Real estate investors, are you aware that some of the recent Federal real estate laws could have tax implications?
One that is catching many investors off guard is the Underused Housing Tax.
Did you even know that in certain circumstances there is a requirement to complete a new tax form for each investment property, and failure to comply will result in a $10,000 fine per property?
Daniel DiManno, Partner at Capstone LLC Chartered Accountants outlines what to expect for filing this April 2023 and subsequent years, what your obligations are, and the implications of not filing or filing incorrectly.
The Reite Club recently hosted an event with Daniel DiManno, CPA, CA, discussing the implications of the Underused Housing Tax Act. Daniel noted that there are severe penalties for failing to file for rental properties by April 30th and that the act could be expensive for investors who are unaware of it.
He also touched on the new anti-flipping rules stating that if you sell a property within 12 months of buying it, you will have to pay business tax on the entire profit, rather than just 50%. There are exceptions to this rule for those who have to sell due to life circumstances.
But the main focus was the “Underused Housing Tax” which is a 1% annual tax that is being imposed on the value of residential real estate in specific circumstances. The tax is meant to target non-primary residences that are left vacant for long periods of time. The tax applies to properties that are not the primary residences of the owners, and that is left vacant for more than six months out of the year.
The new UHT return applies to foreign or domestic non-public corporations, individuals who are non-residents or non-citizens of Canada, trustees of trusts, and partners of partnerships. These people are required to file the return if they own residential rental property. Canadian citizens are not required to file the return unless they are part of a partnership.
This episode discusses the types of property that are exempt from the UHT return, as well as the types of property that are included. It also explains how to determine whether or not a property is considered residential under these rules.
If you own a property that could potentially be considered residential, it could be advisable to file a U H T return in order to avoid any penalties. There are various circumstances under which an individual would be exempt from paying the 1% tax on secondary residences in Ontario. These include if the property is the individual’s primary residence if it is rented out for at least 180 days of the year, if the property is seasonal or inaccessible, if it is undergoing renovation, or if the owner has recently purchased the property. If the owner of the property dies, the executor is also exempt from paying the tax for one year.
The new tax will be 1% of the value of the property, and the value is determined by the most recent sale price or the assessed value based on property tax assessments. The penalties for not filing the return or for not paying the tax on time are quite substantial, and they increase based on the number of months that the return is outstanding.
The Canada Revenue Agency will penalize individuals who do not file a UHT return for each unit they own. The penalties will be multiplied if the individual owns multiple units. The deadline for filing the U H T return is April 30th.
There is some debate among tax experts as to whether or not joint tenants or tenants in common will be considered a partnership for the purposes of the UHT, but it is generally believed that they will not be treated as such. The filing deadline for the UHT has not yet been announced, but it is expected to be sometime in the near future.
Daniel DiManno provides valuable information on the requirements for filing for the CRA including the need to get a RU number, including the need for businesses to call the CRA and obtain the number. He also discusses the implications of a husband and wife owning property jointly with a third party, and how the joint venture would be required to file.
Contact Daniel DiManno
daniel@capstonellp.ca
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