Tax and estate planning leader speaks out on underused housing tax’s ongoing impact on clients and overwhelmed accountants
On October 31, the federal government announced it would be extending the filing deadline for its Underused Housing Tax (UHT) – an annual federal 1% tax on the ownership of vacation or underused housing in Canada that took effect on January 1, 2022 – by six months.
With that extension, homeowners impacted by the tax requirement as of 2022 will now have to file a return with the Canada Revenue Agency (CRA) by April 2024. This marks the second government extension since the government announced in March that it would add six months to the original April 2023 filing deadline.
While many taxpayers and stakeholders in the tax professional community might appreciate last week’s eleventh-hour extension, they probably don’t include those that scrambled to meet the October red-letter date.
“I think most of the accountants and accounting firms I’ve spoken to were gearing up to be done by October 31, so the fact that the extension was granted so late in the day probably didn’t help them,” says Mariska Loeppky, assistant vice president, Tax & Estate Planning at IG Wealth.
UHT’s impact: more far-reaching than expected
Loeppky says the six-month extension will probably be welcome relief for the many Canadians who didn’t realize their filing obligation. When the legislation first came out, she understood it would apply only to non-residents, but later realized it’s more far-reaching.
“Under the rules, the definition of excluded owner doesn’t include people who own an interest in the property through a partnership or through a trust,” Loeppky explains. “Even a corporation has to file a tax return for the UHT.”
An individual taxpayer who’s required to file for the UHT but fails to do so will face a penalty of $5,000; corporations will have to pay $10,000. Many people are eligible for exemption from the UHT tax, but they must file a return to claim the exemption.
Within her network, Loeppky says firms and accountants have spent a lot of time and resources developing processes to ensure they’ve captured all the clients they need think to file a return for the UHT. That investment has been necessary, she says, considering the grey area and confusion around it.
“I know a lot of people who have said ‘I own a property with my husband, and I rent it out. Would the CRA consider this a business, and do I need to file for the UHT?’” she says. “Many people who become aware of this obligation are protectively filing, because they’d rather file the return than not file one and have to pay a penalty.”
Niche cases and new questions
One thing people might not be aware of, Loeppky says, involves ownership of property within joint spousal trusts. A Canadian resident who owns a residential property personally doesn’t have to file a UHT return. But if the property is placed inside a joint spousal trust, she says both partners will probably have to file a UHT return to claim an exemption from the tax.
Loeppky shared another instance of a brother and a sister living in the US who own a Canadian vacation property – a seasonal cottage that’s not accessible the whole year. The sister had Canadian citizenship, so she didn’t have to file a return, but the brother had to file a return to claim an exemption from having to pay UHT because he wasn’t a Canadian citizen.
“We usually just focus on who’s a resident and who's not a resident. This is the first time that we actually have to ask ‘Are you a non-resident, but still a citizen of Canada?’” she says. “You also have to file a return for each property, so if you have a corporation and own a couple of properties through that, you have to file for each of them.”
According to Loeppky, the amount of work needed to file a return for the UHT caught many clients and industry professionals by surprise. Aside from issues with filing the UHT online, she says some taxpayers have been turned away by accounting firms that simply didn’t have the capacity to accommodate their case.
For clients at IG Wealth who aren’t sure, she says their primary advice has been to reach out to their accountant. With six months added to the UHT filing timeline, Loeppky is hopeful more accountants will be in a position to help their clients, though many tax professionals are already inundated with other tax filing cases and issues.
“I think what we’re seeing now is that the UHT compliance burden goes beyond what they initially wanted to accomplish. We’ll have to see if they make any adjustments,” Loeppky says. “I don’t know how many returns they have to process, or if they’ll be issuing a notice of assessment, or confirmation that people’s returns were accepted as filed. … Those are all big questions that I think accountants are asking right now.”