Introduction – Responding To Canada’s Underused Housing Tax

Because, "Not All Forms Of @CitizenshipTax Are The Same": Commentary on the @RepBrianHiggins outrage at the CDN tax on CDN property owned by US citizens … https://t.co/h1N58bvBIl

— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) February 19, 2023

Canada’s Underused Housing Tax is NOT a tax imposed because the “foreign owner” doesn’t spend enough time in the property. Rather Canada’s Underused Housing Tax is a tax imposed because the “foreign owner” doesn’t make the property sufficiently available to non-owners!!

This is the fourth in my series of posts about Canada’s “citizenship-based” Underused Housing Tax.

The first three posts are:

1. US Residents Who Own Residential Property In Canada May Be Subject To Various Vacant And Underused Property Taxes

2. NY Congressman Brian Higgins Draws Attention To The Injustice Of Citizenship Taxation By Challenging Canada’s Underused Housing Tax

3. U.S. FBAR And Form 8938 Penalties May Be A Bigger Problem For U.S. Residents Than Canada’s Underused Housing Tax

The purpose of this post is two-fold:

First: to explain what “Canada’s Underused Housing Tax” really means for “foreign owners” of certain Canadian property:

Conclusion: It means that foreign owners who own property that is NOT in a designated recreational location and who do NOT release their property into the rental market will be forced to pay the 1% tax.

Second: to explain that owners of most Canadian residential property that is not in a designated recreational location, who are neither Canadian citizens nor permanent residents of Canada can avoid releasing their property into the rental market ONLY if they either:

1. Pay Canada’s Underused Housing Tax

2. Sell their property in Canada

In my opinion U.S. (and other foreign residents) should be advised to simply pay the annual tax.

The Government Of Canada’s “Underused Housing Tax” is designed to force “foreign owners” of property to choose among the choices of: releasing their property into the rental market, paying the 1% tax or selling their property!

Explaining this conclusion.

This post ignores the “fringe situations” of properties that are newly purchased, uninhabitable, etc. I am focussing on the situation as it is likely to affect the majority of people. I urge people to read the actual legislation.

Final warning!!! All individual owners of residential housing in Canada who are neither Canadian citizens nor permanent residents of Canada are required to file the Underused Housing Tax return even if the tax is not payable! The penalty for failing to file the return is $5000 CDN.

Here we go …

*Canada’s Underused Housing Tax – If you don’t own property in a “designated area” you are in trouble

Canada’s Underused Housing Tax is a tax that is unfair because it is based primarily on citizenship and immigrations status. Canadian citizens and permanent residents of Canada are “excluded” from the tax. U.S. citizens and residents are “affected” by the tax and are therefore required to file a return. Those “affected” by the tax may or may not have to pay the tax. The tax is 1% of the value of the property. Certain “affected” owners may be “exempt” from paying the tax. Those who are exempt from paying the tax will be exempt (fringe issues not considered) based on either (1) the property meeting an appropriate “occupancy” test or (2) because the property is in a designated area and is used by the owner for at least 28 days in a calendar year. I would expect many U.S. residents to be exempt from paying the tax because of the “designated area” test. I would also expect that many will be required to pay the tax because they are simply unable to meet the “occupancy test”.

Exempt because of satisfying the “designated area” test

Section 6 of Canada’s Underused Housing Tax Act includes the following the exemption from payment of the tax:

(m) the residential property is located in a prescribed area and prescribed conditions, if any, are met; or

This appears to allow the Government of Canada to change the “area and prescribed conditions” without amending the legislation. At present in order to meet the exemption …

Your ownership of a residential property may be exempt for a calendar year if the property is:

– a vacation property located in an eligible area of Canada and used by you or your spouse or common-law partner for at least 28 days in the calendar year
– Refer to the Underused housing tax vacation property designation tool to determine if your residential property is located in an eligible area of Canada for the purposes of this exemption.

I emphasize that the definition of “eligible area” can change without amending the legislation!!

Exempt because of satisfying the “occupancy test”

A careful reading of the statute reveals that the occupancy test CANNOT be satisfied by the owner occupying the property for 180 days of the year. Rather the “occupancy test” is satisfied only if people other than the owner occupy the property for at least 180 days per year. This is an important distinction. Canada Immigration allows U.S. citizens to visit Canada for up to six months (approximately 180 days). My reading of the statute is that occupancy by an owner who is neither a citizen nor permanent resident of Canada will NOT satisfy the “occupancy test”. Rather, occupancy by other people is required. Let’s see why …

The Canada Revenue Agency site describes the “occupancy test” as follows:

Exemptions based on the occupant of the residential housing

Your ownership of a residential property may be exempt for a calendar year in either of the following situations:

– it is the primary place of residence for you or your spouse or common-law partner, or for your child who is attending a designated learning institution

– at least 180 days in the calendar year are included in one or more qualifying occupancy periods for your ownership of the residential property
– A qualifying occupancy period is at least one month in a calendar year during which one of the following qualifying occupants has continuous occupancy of the residential property:
– an individual with a written contract who deals at arm’s length with you and your spouse or common-law partner
– an individual with a written contract who does not deal at arm’s length with you or your spouse or common-law partner, and who pays at least fair rent for the property
– you, or your spouse or common-law partner, who has a Canadian work permit
– your spouse or common-law partner, parent, or child who is a Canadian citizen or permanent resident

https://www.canada.ca/en/services/taxes/excise-taxes-duties-and-levies/underused-housing-tax.html

Commentary on the “occupancy” test

“Primary place of residence”

It’s difficult to understand how the property could be the “primary residence” of an individual who lives in the United States AND is not permitted to visit Canada for more than six months per year. I agree with the following commentary from BDO which notes:

An exemption applies only for individual owners, where the residential property is their primary place of residence (on a worldwide basis, not just in Canada). In this context primary refers to a main residence and not a secondary residence. This exemption could also apply where the child of an owner or their spouse or common-law partner occupies the home for the purpose of attending a designated learning institution (DLI) and occupies the residence as their main place of residence. A DLI is a school approved by a provincial or territorial government to host international students. All primary and secondary schools in Canada are DLIs, as are many colleges, universities, and trade schools.

Assuming the property cannot qualify as a “primary residence” for a U.S. citizen (who is neither a Canadian citizen nor permanent resident), a U.S. resident cannot just spend six months per year in the property to satisfy the occupancy test! It appears that for owners who are neither Canadian citizens nor permanent residents of Canada, the “occupancy test” can be satisfied ONLY if other people occupy the property for at least 180 days per year!

In other words: Assuming the owners cannot meet the “primary residence” test, the “occupancy test” can be met only if the property is rented to third party tenants for at least 180 days per year!

What this really means …

To put it simply:

If you don’t rent your house to third party tenants for at least 180 days per year, you will be assessed a tax equal to 1% of the property value!!!

(Forget it! Just pay the tax!)

How to satisfy the “occupancy test”

Therefore, the more likely question is whether the “occupancy” test can be met. Notice that the “occupancy” test is met if the property is occupied for at least 180 days in the year which must be composed of “occupancy period(s)” that individually last at least 30 days. Because an “occupancy period” must last at least 30 days, “short term rentals and usage” (less than 30 days) will not meet the requirement to constitute an “occupancy period”.

Therefore, unless the property owner is willing to rent the home to a third party in an arms length transaction, it appears that the occupancy test CANNOT be easily met!

Options if the “occupancy” test cannot be met

1. Pay the 1% penalty tax each year.

2. Sell the property. (Note that if the property is sold the capital gains will be taxed by both Canada and the United States. Properties that have been owned for a long time will be subject to a significant tax bill.)

When a “nonresident” of Canada sells property in Canada …

Unless a “clearance certificate” is received in advance, S. 116 of the Income Tax of Canada requires that, the proceeds of the sale will be subject to a 25% withholding of the sale price!! (This is similar to the U.S. FIRPTA tax.)

Bottom line: It may be less expensive and more reasonable to simply retain the property and pay the penalty tax. I would NOT recommend that U.S. residents who own property in Canada attempt to rent the property in order to satisfy the “occupancy test”. The Province Of Ontario (like many other Canadian provinces) has a “Residential Tenancies Act” that is VERY hostile to landlords! The costs of short term renting are VERY likely to exceed the cost of paying Canada’s Vacant Home Tax.

In conclusion:

Remember that ALL individual owners who are neither Canadian citizens nor permanent residents ARE required to file the annual return!! The failure to file the return will subject the owner to a minimum $5000 penalty (which will become a lien on the property).

Unless the property is in a “designated area” and is used for at least 28 days in the calendar year, the only practical options are:

1. Simply pay the tax

2. Sell the property

I recommend that you NOT attempt to rent out the property.

The evil of taxes based on citizenship …

This is a Canadian tax based on citizenship and it discriminates against U.S. citizens who live live in the United States.

On the other hand, the United States imposes citizenship taxation on all Canadian residents who are U.S. who because of a U.S. birthplace are U.S. citizens. (This fact will make it difficult to generate sympathy for Americans affected by this tax.)

Citizenship taxation is almost always unfair. That said, Canada’s Underused Housing Tax does NOT compare to the injustice of the U.S. citizenship tax regimes which imposes U.S. taxes, forms and penalties on Canadian residents who are dual U.S./Canada citizens. It would be helpful for residents on both sides of the border to unite in their opposition to citizenship based taxation practiced by either country!

Those who need assistance with any and all aspects of understanding and compliance with Canada’s Underused Property Tax might visit VacantHomeTax.com

*Appendix – Canada’s Underused Property Tax

Information may be found in the following three places:

Canadian Government Summary Of Canada’s Underused Housing Tax Law:
https://www.canada.ca/en/services/taxes/excise-taxes-duties-and-levies/underused-housing-tax.html

The Text Of Canada’s Underused Housing Tax Law:
https://laws-lois.justice.gc.ca/eng/acts/U-0.5/FullText.html

The Actual Tax Return – Form UHT-2900 – Due April 30uht-2900-22e

Penalties for failing to file the return on time

There are significant penalties if you fail to file an Underused Housing Tax return when it is due. Affected owners who are individuals are subject to a minimum penalty of $5,000. Affected owners that are corporations are subject to a minimum penalty of $10,000.

Have a question? Contact John Richardson, Citizenship Solutions.