A tax trap for the unwary!
Elisabeth Colson and William J. Smith
by Elisabeth Colson and William J. Smith
The Canadian government introduced a tax on vacant residential properties owned by non-residents in its April 2021 budget. The Underused Housing Tax Act was passed in June 2022 and requires non-residents to pay an annual one percent tax on the targeted properties, retroactive to 01 January 2022.
Unfortunately, the legislation's impact far exceeds taxing “foreign, non-resident owners” “parking offshore money” in Canadian residential real estate. Every Canadian private corporation, partnership and trust holding residential property must file a return by 30 April of the subsequent calendar year, regardless of their tax year-end date. Failure to file leads to a minimum penalty per property of CAD 5,000 for individuals and CAD 10,000 for corporations.
To file, corporations and partnerships must first register for an “RU” extension to their Business Number; non-residents must obtain an individual tax number. Canadian citizens, permanent residents, governments, publicly listed companies, REITs, charities, co-ops, municipal governments, schools, and some other entities are exempt from both the requirement to file and from the tax.
Residential property is property (other than prescribed property) that is situated in Canada and that is:
(a) A detached house or similar building, containing not more than three dwelling units, together with that proportion of the appurtenances to the building and the land subjacent or immediately contiguous to the building that is reasonably necessary for its use and enjoyment as a place of residence for individuals;
(b) A part of a building that is a semi-detached house, row house unit, residential condominium unit or other similar premises that is, or is intended to be, a separate parcel or other division of real or immovable property owned, or intended to be owned, apart from any other unit in the building together with that proportion of any common areas and other appurtenances to the building and the land subjacent or immediately contiguous to the building that is attributable to the house, unit or premises and that is reasonably necessary for its use and enjoyment as a place of residence for individuals; or
(c) a prescribed property.
Estate trustees must also file a return if the estate assets include a residential property on 31 December. Testamentary trusts (trusts created by a will) only have an exemption from taxation for the year of the testator's death and for the subsequent year.
Private corporations, partnerships, trustees, and executors holding residential property should register and file a return by 01 May 2023, or seek professional assistance. The tax is based on a calendar year, so corporations will need to file annually by the end of April, even if they have an off-calendar year-end.
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Devry Smith Frank LLP is a full-service Ontario-based Canadian law firm of over 70 lawyers. DSF has provided approachable, professional, and affordable service to its business, personal, and institutional clients since 1964.
William (Bill) Smith is a founding member of Devry Smith Frank LLP. He has a broad-based practice which spans corporate commercial matters, employment law, real estate, and tax law. He takes an active role in coordinating all aspects of his clients’ legal needs. Contact Bill.
Fluent in English and French, Elisabeth Colson is a member of the Bars of Quebec and Ontario. She is a Partner with Devry Smith Frank LLP and has extensive experience in a wide range of business law matters, including mergers and acquisitions, private placements, franchising, corporate reorganisations, and shareholder agreements. Contact Elisabeth.
