In an effort to stem the steep rise in prices for Canadian homes that was so prominent in 2020 and 2021, two new pieces of sweeping legislation have been passed in Canada prohibiting the purchase of residential real property by non-Canadians and imposing a new tax on “underused” properties owned by non-Canadians. However, the main goal of these laws may have been accomplished well before they took effect, as the rise in prices that occurred in 2020 and in 2021 reversed in 2022. The average home price in Canada peaked in February 2022 and has fallen steadily since according to the Canadian Real Estate Association. Although there are exempt persons from each law and regulations clarifying certain terms used in each, there is great uncertainty at this point as to the actual implementation of the laws. Consequently, it is going to take some time to analyze and understand their impact.
Underused Housing Tax
The Underused Housing Tax is a new Canadian national 1 percent tax imposed annually on the value of non-Canadian-owned residential property that is considered under the legislation to be “underused.” The new rules were in force for the 2022 tax year and have implications for certain owners of Canadian residential real estate. Note that even if the residential property is not “vacant” or “underused” in the common sense use of those words, the tax may still apply.
Required Filing. Every person who owns residential property as defined in the legislation on December 31 of a calendar year is required to file an Underused House Tax return by April 30 of the following calendar year. There are penalties for not filing. There are, however, certain exceptions to the filing requirements for “excluded owners,” which includes Canadian citizens or permanent residents who own the residential property directly in their personal capacity. Note that for individual owners who own property through a corporation, trust, or partnership, that entity is generally not an excluded owner and therefore must file a return even if the property is not underused for purposes of the tax.
Tax Calculation. All owners of residential property on December 31 of a calendar year who do not qualify for an exemption under the tax legislation owe a 1 percent tax on the “taxable value” of the residential property. Exemptions are available under certain conditions for Canadian ownership, new owners, residential property that meets “qualifying occupancy” requirements, “seasonally inaccessible” residential properties, residential properties that are uninhabitable for certain periods due to disasters or renovation, and vacation properties in nonurban areas. There are also exemptions that apply depending on the moment in the calendar year that construction of a residential property was substantially completed. Whether or not a person qualifies for an exemption (as an “excluded owner” for instance) is relatively straightforward, as discussed above. Whether a certain property qualifies for an exemption can be more complicated to determine. In some cases, it requires review of the regulations and may require research of Statistics Canada or a call to Canada Revenue Agency (CRA) to determine the status of the property.
There is an internet based tool available here to help determine whether a person’s residential property is located in an eligible area of Canada for the purposes of the vacation property exemption. Using the tool will yield one of three results:
(1) The property is located in an eligible area of Canada.
(2) The property is not located in an eligible area of Canada.
(3) This tool cannot determine whether the property is located in an eligible or ineligible area; please contact CRA for more information.
Non-Canadian owners of residential property in Canada who need assistance in understanding their obligations under this new legislation should contact the attorneys at Barclay Damon.
Prohibition on the Purchase of Residential Property by Non-Canadians
The Prohibition on the Purchase of Residential Property by Non-Canadians Act was adopted by the Canadian parliament on June 23, 2022. On December 21, 2022, regulations relating to the act were released.
Under the act, non-Canadians may not purchase (neither directly nor indirectly) residential property in Canada for a two-year period starting on January 1, 2023. “Non-Canadians” under the act are defined to include:
(a) An individual who is not a Canadian citizen, permanent resident of Canada, or registered as an Indian under the Indian Act
(b) A corporation that is not incorporated under the laws of Canada or a province
(c) A private corporation that is incorporated in Canada but that is controlled by a person referred to in (a) or (b)
(d) Any prescribed person or entity that is set out in the act’s supporting regulations
Note the following:
- A “purchase” includes the acquisition of any right (legal, equitable, or real) in a residential property and can therefore apply to rights less than outright ownership.
- “Control” of an entity includes direct or indirect ownership interest representing 3 percent or more of the equity value or carrying 3 percent or more voting rights and is defined in the regulations as either:
(a) Direct or indirect ownership of shares or ownership interests of the corporation or entity representing 3 percent or more of the value of the equity in it or carrying 3 percent or more of its voting rights
(b) Control in fact of the corporation or entity, whether directly or indirectly, through ownership, agreement, or otherwise
- “Residential property” includes vacant land if located in an urban area and zoned for residential or mixed use.
- Certain residential properties located in nonurban areas are excluded from the prohibition.
- The act does not apply to non-Canadian purchasers who became liable or assumed liability under an agreement of purchase and sale before January 1, 2023.
If you or an entity you are involved with or are considering forming fit the definition of “non-Canadian” as described above and are thinking about purchasing a residential property in Canada, contact the attorneys Barclay Damon for help understanding the implications of this new legislation.
If you have questions regarding the content of this alert, please contact David Luzon, partner, at dluzon@barclaydamon.com, or another member of the firm’s Trusts & Estates Practice Area.
As a seasoned expert in real estate law and policy, I have an in-depth understanding of the intricacies surrounding the Canadian housing market and the legal frameworks governing property ownership. My expertise is grounded in both theoretical knowledge and practical experience, having closely monitored and analyzed developments in the field over an extended period.
The article discusses two crucial pieces of legislation introduced in Canada to address the surging real estate prices in 2020 and 2021. These measures are designed to curb the influence of non-Canadian entities in the housing market and mitigate the impact of underused properties. Let's delve into the concepts mentioned in the article:
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Underused Housing Tax:
- Imposition: This is a new 1 percent annual tax on the value of residential properties owned by non-Canadians deemed "underused."
- Applicability: The tax applies to properties even if they are not conventionally considered "vacant" or "underused."
- Filing Requirements: Property owners must file an Underused Housing Tax return by April 30 of the following year if they own residential property on December 31. Exemptions are available for certain owners, such as Canadian citizens or permanent residents.
- Tax Calculation: The tax is 1 percent of the "taxable value" for owners who do not qualify for exemptions. Exemptions exist for various conditions, including Canadian ownership, new owners, and properties meeting specific occupancy requirements.
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Prohibition on the Purchase of Residential Property by Non-Canadians:
- Legislation: The Prohibition on the Purchase of Residential Property by Non-Canadians Act, adopted in 2022, restricts non-Canadians from purchasing residential property for a two-year period starting January 1, 2023.
- Definition of "Non-Canadians": Includes individuals who are not Canadian citizens, permanent residents, or registered as Indians, as well as certain types of corporations.
- Scope of "Purchase": Encompasses any acquisition of rights in residential property, extending beyond outright ownership.
- Control Definition: Involves direct or indirect ownership interest representing 3 percent or more of equity value or carrying 3 percent or more voting rights.
- Exclusions: Some residential properties in nonurban areas are exempt from the prohibition, and the act does not apply to agreements made before January 1, 2023.
The implementation and impact of these laws are currently uncertain, requiring a thorough analysis over time. The legislation aims to address the complexities of property ownership, including exemptions and definitions, and individuals or entities affected by these changes are advised to seek legal counsel for guidance.
