To address the national housing crisis and increase the supply of affordable housing, steps have been taken by governments at the federal, provincial and municipal levels. The Province of Ontario has instituted a 25% non-resident speculation tax. The federal Prohibition on the Purchase of Residential Property by Non-Canadians Act (the “Non-Canadian Act”) prohibits non-Canadians from purchasing homes in Canada until the end of 2024 (which date may change). The federal government as well as some municipalities are imposing taxes on vacant or underused housing. Like the provincial non-resident speculation tax and the federal Non-Canadian Act, the federal tax on vacant or underused housing targets non-Canadian and non-residents, while the municipal vacant unit taxes target vacancy more generally.
The federal government has also imposed a rule against flipping housing, affecting all owners with potential adverse tax consequences.
The Underused Housing Tax
The federal Underused Housing Tax Act generally applies to non-resident, non-Canadian owners, and was first imposed for the 2022 calendar year. Underused housing tax returns must be filed annually by all owners of residential property in Canada, other than excluded owners, for each of their residential properties.
The tax applies to residential property in Canada, which is defined in the Underused Housing Tax Act as one of either a detached house or similar building with no more than three dwelling units, a semi-detached house, a rowhouse, a residential condominium unit or similar premises. A dwelling unit is a residential unit that contains:
(a) private kitchen facilities; (b) a private bath; and (c) a private living area. A residential unit is a single, self-contained set of rooms in a building or part of a building that is suitable as a residence. Residential properties include duplexes and triplexes, laneway houses and cottages, and exclude quadruplexes, high-rise apartments, mobile homes, hotels, motels and boarding houses, commercial cottage operations, and buildings used more than 50% for retail or office that contain an apartment. A bed and breakfast operated in a home may be a residential property, unless it was purposely built or converted for the specific use (which requires more than just using it for that purpose).
The tax is 1% of the value of the property, levied annually, multiplied by the percentage ownership of the affected property owner. For the purpose of the tax, the property value is the greater of its assessed value or its most recent sale price in a calendar year, and an election can be made on or before the return filing deadline, to have the tax based on the property’s fair market value.
The annual return filing deadline is April 30. For the 2022 calendar year, the deadline has been extended by a year to April 30, 2024. Absent an extension, the filing deadline for the 2023 calendar year will also be April 30, 2024. The penalties for failing to file an annual return are a minimum of $5,000 for individuals and $10,000 for corporations, increasing if the return is more than a year late. Returns must be filed by owners of residential properties, other than excluded owners. That is, all affected owners (ie, not excluded owners) must file a return annually, even if their ownership of a property is exempt from payment of the tax. If the tax is payable in respect of a calendar year, it must be paid by April 30 of the following year.
Excluded owners include Canadian citizens and permanent residents, the provincial and federal governments and their agents, indigenous governing bodies, charities registered for Canadian tax purposes, co-operative housing corporations and corporations incorporated under the laws of Canada or a province whose shares are listed on a Canadian stock exchange. Excluded owners do not include other corporations incorporated in Canada, such as Canadian controlled private corporations.
Affected owners of a residential property on December 31 of a calendar year have to pay the underused housing tax for the property for the calendar year, unless their ownership of the residential property is exempt from the tax for the calendar year. Ownership of the residential property may be exempt if certain conditions are met, including where the property is:
(a) a vacation property located in an eligible area of Canada (areas with smaller populations);
(b) used as a primary place of residence;
(c) used for qualifying occupancy;
(d) not suitable for year-round use or only seasonally accessible;
(e) uninhabitable during the calendar year;
(f) newly constructed;
Ownership of the residential property may also be exempt if the owner is:
(a) a specified Canadian corporation, a partner of a specified Canadian
partnership, or a trustee of a specified Canadian trust;
(b) a new owner during the calendar year (who was not an owner during the
previous nine calendar years);
(c) a deceased individual, or their personal representative or co-owner.
The vacation property exemption applies only where the property is: used by the owner, the owner’s spouse or common-law partner as a residence for at least 28 days in the calendar year; located in an eligible area; and is owned by individuals (ie, not corporations).
To satisfy the requirements of the qualifying occupancy exemption, at least 180 days of ownership in the calendar year must be included in one or more qualifying periods of occupancy. A qualifying period of occupancy is a period of at least one month in a calendar year during which certain individuals have continuous occupancy (the right to occupy, even if physically absent) of a dwelling unit that is part of a residential property. There are two types of qualifying occupants – individuals with written agreements (referred to as Type 1 qualifying occupancy); and individual owners and their families (Type 2).
Affected owners of newly constructed properties that are not substantially completed by March 31 in the calendar year are exempt from the underused housing tax, as are affected owners of homes completed prior to March 31 that are not inhabited as a residence during the calendar year but are offered for sale in the year (ie, homes held as inventory by builders).
A corporation is a specified Canadian corporation and exempt from the tax where less than 10% of the equity shareholders or holders of less than 10% of the voting rights are not Canadian citizens or permanent residents. Ownership by the trustees of a trust whose beneficiaries are all excluded owners or specified Canadian corporations, and by a partnership whose members are all excluded owners or specified Canadian corporations are also exempt from the tax. So, while a Canadian-controlled private corporation that owns residential property is exempt from payment of the tax, it is still required to file a return annually, or face steep penalties.
Where an affected owner died in the calendar year or previous calendar year, the ownership of a residential property is exempt from the underused housing tax for the calendar year. The ownership of a co-owner of a deceased co-owner is also exempt from the tax where the deceased’s ownership percentage was at least 25%.
The exemptions for primary places of residence and Type 2 qualifying occupancy are intended to apply only to individual owners and certain members of their families. For owners of multiple residential properties who are neither Canadian citizens nor permanent residents, an election can be made to exempt only one such property from the tax.
All affected owners should take note of the annual return filing deadline. It is important to remember that affected owners must file annual returns, even if they are exempt from the underused housing tax.
Vacant Unit Taxes
Municipalities, including the Cities of Toronto and Ottawa are imposing taxes on vacant residential units. In Ottawa, the tax was first payable in 2023, and 2022 in Toronto. In Hamilton, a vacant home tax was expected to be passed by municipal Council in November, 2023, and its defeat was a surprise. Peel Region was considering imposing the tax, but postponed the decision when the Province passed legislation in 2023 to initiate the process of dissolving the regional municipality. In December, 2023, the provincial government backed down on the dissolution of Peel Region. Events in Hamilton and in Peel may be just delays in the ultimate implementation of vacant unit taxes.
The purpose of the vacant unit tax is to increase available housing, by encouraging property owners to rent unoccupied homes. The tax rules are similar in the various municipalities that have imposed vacant unit taxes, but the following discussion refers specifically to the tax levied in the City of Toronto, where the tax is currently a levy of 1% annually (and will rise to 3% in 2024) of the assessed value of an unoccupied residential unit. The cost of the tax is a disincentive to owners who would otherwise allow homes to remain vacant.
In Toronto, a residential unit is considered vacant if during the year, no dwelling units comprising the residential unit are either the principal residence of the owner or another occupant (including a tenant), or occupied for residential purposes by one or more tenants for at least six months of the year. A residential unit is a dwelling unit as determined by the property assessment. A house used for commercial purposes or a builder’s model home that are assessed as commercial properties for tax purposes are not considered residential units. Multiple unit properties, co-ops and other properties in the residential tax class with a single assessment roll number and multiple units will be considered occupied if at least one unit was occupied for six months or more.
A principal residence is a residential unit in which a person is ordinarily resident. A person may only have one principal residence. A principal residence does not need to be the primary residence in which a person most often resides. For example, for the person fortunate enough to have a winter home in a warm country, a summer cottage in Ontario, and a home in Toronto, spending more time at the cottage than at the home in Toronto should not prevent the individual from designating the home as the person’s principal residence.
The vacant unit tax applies if the unit was vacant or deemed vacant in the previous year, unless an exemption applies. Exemptions exist, where: (i) an owner has died; (ii) the unit is undergoing repairs or renovations that prevent occupancy; (iii) the principal resident is in hospital or long-term care; or (iv) the property was transferred to an arm’s-length transferee during the taxation year. A unit will be deemed to be vacant where an owner fails to file a declaration regarding the occupancy status of a residential unit by the due date (the declaration due date in Toronto is currently the end of February for the previous taxation year. Note that the failure to file a declaration will result in the tax being levied. The various municipalities levying this tax seem to agree that this sort of deeming provision is an appropriate way to ensure compliance with the reporting requirements. In addition, there are fees associated with late filing, and like unpaid property taxes, penalties (up to $10,000) and interest (1.25% per month) on unpaid fees and taxes, and these amounts are considered a lien against the property in priority to mortgages.
Regular audits are expected to take place.
When purchasing residential property in a municipality that imposes a vacant unit tax, purchasers should ensure that the vendor submitted the required occupancy declaration and has paid or will pay any applicable vacant unit taxes. Care must be taken, because non-payment of the tax may not be evident from property tax records, because the vacant unit tax for a previous year’s vacancy will not be levied at the time interim tax bills are issued for the current year. In a purchase and sale agreements, purchasers should obtain the vendor’s representation and warranty with respect to whether the tax is applicable and the vendor should be required to provide the purchaser with a copy of the most recently filed occupancy declaration along with a sworn or declared statutory declaration that the occupancy declaration is true and correct.
Federal Anti-Flipping Rule
As of January 1, 2023, the federal Income Tax Act was amended so that profits from flipping properties are taxed as income rather than as capital gains (only 50% of which are taxed). Previously, whether profits from flipping were to be characterized as income or capital gains was a matter of fact to be determined in each situation. The anti-flipping rule prevents them from being considered as capital gains. Where the rule applies, the principal residence exemption is not available.
The anti-flipping rule applies where a person owns a residential property for less than 365 consecutive days, and it applies to assignment transactions as well sales. Where a person suffers a loss on a sale within 365 days of acquiring ownership of a property, the loss is not deductible. Limited exceptions to the rule are available, where the sale of a property within 365 days of acquiring it was due to:
(i) serious illness, disability or death,
(ii) household or family additions,
(iii) relationship breakdown,
(iv) threats to personal safety,
(v) work relocation or termination of employment,
(vi) insolvency, or
(vii) destruction or expropriation.
The increased income tax consequences of the anti-flipping rule certainly makes flipping a less attractive activity. However, critics are skeptical about whether the anti-flipping rule, or the vacant and underused housing taxes, will have any real impact on increasing the availability and affordability of housing in Canada.