By Adriel N. Clayton

Entities in Canada, including certain not-for-profits, that own residential real estate in the country may have increased tax filing requirements as a result of the underused housing tax (“UHT”), a federal taxation scheme that was initially introduced in the 2021 Federal Budget and implemented by way of the Underused Housing Tax Act (“UHT Act”). The UHT, which came into effect on January 1, 2022, imposes a 1% tax on vacant and underused residential real estate owned by certain non-residents and non-Canadians. While Canadian charities and not-for-profits will generally be exempt from paying the tax itself, there are certain circumstances where UHT filing requirements may still apply notwithstanding having a tax exemption.

The Tax Exemption

Subsection 6(7) of the UHT Act sets out various circumstances where the UHT is not payable. This includes an exemption for “specified Canadian corporations” that hold “residential property”. Specified Canadian corporations include both share-capital and non-share capital corporations that are incorporated in Canada (which would include charitable and other types of not-for-profit corporations), with a few exceptions related to limited control by non-citizens and non-residents. A residential property includes a “detached house or similar building that contains a maximum of three dwelling units, including the related land” or a “semi-detached house, rowhouse unit, or condominium, including the related land”. The tax exemption is therefore broad – as a general rule, corporations that are incorporated in Canada and largely Canadian controlled will be exempt from paying the UHT where they hold residential property.

Filing Requirements and Exemptions

Notwithstanding the above, entities that are exempt from paying the tax may nonetheless be required to file an annual UHT return, Form UHT-2900. The return must be filed by entities that are “affected owners” of residential property. Affected owners include those that own residential property in the land registration system where the residential property is located; life tenants under a life estate in the residential property; life lease holders of the residential property; and lessees that have continuous possession of the residential property via a long-term lease.

The general assumption is that affected owners (including those that are exempt from paying the UHT) will be required to file the Form UHT-2900, unless they are subject to a filing exemption. Those owners that are exempt from filing include registered charities for Canadian income tax purposes; cooperative housing corporations, hospital authorities, municipalities, para-municipal organizations, public colleges, school authorities, and universities for Canadian GST/HST purposes; as well as corporations wholly owned by Indigenous governing bodies. Additionally, entities that own residential property as trustees of a mutual fund trust, real estate investment trust (REIT), or specified investment flow-through trust for Canadian income tax purposes are exempt from filing requirements.

While registered charities are exempt from filing, other not-for-profits, apart from those specified above, will not qualify for the filing exemption. As such, corporations that hold residential property in trust for another entity or person other than in a manner specified above, e.g. through a bare trust, will not qualify for the filing exemption. This means that although registered charities are exempt from the UHT filing requirements, it will be important to review title ownership in circumstances where a separate non-charity trustee is holding title in trust for the charity (as is sometimes done, for example, to prevent the merging of adjacent lots of land), since the trustee may not be exempt and may therefore be subject to filing requirements. While the rules regarding exemptions are complex, the Government of Canada provides a helpful interactive questionnaire to assist with determining whether an entity is an affected or excluded residential property owner.

For the 2022 taxation year, affected owners must file a return by October 31, 2023. Thereafter, annual returns for the previous taxation year will be due on April 30, commencing in 2024. The importance of timely filing, even where a tax exemption is available, should also be stressed, as there are significant penalties for failure to file on time. For corporations, there is a minimum penalty of $10,000 per late return. Instructions for filing the return are available online.

​Read the October 2023 Charity & NFP Law Update