Reminder:  UHT Tax Return Deadline Coming Soon

If you own a residential rental property as an investment or in business with another person, it is important to consider whether it’s necessary to file a new tax return in Canada: the UHT-2900, which is due on  October 31, 2023.  This is particularly important news for younger real estate investors and therefore, an opportunity for tax and financial advisors to be of help. Here’s how the numbers tell a new story, and why tax compliance is a new issue:

Despite what the news tells us about how difficult it is for younger people to buy into the residential housing market, recent statistics on residential property buying indicate that 44% of the youngest investors own two or more investment properties, which is higher than the Millennials 35 to 54 (29%), and the GenX, Boomer Cohorts (25%).  This is according to a May 2023 survey by Royal LePage. Of particular note, 67% of younger investors (18-34) own their primary residence, compared to 88% and 95% of investors aged 35-54 and 55 or older, respectively.

Especially when residential property is owned together with another person, and is a rental property, the parties must consider whether they are “affected” owners under the new UHT (Unused Housing Tax). Even if they are not required to pay the new, annual 1% tax, they must consider whether they will need to file the return anyways.  Failure to do so will result in expensive penalties for each owner.  Let’s unpack what this means.

First, who needs to be concerned about the new filing requirements under UHT?  This annual 1% tax is levied on the ownership of vacant or underused housing (but not land) in Canada. In general, the tax will apply to non-resident, non-Canadian owners. Resident Canadian owners and non-resident Canadian owners are, in general, not liable to pay this tax.  They are considered to be “excluded owners”.

However, in some situations, the UHT-2900 form filing requirements will apply to Canadian individuals, partnerships and certain corporations which own residential property in Canada.  These “affected” owners, like non-resident, non-Canadian owners, must file a UHT-2900 form for each property owned on December 31, 2022, by October 31, 2023.  This is a one-time extension of the normal due date for the new return, which is April 30 for properties owned on December 31, 2023.  This new date should be noted on the tax filing calendar as well.

More specifically, individual owners who are citizens or permanent residents of Canada, must file a UHT-2900 return when they are a partner of a partnership, or a trustee of a trust (other than as a personal representative of a deceased individual, or a trustee of a mutual fund trust, real estate investment trust or SIFT trust).

In the case of corporate owners of residential real estate, UHT-2900 filing is required by non-resident corporations, private corporations incorporated in Canada (shares are not listed on any public exchange) and Canadian corporations without share capital.

Some exemptions will apply with regard to paying the tax, but not to filing the form, and that is the crux of the issue for those who own residential  properties together.  To exempt out of paying the tax, filing a UHT-2900 is required for each property owned in Canada and by each affected, exempt owner.  Significant penalties occur when those filings are missed.

This is why, for spouses and others who own residential rental properties together, it’s important to determine whether they are partners in a partnership, or whether they are simply co-owners, in which case they would qualify as excluded owners for UHT purposes.   Taxpayers who are co-owners, and not in a business partnership, or who do not receive a T5013 slip, simply file to report income and expenses on Form T776 with their personal tax returns.

For guidance in this murky area, we look to CRA’s definition of co-ownership of a rental property.  Usually, CRA will consider spouses and others to be in a “co-ownership” if a residential rental property is owned as an investment. Interest, dividends, rents and royalties qualify as “passive” investment income for reporting under the Income Tax Act.  

When are you in a partnership carrying on a business?  This can occur, with or without a written agreement if the parties operate a business in common, pursued for profit together.  Partnerships were further defined in a Supreme Court Case (Continental Bank), where the elements of a partnership in common law jurisdictions were outlined by the judge, as outlined in Income Tax Folio S4-F16-C1, What is a Partnership?  A partnership required:

• the contribution by the parties of money, property, effort, knowledge, skill or other assets to a common undertaking;
• a joint property interest in the subject matter of the adventure;
• the sharing of profits and losses;
• a mutual right of control or management of the enterprise;
• the filing of income tax returns as a partnership;
• joint bank accounts; and
• correspondence with third parties.

Affected owners of a residential property on December 31 of a calendar year, who are members of a “Specified Canadian partnership”, a “specified Canadian trust or a “specified Canadian corporation” will need to file the UHT-2900 return, but will not pay the UHT.   These definitions will be further discussed in the Knowledge Bureau’s CE Summit on September 20. 

Make a Difference.  There is still much confusion about who must file the new UHT 2900 return in a marketplace in which there is significant residential rental property ownership, and increasingly by a younger co-hort. These owners need help from knowledgeable financial professionals.   By providing clear and unbiased advice, these financial professionals can help to build wealth in their communities, and secure the futures of younger cohorts now in the market to supplement their incomes with rental property revenues.