Underused Housing Tax Part II – Is Your Property Underused?

The federal government’s Underused Housing Tax Act (“UHTA”) took effect on January 1, 2022. With the first Underused Housing Tax Return due April 30, 2023, and severe penalties for non-compliance, it is important that Canadian property owners consider whether they are required to file a return and, if yes, whether they owe the tax.

This article is the second of a two-part series discussing the application of the Underused Housing Tax (the “Tax”). The first part, found here, set out the basics of the Tax and which types of owners are required to file a return and may be liable for the Tax.

This second part sets out property-specific exceptions to the Tax, including how to determine whether a residential property is “underused”. We also provide some important tips for drafting residential tenancy agreements to ensure property owners can prove occupancy and that they are not subject to the Tax.

Property Specific Exemptions

For those owners required to file a return and not otherwise exempt from the application of the Tax, some or all their residential properties may still be exempt. There are a few substantial exemptions based on the location, availability, and occupancy of the property.

            Location Exemption

Regarding location, the residential property will generally be excluded if it falls outside a major population center and is used as a residence by the property owner, their spouse or common-law partner for at least 28 days during the year.[1] More specifically, to fall into this location-based exception, the property must be located:

• In neither a census metropolitan area[2] nor a specified census agglomeration[3]; or
• In such an area but not within a population centre.[4]

Property owners relying on this exception will need to continuously review new updates to the Statistics Canada Standard Geographical Classification to ensure they do not fall into one of these areas in future years.

            Availability Exemption

The residential property will fall into an availability exemption if one of the following applies:

• The property is not suitable for year-round residential use (e.g., a house lacking a central heating system or room heating sources[5]);
• It is seasonally inaccessible because public access is not maintained year-round (e.g., the road to the property is impassable throughout the winter season[6]);
• It is uninhabitable for at least 60 consecutive days in the year due to a disaster or hazardous condition (and such disaster/condition did not apply for more than one prior year);
• A unit that is part of the property is uninhabitable for at least 120 consecutive days during the year as a result of a renovation, the renovation is carried out without undue delay, and the renovation exception has not been claimed in the past nine years (e.g., if the units of a duplex are each renovated in subsequent years, the exemption will only be available for one of those years[7]);
• Construction of the property is not substantially completed before April of the year; or
• Construction is substantially completed prior to April; the property is offered for sale to the public during year and it was never occupied by an individual as a place of residence during the year.[8]

The CRA has already provided guidance on when it will consider a property to be “substantially completed” for the purposes of the Act. In particular, the property is substantially complete if it is at a stage of completion that allows an individual to reasonably inhabit the property. This typically occurs when construction is 90% or more complete.[9]

Occupancy Requirements

If none of the owner(s) or property specific exemptions are applicable, the property owner(s) will need to determine whether they have met the occupancy requirements for the property. There are 2 separate classes of occupancy under the UHTA which may exempt an owner from the Tax in respect of a property. The first relates to the property being the primary place of residence for specific individuals; the second, refers to qualifying occupancy.

Under the UHTA, no tax will be payable by an individual for a property if that property (or a dwelling unit within it) is the primary place of residence for one of the following individuals:

• The owner;
• Their spouse;
• Their common-law partner;
• A child of the owner or their spouse/common-law partner if the child occupies the property for the purposes of authorized study at a designated learning institution.[10]

If the owner or their spouse or common-law partner own any additional residential properties, they must file an election with their return stating which property they are claiming this primary residence exemption for. If no such exemption is filed, the owner and the spouse/common-law partner will be liable for the Tax on all their properties.[11]

If the property is not the primary residence of any of the above individuals, the owner will need to determine whether there has been a sufficient “qualifying occupancy period” (“QOP”) in the year. A QOP is a period of at least a month in the calendar year of continuous occupancy of the property (or a dwelling unit within it) by:

• an arm’s length individual (to the owner and any spouse/common-law partner) occupying the property under a written agreement;
• a non-arm’s length individual (to the owner and spouse/common-law partner) occupying the property under a written agreement and paying at a minimum fair rent[12] for the property;
• the owner or their spouse/common-law partner occupying the property for the purpose of pursuing authorized work under a Canadian work permit; or
• the owner’s spouse, common-law partner, parent, or child (“specified relatives”) if they are a Canadian citizen or permanent resident.[13]

To further complicate matters, the QOP for the property will not include periods of time during which the sole occupants are the owner and/or their specified relatives if each of those individuals resides at a different property for a number of days equal to or greater than the number they stay at the property.[14]

For the owner to be exempt from the Tax, the qualifying occupancy periods for the property must total 180 or more days. No single day can be used more than once for the purposes of calculating the total period.[15]

Drafting Tips & Record Retention

For those property owners relying on an exemption or occupancy to not pay the Tax, it is important that they obtain and maintain sufficient documentation and records to prove that they qualify. The CRA has stated that generally records relating to liability under the UHTA must be kept for six years from the end of the year to which they relate.[16] If adequate records to support the exemption or occupancy are not maintained, the CRA may disallow the exemption.

As an example, if an owner says that their property is uninhabitable for 60 or more days due to a disaster or hazardous condition, they may need to prove such a condition existed to the CRA at a later date. Examples of records which could be kept in that scenario are:

• Images of the property;
• Documents related to the renovation or construction; and
• Hotel bills.

If, instead, a property owner is relying on qualifying occupancy by anyone other than themselves or a specified relative (a “renter”), there will need to be a written agreement in place. That agreement must be kept for the six-year period.

If the renter is a non-arm’s length individual, the owner will further need to be able to prove that the rent paid was “fair rent”. To do so, the owner would need records of the rent amount as well as the property’s value that year.

Beyond these basic requirements, the owner could be called on by the CRA to prove that the renter actually occupied the residential property during the QOP. Without provision in a rental agreement, a landlord cannot simply demand that a renter provide them with proof of occupancy.

We therefore recommend that landlords build rights into their residential rental agreements that allow them to request proof of occupancy from their tenants. Even better, there could be a positive obligation on a tenant to provide proof of occupancy, similar to how a tenant is often required to provide proof of tenant’s insurance. This is preferable to waiting for an audit request from the CRA years down the road and attempting to track down the renter at that time.

As the legislation is new, there is little guidance on what documentation could be used to prove proof of occupancy. However, in British Columbia where a similar tax already exists, the governing body has requested, for example, a letter addressed to the renter at that residential property address. A photocopy of the renter’s identification showing the residential property’s address should also suffice. These records would need to be maintained for six years in accordance with applicable privacy legislation.

If you have any questions regarding preparing a lease agreement which contains these types of provisions and with understanding your privacy obligations, any of the members of our Corporate Commercial Law team would be happy to discuss.