What is the Underused Housing Tax?

Effective January 1, 2022, the Underused Housing Tax (UHT) was introduced by the Canadian federal government with the objective of applying a one percent annual tax on the value of vacant or underused residential properties located in Canada. The goal of the newly implemented legislation is to mainly penalize non-resident, non-Canadian owners of vacant or underused residential property. As a result, the tax generally applies to residential property owned by foreign individuals who are not Canadian citizens or permanent residents – in certain circumstances, the rule may also apply to residential real estate owned by Canadian entities. ¹  This UHT was implemented on June 9, 2022 and applies to those who own residential property as of December 31, 2022. ² 


What Types of Properties are Affected by the Underused Housing Tax?

According to the Government of Canada, the UHT applies to Canadian residential
property which include, but are not limited to: ³ 

•  Detached houses
•  Duplex
•  Triplex
•  Semi-detached house
•  Townhouse or rowhouse unit
•  Residential condominium unit
•  Other similar property types that contain three or fewer dwelling units

Who Needs to File the Underused Housing Tax?

Under the UHT, all affected owners of residential property in Canada on or before December 31, 2022 must file an Underused Housing Tax return (UHT-2900) by April 30 of the subsequent calendar year. ⁴  Affected owners, unless qualified for an exemption, are required to pay the one percent tax of the property’s value (calculated as the greater of the property’s assessed value or most recent sale price) multiplied by the ownership percentage.⁵  It is important to note that even if an affected owner’s residential property qualifies for a tax exemption, he or she is still required to file a UHT-2900. Excluded owners of residential property, on the other hand, are not required to file an Underused Housing Tax return.

Who Qualifies as an Affected Owner?

As previously stated, all affected owners of residential property are required to file an Underused Housing Tax return. The following criteria below applies to affected owners: ⁶ 

•  A foreign individual who does not hold Canadian citizenship or permanent residency
•  An individual who holds Canadian citizenship or permanent residency and     owns residential real estate as a trustee of a trust (with the exception of acting as a     personal representative of a deceased individual)
•  Any individual who owns residential real estate as a partnership
•  A corporation that is not incorporated in Canada
•  A Canadian corporation with shares not listed on a Canadian stock exchange
•  A Canadian corporation that does not hold any share capital

Who Qualifies as an Excluded Owner?

Excluded owners are not obligated to file a UHT-2900. To qualify as an excluded owner, one of the following criteria must be met: ⁷ 

•  An individual who holds Canadian citizenship or permanent residency
•  A Canadian corporation whose shares are publicly traded on a Canadian stock         exchange
•  A registered charity
•  Any individual who owns residential real estate as a trustee of a trust
•  A cooperative housing corporation
•  An Indigenous governing body or a corporation that falls under the ownership of       an Indigenous governing body
•  A government body, municipal organization, or other public service organization

What are the Exemptions to the UHT?

Although an individual may be an affected owner of the UHT, he or she may be eligible for an exemption which is strictly dependent on: ⁸ 
    1. the type of ownership
    2. the occupancy of the property
    3. the availability of the property
    4. the location and use of the property

Type of Ownership Exemption

The first exemption is based on the type of ownership of the residential property. To
qualify for this exemption, one of the following criteria must be met: ⁹ 

• a new owner in the calendar year (must not have owned the property in the past nine years)
• a deceased owner, or a representative or co-owner of the property of the deceased owner
• the residential property is owned by a specified Canadian corporation, a partner of a specified Canadian partnership, or a trustee of a specified Canadian trust

Occupancy of the Property Exemption

The second exemption is based on the nature of the occupancy of the property. To fall
under this exemption, the owner must satisfy the following: ¹⁰ 

• the residential property is the primary place of residence for the owner, the owner’s spouse or common-law partner, or the owner’s dependents attending a designated educational institution
• the qualifying occupancy period test, where the property must be occupied for no less than 180 days in the calendar year, which consists of one or more periods that are at least one month in length through:

Availability of the Property Exemption

This exemption is based on the availability of the residential property, where the exemption may be claimed provided that the property is: ¹¹ 

•  a newly constructed property
•  uninhabitable year-round or partially inaccessible on a seasonal basis
•  uninhabitable for no less than 120 consecutive days due to renovations or in         complete construction
•  uninhabitable for at least 60 consecutive days due to disaster or hazardous conditions

Location and Use of the Property Exemption

The final exemption relates to the location and use of the residential property, where an
exemption may be eligible where:

• the property is a vacation property located in a designated area and is used by the owner or their spouse or common-law partner for at least 28 days in a calendar year

How to File the UHT and Penalties for Late Filing

The UHT may be filed either by mail or electronically. If elected to file by main, the UHT-
2900 form must be mailed to either the Winnipeg Tax Centre or the Sudbury Tax Centre
depending on the owner’s location of residence. Failure to file the UHT in a timely manner
(before April 30 th ) may result in late penalty charges, which include a minimum penalty of
$5,000 for individuals and a minimum of $10,000 for corporations.

For those with address of residences located in any of the following locations, the form may be mailed to the Winnipeg Tax Centre: ¹² 

• Canada – Alberta, British Columbia, Saskatchewan, Manitoba, Northwest Territories, Nunavut, Yukon, and all locations in Ontario with the exception of Toronto, Barrie and Sudbury
• International – United States of America, United Kingdom, France, Denmark, Netherlands

Winnipeg Tax Centre
Post Office Box 14001
Station Main
Winnipeg MB R3C 3M3
Canada

For those with address of residences located in any of the following locations, the form may be mailed to the Sudbury Tax Centre:

• Canada – Quebec, New Brunswick, Newfoundland and Labrador, Nova Scotia, Prince Edward Island, and only those located in the cities of Barrie, Sudbury or Toronto in Ontario

Sudbury Tax Centre
1050 Notre Dame Avenue
Sudbury ON P3A 5C2
Canada

If elected to file online, the UHT may be filed on the following website:
https://apps.craarc.gc.ca/ebci/sres/ext/pub/ntrUhtFlng?request_locale=en_CA

1 https://www.canada.ca/en/services/taxes/excise-taxes-duties-and-levies/underused-housing-tax.html
2 https://www.mnp.ca/en/insights/directory/underused-housing-tax-act
3 https://www.mnp.ca/en/insights/directory/underused-housing-tax-act
4 https://www.canada.ca/en/services/taxes/excise-taxes-duties-and-levies/underused-housing-tax.html
5 https://www.manningelliott.com/blog/underused-housing-tax-
uht#:~:text=Form%20UHT%2D2900%20is%20to,30th%20of%20the%20following%20year.
6 https://www.canada.ca/en/services/taxes/excise-taxes-duties-and-levies/underused-housing-tax.html
7 https://www.canada.ca/en/services/taxes/excise-taxes-duties-and-levies/underused-housing-tax.html
8 https://www.canada.ca/en/services/taxes/excise-taxes-duties-and-levies/underused-housing-tax.html
9 https://www.mnp.ca/en/insights/directory/underused-housing-tax-act
10 https://www.mnp.ca/en/insights/directory/underused-housing-tax-act
11 https://www.canada.ca/en/services/taxes/excise-taxes-duties-and-levies/underused-housing-tax.html
12 https://www.canada.ca/en/services/taxes/excise-taxes-duties-and-levies/underused-housing-tax.html#2

How to Determine the Deductibility of Business Expenses?

The determination of the deductibility of certain business expenses for taxation purposes has often boggled the mind of numerous business owners. To appropriately determine the deductibility of a business expense, the first and foremost procedure is to determine whether the expense is of a personal or business nature. In accordance to paragraph 18(1)(a) of the Income Tax Act, business expenses that are eligible for a deduction are only  limited to those that are incurred “for the purpose of gaining on producing income from [a] business or property”. ¹ In addition, paragraph 18(1)(h) further states that personal expenses are not eligible for a deduction with the exception of travel expenses incurred in the course of generating business income. ² In other words, deductible business expenses are only limited to expenses incurred for the purpose of income-generating activities while personal expenses are deemed non-eligible deductions.

Moreover, it is important to note that business expenses that qualify for a deduction must be reasonable in amount. While this criterion is rather subjective in nature, the general rule for determining the reasonableness of a business expense relates to the question: Provided the circumstances, would an ordinary person in the course of business not pay such an amount? ³ If the answer to the question is yes, then the amount is likely to be unreasonable. For example, cleaning services for the purpose of property maintenance is considered a legitimate business expense incurred for income-generating purposes. A business owner may also decide to employ a family member to perform these services once a week for three hours while paying that individual a salary for the service performed. In this case, the amount paid must be reasonable taking into consideration the prevailing market rate for such services – offering a wage of $100 an hour may seem unreasonable provided that the average rate for cleaning services in a certain jurisdiction is equivalent to $25 an hour.

What Expenses Qualify for a Tax Deduction?

As a general rule, personal and living expenses are prohibited from tax deductions as only expenses that are incurred for the purpose of generating business income are eligible for deductions. The list below is comprised of business expenses that are generally eligible for a deduction&nbsp⁴:

• Accounting, legal, and other professional fees
• Advertising and marketing expenses
• Business tax, fees, licenses and dues
• Insurance expenses
• Bank charges and interest expense
• Repair and maintenance expenses
• Office expenses
• Meals and entertainment (limited to 50%)
• Employee wages, salaries and benefits
• Business start-up costs
• Motor vehicle expenses
• Business supplies
• Home office expenses
• Rent
• Telecommunication expenses
• Utility fees
• Property taxes
• Private health insurance premiums
• Bad debt

What Expenses Do Not Qualify for a Tax Deduction?

In contrary to the above listed deductible business expenses, the following list below outlines some common non-deductible business expenses ⁵ :

• Value of your own labour (i.e., repairing your own doors)
• Capital assets (i.e., furniture, office equipment)
• Capital expenses (i.e., repair and maintenance of floor or windows)
• Commuting costs (i.e., home to workplace)
• Penalties and fines
• Golf club dues and gym memberships
• Life insurance premiums

What the CRA Looks for During Business Audits

In order to verify the legitimacy of business expenses, the CRA conducts regular business audits of the expenses incurred in a business. In particular, the CRA will be on the look out for personal expenses claimed as business expenses, with red flags including ⁶ :

• Purchases made that appear irrelevant to the performance of ordinary business activities
• Purchase invoices addressed to the taxpayer or their related parties
• The shipment/delivery address on the invoice is the taxpayer’s own residence
• Credit card transactions made for personal purchases

Tips to Track Business Expenses

To facilitate the recordkeeping process for business expenses, it is important to develop good habits to track these expenses. First of all, it is mandatory to keep all records associated with your business expenses, including but not limited to receipts, invoices, monthly bank and credit card statements, as well as a record of each automobile used for business purposes. Below are some tips to help make the recordkeeping process simpler and more efficient:
 TIP 1: Always ask for a receipt for all purchases made. When possible, label the receipts with
relevant information such as the expense category and the purpose of the cost incurred.
 TIP 2: Keep personal and business expenses separate. Open a separate business account and credit card and use these for the sole purpose of business expenses.
 TIP 3: For motor vehicles used for both personal and business purposes, keep a mileage log of the total kilometers driven for business purposes as well as the date, purpose, destination of the trip. In addition, record the odometer at the start and end of the year and keep a separate mileage log for each vehicle if you use more than one vehicle for business travel.

¹ J. Andre Rachert, "Proving Business Expenses: Checklists and Commentary," in 2012 British Columbia Tax Conference (Toronto: Canadian Tax Foundation, 2012), 11:1-26.
² J. Andre Rachert, "Proving Business Expenses: Checklists and Commentary," in 2012 British Columbia Tax Conference (Toronto: Canadian Tax Foundation, 2012), 11:1-26.
³ Hugh Neilson, "Deductibility of Expenses," in 2013 Prairie Provinces Tax Conference (Toronto: Canadian Tax Foundation, 2013), 14:1-21.

⁴ https://www.canada.ca/en/revenue-agency/services/tax/businesses/small-businesses-self-employed-income/business-income-tax-reporting/business-expenses/types-operating-expenses.html

⁵ https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/sole-proprietorships-partnerships/business-expenses.html

⁶ J. Andre Rachert, "Proving Business Expenses: Checklists and Commentary," in 2012 British Columbia Tax Conference (Toronto: Canadian Tax Foundation, 2012), 11:1-26.

We will cover the fiscal year-end determination in regard to the following situations:

• New Corporations
• Inactive Corporations
• Change of fiscal year end
• Other Special Situations
• Winding-up / dissolution
• Emigration

New Corporations: Setting up a Tax Year and Filing a Corporate Income Tax Return

Setting up a new corporation can be an exciting yet stressful time for many new business owners. Taxation implications, in particular, constitute one of the most important yet problematic issues of which new corporations must be aware.

First and foremost, corporations must decide on a tax-year. Under Canadian taxation law, the tax year for a corporation is equivalent to its fiscal period and cannot be greater than 53 weeks or 371 days. For instance, suppose that a new corporation’s incorporation date is March 25, 2021. For its fiscal year end, the company may choose any date no longer than 53 weeks or 371 days from its incorporation date as its fiscal year end, or in other words, any date before March 31, 2022. Although a newly incorporated corporation is free to choose any date as its fiscal year end, in practice it is recommended that corporations choose the end of a month as its fiscal year end. For individual income tax purposes, the tax-year end is December 31.

However, for corporation income tax purposes, a corporation may decide not to use December 31 as its fiscal year end, which in turn results in a time difference when filing income for individual and corporate tax purposes. In the example above, suppose that the corporation chooses March 31, 2022, as its fiscal year end. Since the March 31 year end is different from the December 31 year end for individual income tax filing, this may result in those shareholders receiving dividends, bonuses, and other compensation to report these incentives on their individual income tax return the subsequent year. Therefore, corporations should contact their accountant prior to their fiscal year end in order for the accountant to gain a better understanding of the corporation’s financial situation and make appropriate recommendations.

On the other hand, it is worth mentioning that for group companies or otherwise known as multiple corporations controlled by a sole shareholder or same group, it is recommended to talk with your accountant in regard to your group company’s tax planning.
In terms of filing a corporate tax return, the CRA requires that a tax return must be filed within the six months following the end of a tax year. Referring to the example above, since the fiscal year end is March 31, the corporation is thus required to file their corporation income tax return before September 30.

Inactive Corporations

A corporation that has not conducted any business operations during the fiscal year is deemed inactive. A common misconception is held by many businessowners in relation to filing taxes for an inactive corporation, simply believing that because the corporation has not generated any business activity for the fiscal year, it is therefore not required to file corporate taxes. However, this is not the case as the CRA requires that regardless of a corporation’s activity, it is still required to file a tax return as long as it is incorporated. One thing to note is that inactive corporations that do not have any information on their statement of financial position or statement of earnings are not required to fill out schedules 100, 125, 141 on their corporate tax return.

Change of fiscal year end

If under any circumstances that a corporation decides to change its fiscal year end, the corporation must submit a letter to the CRA for approval, citing a full explanation of the details and an effective date for the proposed change. In certain circumstances, such as the change of the fiscal year end occurred automatically, then approval from the CRA is not required.

Other Special Situations

Change of Control
As per ITA ss.249(3.1), deemed year end occurs on change of status and another deemed year end on acquisition of control subject to ss.249(4). If a CCPC’s shares are acquired by a non-resident, it might result in a situation that two deemed year ends will occur.

First, when a formal share purchase agreement is signed, a deemed year end will occur due to the loss of CCPC status.

Afterwards, when the CCPC shares purchase actually occur, this will subsequently result in a second deemed year end subject to ss.249(4). For more detailed information regarding these changes, CRA Technical Interpretation 2011-0424446E5 can be used as a guide.

Winding-up / dissolution

In the course of winding-up of a corporation, the corporation’s fiscal year ends at dissolution.

Note: A corporation with the status 'intent to dissolve' or 'in the process of dissolution' must file as long as they are not entirely dissolved.

Emigration
When a corporation is no longer a Canadian resident, there will be deemed year end due to the change of the corporation’s status subject to ss.128.1(4).

When you start your business with your passion and vision, do you have any plan on your accounting records management? It will be wise to consider it when the business is started.

Tips:

Keep all sales invoices, payment receipts, bills in an order. The records might be sorted by dates, all organized by month. Or the records can be organized by categories including names of customers, vendors, government filings, company legal books etc.

Use an accounting software will be helpful to track the records. Nowadays, online banking can be linked with accounting software. Bank and credit card transactions can be updated timely. Reconciliations can be performed periodically to check if there are missing bank transactions recorded.

In the meantime, there might be shareholder's out-of-pocket payments for business expenses. A reimbursement form will be helpful to list the payments by the shareholder to withdraw the equivalent amount from the company. If the amount is not reimbursed yet at the year end, the expenses should be recorded in the company's books. The unpaid balance by the company will be the short-term shareholder loan.

There are other things that the shareholder who is actively involved in the business should be aware of. For example, how to track the GAS expenses for business? Are all meals and entertainment deductible for business purposes? What if the shareholder works at home for business? When the shareholder needs to get a new phone and how it record it appropriately for the company?

You are more than welcome to contact us if you would like to ask.

It's time to get your 2021 tax return prepared and filed on time. We hope the checklist can help you have gather the required tax information to complete your tax return. Please feel free to contact us if you have any questions. We will be able to help you for additional information like moving expenses, more detailed information needed for rental income reporting etc.

2021 T1 Checklist