If you are like most of the other Canadians I have spoken with, you are aware of the governments campaign to impose a 1% tax on underused houses to foreigners. The campaign was broad and was aimed at reducing housing costs in Toronto and Vancouver.
I've been approached many times in recent months by my peers, asking me about this program and if they are affected. They don't have any idea that this program would apply to them, and yet they could have been fined already, as a return was originally due April 30th. The author of this paper is happy that there was an extension to October 31st for the 2023 year.
What most of us are unaware of, is that Canadians may be significantly affected. We are not affected in the manner that any tax would be owing, as there is an exemption for Canadians, however significant penalties apply for failure to file the UHT return. Not knowing you are required to file a return is not a relief provision.
The first question to ask is, are you affected?
- If you are a member of a partnership and that partnership owns a house in Canada, you are affected.
- If you have a house in your name that you hold in trust, either in a formal trust, or, your name is on the deed for your children’s house, you are affected.
- If you're a private corporation and you own a house you are affected. (This would pertain to the directors of the corporation, most corporations that are not public are owned by limited group of people.)
The next question would logically be, what are the penalties?
- The penalties as mentioned are substantial, being a minimum of $5,000 per return per individual or $10,000 per return per corporation.
What do you mean when you say per return?
- A return is required for each residence owned by the partnership, trust or corporation. Further, if there are five members in a partnership that owns a residence or two residences there will be five returns for each residence due, potentially $50,000 in fines for a five-person partnership that has two residences and doesn't realize they have to file.
- You have to file the return even if the partnership owns a house that you reside in full time. It doesn't have to be foreign owned, nor does it have to be underused, for you to need to file a return.
Why would a penalty exist if there is no tax and I'm fully exempt?
- Also a good question. The penalty doesn't seem to be consistent with most of the tax penalties in Canada. Most penalties are a function of the amount of tax owing, in the UHT return it seems to be administrative (for not filing).
It is estimated that there are over 100,000 homes in Canada owned by foreigners, however, in the author's experience, and opinion, there are many times more houses owned by Canadian private corporations, Canadian partnerships and trustees that reside in Canada. One question I have is why would any of these people who are fully exempt be required to file a return at all? It imposes a burden on the taxpayer and on all taxpayers, who are paying to examine returns for which there is absolutely no revenue being generated (aside from a filing penalty which I find egregious).
I will attempt to provide some examples that have caught people off guard even after being told that if they are a member of a partnership, own a corporation that owns a residence in Canada or if their name is on a property in trust, that they would have to file.
One example is where a corporate taxpayer has his name on the deed of a corporate property (1% to keep an abutting property from merging) and that property has a residence. In this case, if the taxpayer is holding his interest in trust for the corporation, he or she would be required to file a UHT return (as a trustee) or be subject to a minimum $5,000 penalty, further, the corporation must also file on that house or be subject to a $10,000 penalty (or higher).
Another example that people don't typically think of as a trust, is, having their name on their children's house, so that the child could obtain a mortgage. In that case the parent would have to file a UHT return or suffer a $5,000 penalty per return. Similarly, for children whom have their names on their parents’ properties to avoid probate, the children would have to file or be subject to a $5,000 or higher penalty.
A third example which I come across quite regularly, would be a husband-and-wife partnership, which buys a property, such as a business or farm, that also has a residence. Each of the spouses must file or be subject to a $5,000 penalty. This is different than a husband and wife buying their matrimonial home. In the later case, it is most likely that the house is co-owned. A distinctive factor would be whether a partnership exists, evidenced usually by a business number (such as HST), and that business number is used to self assess HST on the purchase of the property. The fact that a partnership exists doesn’t necessarily mean that a house, owned by the same individuals that make up the partnership, is a partnership asset, or requires a UHT filing. It is advised that you speak with a professional if these situations apply to you.
The agriculture industry is particularly prone to having houses that require UHT filings. It is very common for farm partnerships or farm corporations to own the house in which the principals live. Farms often have residences on them and cause farmers to own multiple residences. We are lucky the UHT return does not apply to sole proprietorships.
As mentioned earlier the 2023 return is due October 31st, the filing process is fairly simple, and requires information from the property tax notice and general information. All Canadians and Canadian controlled private corporations with less than 10%, foreign ownership or Canadian partnerships with no foreign ownership are exempt from the tax whether the house is underused or not. The penalties are significant and easily avoidable. So, are you affected? As a Canadian taxpayer, we all are.
It is recommended that if you believe you are within any of the above criteria to reach out.