UHT: Are Spouses Who Own Rental Properties with Partners Affected?

Evelyn Jacks

According to the legislation for Canada’s new Unused Housing Tax (UHT), if you are an excluded owner of a residential property in Canada, you have no obligations or liabilities under the Underused Housing Tax Act.  But are spouses who own residential rental properties together excluded owners?  The legislation is fuzzy, to say the least and that’s a problem for professional tax preparers.

Let’s look at some definitions and some important information on the tax filing form itself: the UHT-2900E. 

First there the definition of an “excluded owner”. If you are an excluded owner of a residential property in Canada, you have no obligations or liabilities under the Underused Housing Tax Act.  An excluded owner includes, but is not limited to:

• An individual who is a Canadian citizen or permanent resident - unless included in the list of affected owners below
• Any person - including an individual who is a Canadian citizen or permanent resident - that owns a residential property as a trustee of a mutual fund trust, real estate investment trust, or specified investment flow-through trust (SIFT) for Canadian income tax purposes
• A Canadian corporation whose shares are listed on a Canadian stock exchange designated for Canadian income tax purposes
• A registered charity for Canadian income tax purposes

A cooperative housing corporation for Canadian GST/HST purposes

• An Indigenous governing body or a corporation wholly owned by an Indigenous governing body

While this is the definition on CRA’s website as of March 8, 2023, the UHT - 2900E tax form goes into further depth and adds the following to the list of excluded owners:

• The government of Canada or a province or an agent of the government of Canada or a province
• An individual who is a Canadian citizen or permanent resident of Canada unless the individual is An owner of the residential property as
  • A trustee of a trust (except if the individual is the personal representative of a deceased individual, in which case the individual is an excluded owner)
  • A partner of a partnership (but the definition of a specified Canadian partnership below)

So, are spouses partners for these purposes when they own multiple residential properties together?  When you look at the definition of a partnership as articulated by the CRA, here’s what you find:

A partnership is a relationship between two or more people carrying on a business, with or without a written agreement, to make a profit. If there is no business in common, there is no partnership.

That is, co-ownership of a rental property as an investment does not make a partnership. 

CRA goes farther when it comes to spouses:

Most of the time, if you own the rental property with one or more persons, we consider you to be a co-owner. For example, if you own a rental property with your spouse or common-law partner, you are a co-owner.

In some cases, if you are a co-owner, you have to determine if a partnership exists.

Therefore the answer to the question, do you own the residential property as a partner of a partnership (line 110 of the UHT-2900E) should be no, unless you are out to make a profit – remember, if there is no business in common, there is no partnership.  But if you are in business, the rules are different.  You are likely a member of a partnership.

There is more confusion in Part 3 of the form UHT-2900E.  There are references to spouses who own multiple residential property here.  Note, this section applies only to individuals who are neither Canadian citizens or permanent residents of Canada according to the form. 

Affected Owners.  That allows us to go on to determine, who’s an “affected owner” who must pay the tax?  First of all, it’s anyone who owns residential property in Canada who is not on the list of excluded owners above and does not qualify for an exemption.  Commercial properties are not considered to be residential properties for the purposes of the UHT and therefore should be exempt.

Still, it’s a very wide net.  Here’s the definition:

An affected owner includes, but is not limited to:

• An individual who is not a Canadian citizen or permanent resident
• An individual who is a Canadian citizen or permanent resident and who owns a residential property as a trustee of a trust (other than as a personal representative of a deceased individual)
• Any person - including an individual who is a Canadian citizen or permanent resident - that owns a residential property as a partner of a partnership (although your ownership may be exempt from paying the tax – but not exempt from filing the form -  if you are a partner of a specified Canadian partnership.  This is explained further, below.)
• A corporation that is incorporated outside Canada
• a Canadian corporation whose shares are not listed on a Canadian stock exchange designated for Canadian income tax purposes
• A Canadian corporation without share capital

Your ownership of a residential property may be exempt from paying tax, but not filing the form, for a calendar year if you are:

• A specified Canadian corporation
• A partner of a specified Canadian partnership, or a trustee of a specified Canadian trust
• A new owner in the calendar year
• A deceased owner, or a co-owner or personal representative of a deceased owner.  Note however, there is also uncertainty about whether an individual who is the legal representative for an estate of a deceased person is exempt, where title has not yet transferred to the executor or executrix.

What’s a specified Canadian partnership?  You’ll have to look to the tax form for guidance, and it, too is convoluted.  A specified Canadian partnership, in respect of a calendar year, is one of the following:

• A partnership, each member of which is, on December 31 of the calendar year, an excluded owner or a specified Canadian corporation
• A partnership, each member of which would be, on December 31 of the calendar year, an excluded owner, if the third bullet of the definition of excluded owner were read without reference to “or as a partner of a partnership”
• A prescribed partnership (there are currently no prescribed partnerships in the UHTA or UHTRs)

Clear as mud?   You have to look to the tax filing form UHT-2900E, to make sense of it. Here the definition of a specified Canadian partnership is this:  a partnership, each member of which would be, on December 31 of the calendar year, an excluded owner:

• Unless the individual is an owner of the residential property as a trustee of a trust (except if you are the personal representative of a deceased individual)

(As instructed by the form, we have removed bullet three of the definition of excluded owner, which refers to a partner of a partnership as an affected owner by virtue of the word “unless”).

So now:  are spouses who own multiple residential properties “in partnership” for business purposes required to file the form?  For Canadian citizens or permanent residents of Canada who are excluded owners under the definition of specified Canadian partnership, the answer appears to be yes, for this important reason:  the spouses file as partners but claim an exemption from the UHT under Part 6. 

Also, even if spouses are investors in the properties, as opposed to being in business to make a profit, it may be a good idea to file the form and claim the exemption.  Down the line, CRA may audit and assess those investments in multiple revenue properties to be owned to be in the nature of a business venture.  Tax professionals will want to make a sound judgement call here.  If that’s a risk, file the form.

Even if it’s a lesser risk, and the form is not filed, the exemption under Part 6 of the UHT-2900E as an owner of a residential property solely in the capacity as a partner of a partnership that is a specified Canadian partnership in respect of the calendar year, may not be available if the December 31 deadline is missed for the year following the filing due date, as described below:

Penalties.  The penalties for failing to file the UHT return for each residential property owned in a calendar year by April 30 of the following year are huge:

• The greater of:
  • $5,000 for affected owners who are individuals or
  • $10,000 for affected owners who are not individuals

And

• The total of
  • 5% of UHT payable for the calendar year
  • 3% of UHT payable x number of months the return is past due

If the UHT return is not filed by December 31 of the following year, the determination of the taxes payable is made without the benefit of the exemptions for primary residence, qualifying residence or other exemptions, including the specified Canadian partnership exemption, in Part 6.

Bottom Line.  If there is any chance that CRA may rule in the future that investments by spouses in multiple residences is partnership in the nature of a business, it’s best to file the UHT-2900E form on time.

Evelyn Jacks is best-selling tax and finance author of 55 books and President of Knowledge Bureau.  Follow her on twitter @evelynjacks.

Additional Educational Resources:  This topic will be covered in greater depth at the May 24 CE Summit and DAC Acuity 2023 . Register for both events online now, and take advantage of time-limited early-bird tuition prices!