Underused Housing Tax: Bare Trusts and New Rules

Canada’s Underused Housing Tax (“UHT”) is a new measure that was introduced by the federal government in 2021. Under the UHT, owners of such properties may be subject to an additional tax of up to 1% of the property’s assessed value. The goal of this tax is to encourage owners to make better use of their properties and to increase the supply of available housing.

However, the UHT adds a layer of tax compliance for those with multiple properties, and it can be particularly challenging for owners who have placed their properties in bare trusts or nominee corporations. In this blog post, we’ll explain what bare trusts are, how they are addressed by the new rules, and what owners can do to comply with the UHT.

What are Bare Trusts?

A bare trust is a legal arrangement in which a trustee holds assets on behalf of a beneficiary. In the case of a property, the trustee holds the title, but the beneficiary retains all the rights and responsibilities of ownership. Bare trusts are often used for estate planning purposes or to protect assets from creditors.

Under the UHT rules, a bare trust is the beneficial owner of the property for UHT purposes. This means that the trustee is responsible for reporting and paying the UHT.

New Rules for Bare Trusts and Nominee Corporations

Under the new UHT rules, bare trusts and nominee corporations that own residential properties in Canada must register with the Canada Revenue Agency (CRA) and provide detailed information about the property and its ownership structure. This information includes the names and contact information of all beneficiaries, trustees, and directors, as well as the terms of the trust agreement or articles of incorporation.

Once registered, bare trusts and nominee corporations must also report annually to the CRA on the property’s use and occupancy. This includes information such as the number of days the property was occupied, the rental income earned, and any expenses incurred. Failure to comply with these reporting requirements can result in significant penalties.

Complying with the UHT as a Bare Trust Owner

If you are the owner of a residential property that is held in a bare trust, its important to understand your responsibilities under the UHT rules. Here are some key steps you can take to comply with the new requirements:

Register with the CRA: As a bare trust owner, you must register the property with the CRA and provide all the required information about the trust and its beneficiaries. You can also designate a contact person who will be responsible for communicating with the CRA (such as your accountant).

Keep accurate records: To comply with the annual reporting requirements, you will need to keep detailed records of the property’s use and occupancy. This includes information such as rental income, expenses, and the number of days the property was occupied.

Consult with a tax professional: The UHT rules can be complex, and it is important to seek professional advice to ensure that you are complying with all the requirements. A tax professional can help you understand your obligations, prepare the necessary reports, and minimize your tax liability.

Calculating the UHT Amount

Let’s say that you own a residential property in Canada that is deemed to be underused under the UHT rules. The assessed value of the property is $5,000,000, and the UHT rate for the municipality where the property is located is 1%.

To calculate the UHT amount, you would simply multiply the assessed value of the property by the UHT rate:

$5,000,000 x 1% = $50,000

In this example, the UHT amount would be $50,000. This is the additional tax that you would be required to pay on top of your regular property taxes.

It’s important to note that the UHT rate can vary depending on the municipality where the property is located. Some municipalities may have a UHT rate that is lower or higher than 1%. Additionally, the UHT only applies to properties that are deemed to be underused or vacant for a certain period, so not all properties will be subject to the tax.

Exemption for Primary Residences

It’s important to note that properties that are occupied as primary residences are exempt from the UHT. This means that if you live in the property for most of the year, you will not be subject to the tax.

To qualify for the primary residence exemption, you must meet certain conditions. First, the property must be your primary residence, meaning that you live in it for at least six months of the year. Second, you must declare the property as your primary residence on your income tax return. Finally, you must be a Canadian resident for tax purposes.

It’s important to note that if you own more than one property in Canada, only one property can be designated as your primary residence for tax purposes. Additionally, if you rent out a portion of your primary residence, only the portion that is occupied by you as your primary residence will be exempt from the UHT.

Capital Gains Exemption

Its also important to note that principal residences held in bare trusts still qualify for the principal residence capital gains exemption. When the beneficiary of the bare trust meets the ownership and designation criteria for the principal residence exemption, they may be able to claim the exemption on the capital gains realized from the sale of the property.