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What the underused housing tax means for homes held in trusts, corporations and those used for vacations

This article, written by Deanne Gage, was originally published by The Globe and Mail on May 18, 2023, and features insights from Aaron Hector, B.COMM., CFP, R.F.P., TEP, Private Wealth Advisor.

With the federal government pushing back the filing deadline for the underused housing tax (UHT) to Oct. 31, some advisors are using the extension to identify and notify affected clients.

The UHT targets primarily non-Canadian owners of Canadian residential property and those who own dormant houses. Those affected by the UHT will have to fork over a 1-per-cent tax per year based on the property’s current market value. For example, on a house valued at $1-million, that translates into $10,000 of UHT.

“That’s a sizable amount of tax that you wouldn’t have had to pay before and it’s every year,” says Aaron Hector, private wealth advisor at CWB Wealth Management Ltd. in Calgary.

“It’s not so much that you’re going to pay that 1 per cent tax. It’s just following the process and making sure you’re filling up the forms and sending them in.”

If it’s not on a client’s radar and they don’t do it for whatever reason, they would be exposed to a significant penalty, he adds. The non-filing penalty is $5,000 for individuals and $10,000 for businesses.

While Mr. Hector says none of his clients mentioned the UHT as a concern proactively, he reviewed all their files to see who has possible exposure. After all, the UHT also affects some Canadian homeowners, he notes.

When properties are held in trusts and corporations

Those who hold any residential property in a trust or corporation will have to file. Also, some clients have alter ego trusts and property trusts to keep their financial affairs private or to help with probate planning.

“Quite a few of these trust structures hold real estate and it’s going to create an annual [UHT] filing for all of them,” Mr. Hector says.

He offers an example of how one of his clients may be affected. A parent is on the title of their child’s house, and there is a trust agreement.

“The trust agreement says the de facto owner is the child but the parents are holding it in trust,” he says. “Someone in a situation like that will be captured [by the UHT] and they still have to file.”

Ian Lebane, vice president, tax and estate planner at TD Wealth Advisory Services in Toronto, says the UHT is aimed at targeting high-end wealth loopholes.

“This is all about who owns the property on the title, the registered title of the real estate,” he says. “If you’re a [Canadian owner] on it, you’re excluded, you don’t have to file anything because you’re a registered owner of the registered property.”

But if the real estate is held in a registered corporation, the person doesn’t own the property, they serve as a trustee, he says. Also to be considered are the shareholders of the corporation who could be non-Canadians. “The government wants to get at those things.”

To start, Mr. Lebane notes advisors should examine closely all the shareholders listed on corporations and beneficiaries on all trusts.

“There may be a niece living in France, for example, who is affected,” he says. “It’s those kinds of things where everybody wants to comply because the penalties are so harsh.”

How vacation homes are impacted

Doug Carroll, tax and estate planning specialist at Aviso Wealth Inc. in Toronto, has received many inquiries from American clients who own properties in Canada about how the UHT will affect them. He advises them to file and when they go through the process, they may not be subject to the tax. Residences that are used as vacation properties have different rules than principal residences.

“A minimum of 28 days is the amount of time you have to be using a property in an eligible vacation area in order to not be subject to the UHT,” he says.

It takes considerable work to fill out the UHT form required, Mr. Lebane adds. Unlike some municipal vacant home taxes in locations such as Toronto and Vancouver, where homeowners receive notification of the tax, with the UHT, owners must self-report.

“You have to get property valuations, name the other property owners, you have to claim the exemption,” he says. “So, if you’re eligible for an exemption, you have to go down the list and tell [the Canada Revenue Agency] which exemption [applies].”

Finally, Mr. Lebane encourages advisors and accountants to ask clients for all the information. In some cases, they might consider “unwinding some of the structures” because they were in place for probate avoidance.

Please note this article is on a third party platform and only available in English.

The preceding information is for educational purposes only. As it is impossible to include all situations, circumstances and exceptions in a newsletter such as this, a further review should be done by a qualified professional. No individual or organization involved in either the preparation or distribution of this letter accepts any contractual, tortious, or any other form of liability or its contents or for any consequences arising from its use.