We write to inform you of two important changes to the taxation and reporting of trusts and housing that were brought forward this year. Please read the Trust Reporting Alert and Tax Reporting Alert below for more information.
Trust Reporting Alert: An Update on the Enhanced Trust Reporting Rules
You may remember that the Department of Finance had put forward proposals for a new filing and reporting regime for trusts. A summary of the proposals can be found in our article: New Trust Reporting Obligations — What Trustees And Advisors Need To Know. The proposed filing and reporting rules for trusts will now take effect for taxation years ending after December 30, 2023 (and not for 2022, as previously planned). This delay in the implementation of the proposals is due to Bill C-32, which had its first reading on November 3, 2022. Most trusts have a calendar taxation year, and so the reporting requirement for these trusts will start for the 2023 taxation year. This change in timeline is a welcome reprieve as it is expected that this will become a major new tax compliance burden for trustees and accountants, especially in light of the information that will need to be obtained concerning settlors, trustees and beneficiaries. As well, there is now some additional time to prepare for the reporting requirements that are newly imposed on trusts that did not have any prior obligations. This includes bare trusts and certain express trusts that are resident or deemed resident in Canada. It is important to remember that the trust reporting rules and filing requirements will still apply even if a trust was inactive or did not have reportable income in the tax year.
Tax Reporting Alert: The Underused Housing Tax Act
Owners of certain residential properties in Canada are now subject to tax filing requirements and possible taxation, further to the Underused Housing Tax Act, S.C. 2022, c.5, s.10 (the “Act“). Though the Act includes the term “Underused Housing” in its name, it imposes a tax filing requirement based on its definitions of ownership and residential properties, and not on the property’s use. As a result, it appears that owners of residential property (with some exceptions) must make a tax filing, even if the property is not “underused” or “vacant” (neither of which are defined terms in the Act as it is currently drafted). Importantly, the Act as it is currently drafted, can apply to indirect ownership arrangements, such as bare trusts and corporate nominees that h old title to residential properties. An overview of the Act and its new filing and tax burdens is outlined below.
The Act applies to “owners” and to “residential properties”:
- Owners: a person who is identified as an owner, or who could be considered an owner, under the land registration system, including life tenants, life lease holders and individuals under a long-term lease that have continuous possession of the land fall within this definition. At this time, Canadian resident private corporations (including nominee corporations), partnerships, trusts (including bare trusts, alter ego and joint partner trusts) and estate trustees that hold real property in Canada appear to be “Owners” as they are not considered “Excluded Owners” under the Act. “Excluded Owners” refer to Canadian citizens or permanent residents of Canada, companies listed on a public Canadian stock exchange, registered Canadian charities, trustees of mutual fund trusts, real estate investment trusts and SIFT trusts.
Having said this, the definitions of “Owners” and “Excluded Owners” are not yet complete: both definitions include the term “prescribed persons”, which is not yet defined for the purposes of the Act. We await further regulations for clarity.
- Residential Properties: Canadian residential properties, such as detached homes, detached homes with up to three units, semi-detached homes, row houses and condominiums, are subject to the Act.
Owners must file an annual return by April 30th of the next calendar year, even if the residential property qualifies for a tax exemption under the Act. Trustees of bare trusts and corporate nominees appear to be subject to the filing requirement unless and until a future regulation states otherwise. The Act has retroactive effect to January 1, 2022, and so, the first annual return for the 2022 tax year will be due April 30, 2023. Failure to file the annual return will result in a significant penalty that is equal to the greater of (a) $5,000 if the owner is an individual or $10,000 if the owner is not an individual; and (b) the total of 5% of the applicable tax for the property for the calendar year and 3% of the applicable tax for each complete calendar month that the return is late.
It is likely that the filing obligation will also apply to Canadian resident private corporations, partnerships, trusts (including alter ego and joint partner trusts) and estate trustees that hold real property in Canada even if the beneficiaries of those corporate, trust or estate arrangements are “Excluded Owners” such as Canadian citizens or permanent residents. We await the regulations to the Act, which may clarify whether these arrangements are exempt from the filing requirements. In the interim, it is prudent to ensure that the filing requirements are met within time to avoid incurring a substantial penalty.
The Act also establishes a tax at the rate of 1% of the property’s taxable value for the calendar year, which is the greater of (a) the property’s assessed value for property tax purposes; or (b) the property’s most recent sale price on or before December 31st of the calendar year unless a regulation prescribes a taxable value. All owners of residential properties, other than “Excluded Owners”, will have to pay this tax unless an exemption applies. If more than one person owns a property then each owner will be subject to the taxation and reporting requirements for their share in the property.
There are several tax exemptions in the Act, and a few notable exemptions are available where:
- the residential property is a primary place of residence for the individual, their spouse or common law partner, or their child who is using the property for the purposes of studying at a designated learning institution;
- the owner of the residential property died in the calendar year or the year prior;
- the personal representative of the deceased owner did not own the property within the calendar year or the year prior to the deceased owner’s date of death;
- the owner of the residential property is a “specified Canadian corporation” in the calendar year; or
- the owner of the residential property is an owner solely as a trustee of a “specified Canadian trust”, and is a trustee of the residential property in the calendar year.
From a policy perspective, it is likely that a tax exemption would apply where the occupiers and beneficial owners of residential property are Canadian citizens or permanent residents. However, there is no specific tax exemption for bare trusts or nominee corporations. Whether bare trusts or nominees can fall within the “specified Canadian corporation” or “specified Canadian trust” definitions is subject to interpretation and any future regulations that speak to this.
A “specified Canadian corporation” is a corporation that is incorporated or continued under Canadian or provincial laws, and does not fall within any of the following categories on December 31 of the calendar year:
- individuals who are not citizens or permanent residents hold rights in the corporation;
- the corporation is without share capital and a chairperson or other presiding officer or 10% or more of its directors are not citizens or permanent residents of Canada;
- the corporation is a foreign corporation; or
- a “prescribed corporation” (which is not yet defined for the purposes of the Act).
A “specified Canadian trust” is a trust in which each beneficiary with a beneficial interest in the residential property is an excluded owner or a “specified Canadian corporation” on December 31 of the calendar year.
The regulations to the Act are not yet published and we await further definitions and guidance on interpretation. A broad category of owners should prepare to meet their requirements under the Act if and until there is a clear exemption for properties that are indirectly owned and not otherwise “vacant” or “underused.” You are encouraged to contact your lawyer at Fogler, Rubinoff LLP or one of the members of our Tax and Estates Group to review your documents and obtain legal advice regarding the new taxation and reporting requirements outlined in this bulletin, particularly if you are a trustee, beneficiary or settlor of a trust, or if you directly or indirectly own vacant or underused residential property in Canada.
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