of our real estate team, will be part of an online panel this Thursday, March 23rd at 11:00 am, hosted by CIBC and PMA Brethour, which will discuss the Tax as well as the City of Toronto vacancy tax and the federal prohibition against foreign buying.
Click here to sign up to view the panel discussion.
2. Anti-Flipping Tax
The cost of selling a flipped property in Canada has recently increased with the Federal government's Bill C-32. A housing unit located in Canada that was owned by a taxpayer for less than 365 consecutive days prior to the disposition of the property, with certain exceptions, is now considered a "flipped property".
Profits from the sale of a flipped property occurring on or after January 1, 2023 are now considered taxable business income and no longer a capital gain; in other words, 100% of the gains are taxable. If a taxpayer fails to properly report such gain as business income, they may be assessed a gross negligence penalty equal to 50% of the taxes owing, in addition to interest charges.
Potential GST/HST implications
Note that if a taxpayer is considered to be a "builder", as defined under the Excise Tax Act, which includes someone who undertakes substantial renovations, they will be required to charge GST/HST on the sale.
Footnote
1. An "excluded owner" means a person that is on December 31 of the calendar year[1]:
- a citizen or permanent resident of Canada;
- a corporation incorporated under the laws of Canada or a province whose shares are listed on a stock exchange in Canada;
- a trustee of a mutual fund trust, a real estate investment trust, or a SIFT trust;
- a registered charity;
- a cooperative housing corporation, a hospital authority, a municipality, a public college, a school authority, a university, or a para-municipal organization; or
- an Indigenous governing body or a corporation wholly owned by such a body.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.