New Tax Return Coming for Non Resident Housing Tax

Canada will create a new tax return to be filed by non-residents who own and under-use residential property in Canada, starting in 2022. Accompanying that return will be a payment of a new 1% tax on the value of the property, unless an exemption can be met. Here’s what you need to know.

In its 2021 Budget, the Federal Government made a commitment to make housing more affordable.  One solution proposed was a new national 1% tax on the value of Canadian residential real estate, each year it was owned by non-Canadian non-residents.  The tax will be payable when that property was considered to be vacant or underused.  Now, after a consultation process, a final design of the proposed tax has resulted in two new exemptions that further define what is considered to be “underused” and also has raised some new questions. 

Exemptions.  The first new exemption relates to non-resident owners who use the property as their primary place of residence.  The property can be used by the owner, the owner’s spouse of common-law partner, or an individual who is a child of the owner or of the owner’s spouse or common law partner.  However, in the case of the child’s use it must be for the purposes of authorized study.

The second (new) exemption relates to vacation/rental property owned by a non-resident.  The property can be exempt if it is located in an area of Canada that is not an urban area within a census metropolitan area or a census area having 30,000 or more residents AND is used personally by the owner (or the owners’ spouse or common –law partner) for at least four weeks in the calendar year.

Residency and Principal Residence Exemption Issues.  Though not in the Report’s analysis, the question of tax residency and the intersection of the New Underused Housing Tax with other tax provisions raises interesting questions.

To meet one of the new exemptions, under the new Underused Housing Tax, the property must be the non-resident owner’s “primary” residence and that could result in the taxpayer (the owner, or the spouse or common-law partner) being treated as a factual resident of Canada for income tax purposes.  Otherwise, how could the property be the owner’s primary place of residence? 

It raises other issues too.  Under what circumstances would that factual resident (New Exemption 1) or 4 week long user of the vacation/recreation property, (New Exemption 2)) qualify for the principal residence exemption on a future disposition of the property?

Under the Principal Residence Exemption rules, the property elected must be a Canadian resident’s primary place of residence.  However, it is only necessary that the Canadian resident “ordinarily inhabit” the property for some time in each year. That length of time is not defined in the Income Tax Act. 

When it comes to non-resident owners, in calculating dispositions occurring after October 2, 2016, a taxpayer must be resident in Canada during the full year of acquisition of the principal residence.  If this is not the case, the taxpayer is not eligible for the extra “one-plus” year in calculating the principal residence exemption.   

It will be up to tax filing professionals to straighten all these rules out during the ownership period and upon disposition.

The government proposes to make the new Unused Housing Tax effective January 1, 2022 with the first new tax return required by filing due by April 30, 2023.

Additional Educational Resources: 

Be sure to join Dr. Dean Smith at the January 19 Virtual CE Summit to hear more about new tax changes for taxpayers with cross-border issues.  Register by December 15 to pro-order food and your online Advanced Tax Update Course and Knowledge Journal, all included in the tuition fees.