Reminder:  Filing UHT Return Extended to Oct. 31, 2023

The May 1^st tax filing deadline is less than 20 days away and tax season is in full swing!  The T1 is not the only tax return due on this day.  The T1135 Foreign Income Verification Statement must be filed and this year, a new tax return has been added.  Thankfully, the filing of the new Underused Housing Tax (UHT) Return for 2022, the UHT-2900, has been postponed to October 31, 2023.  But scheduling a return engagement with affected clients is critical:  the tax casts a wider net than originally anticipated and the penalties are high for failure to file.

The Underused Housing Act which received Royal Assent on June 9, 2022, imposes a 1% tax on the value of non-resident, non-Canadian owned residential real estate that is considered to be vacant or underused.  Under this Act, the new annual 1% may apply on each non-resident title owner of vacant residential property, life lease holder, long term tenant or lease holder.

It is based on property’s taxable value, which is the  greater of:

• Assessed value for property taxes
• Most recent sale price on or before Dec. 31 of the year
• Or owner may elect FMV any time between Jan 1 and April 30 of following year.

In general, this tax does not apply to Canadian citizens (residency is not a factor) or trustees of MFT, SIFTs, REITs, Canadian corps or registered charities.  However, but some “excluded owners” may have to file a UHT return to claim an exemption in certain cases when they own multiple residential properties.  This is where a potential tax trap arises:  no taxes to pay but a return to file just the same, subject to big penalties.

There are significant penalties for non-compliance:

• $5,000, if the owner is an individual, or $10,000, if the owner is not an individual; and the total of:
  • 5% of the applicable tax for the property for the calendar year; and
  • 3% of the applicable tax for each complete calendar month the return is late.

Residential property is defined to generally mean:

1) A detached house or similar building, containing not more than three dwelling units

2) A semi-detached house, rowhouse unit, residential condominium unit or other similar premises that is, or is intended to be, a separate parcel of real property

Excluded Buildings Include:

• Those inhabited by individual, spouse or child as their primary residence,
• Property not suitable for year round use
• Uninhabitable for at least 120 due to renovations
• Buildings held at death of the owner

Note:  Currently, if a non-resident of Canada disposes or proposes to dispose of taxable Canadian property, a certificate of compliance may be requested from CRA. The non-resident is required to remit 25 per cent of the expected capital gain (or, in some cases an amount that is acceptable to the CRA), before a certificate of compliance is issued.

If the non-resident does not obtain a certificate of compliance, the purchaser is required to withhold 25 or, in some cases, 50 per cent of the purchase price (generally 25 per cent for residential property) and remit it to the CRA within 30 days of the end of the month in which the sale closed. The CRA can assess these amounts against a purchaser that fails to comply with these withholding and remittance requirements.

Beginning in 2023, an application for a certificate of compliance with respect to a residential property will prompt a compliance review by the CRA. The CRA may verify:

• If an applicant for a certificate of compliance had filed all required UHT declarations, starting in April 2023,
• If the applicant was ineligible for any exemptions previously claimed under the, or w
• If the applicant has amounts outstanding under the UHT.

CRA warns:   The CRA will not issue a certificate of compliance to an applicant until it is satisfied that the applicant is in compliance with any applicable obligations under the UHT. Given the potentially significant amounts of tax, penalties and interest that could be applicable under the UHT, consideration will be given to proposing to amend the Income Tax Act, to increase the amount of withholding tax that applies in respect of residential property and to ensure that any amount.

Bottom Line – help your clients avoid penalties and interest by helping them come up to speed on all the potential tax returns they may need to file by the tax filing due date:  the T1, the T1135 Foreign Income Verification, the UHT-2900.  In addition, optimization of pension income splitting  has a maximum three year window – be sure to adjust prior filed returns by May 1 if taxpayers have left money on the table in their prior filings.

Knowledge Bureau will cover this new information and the filing requirements for the UHT in detail at the May 24 CE Summits. Register by May 15 to take advantage of early-bird pricing!