A number of recent Canadian tax changes have been announced that will affect real estate owners. This article provides a brief high-level summary of a selection of upcoming changes of which real estate owners should be aware. For a more detailed analysis of how these changes will affect your personal situation please contact your Shimmerman Penn representative.
1) Residential Property Flipping Rule
New proposed draft legislation will deem profits on the sale of residential housing units in Canada owned for less than one year (i.e. 365 days) to be business income. Accordingly, unless certain specific exclusions for life events are met, profits from such sales will not be eligible for capital gains rates or the principal residence exemption.
Likewise, the 2022 Fall Economic Statement proposed to extend the same rule to profits arising from assignment sales where rights to a pre-construction residential property are sold at a gain within 12 months.
Under current tax rules, profits would generally only be classified as business income in circumstances where the facts support an “adventure in the nature of trade.”
A new penalty for non-compliance equal to 50% of the additional taxes owing where individuals try to avoid taxes by misclassifying profits has also been introduced.
2) Underused Housing Tax
Effective January 1, 2022, there will be new Federal annual filing requirement, along with a potential tax liability calculated as 1% of the greater of the assessed value or most recent sales price of vacant or underused residential property.
Residential property generally includes detached homes with up to three dwelling units, semi-detached, row-house units, residential condominiums, and similar types of residential dwellings.
Canadian citizens or permanent residents of Canada will generally be exempt from the tax and related filing requirements.
Specified Canadian corporations (i.e. Corporation incorporated in Canada where less than 10% votes and value are held by non-exempt individuals or foreign corporations), Canadian partnerships, or Canadian Trusts holding property will still need to file a return even if exempt from the tax.
Non-resident, non-Canadians or other entities such as Corporations, partnerships, or trusts that are foreign controlled / owned and own residential property will have a filing requirement and may also owe the Underused Housing Tax (UHT) unless at least one specific exception is met.
Limited circumstances that can exempt non-exempt individuals or entities from the tax include uninhabitable or prescribed vacation properties, death, and newly acquired/built properties, or if the property serves as the primary place of residence for the owner, the owner’s spouse or common law partner, or a child for purposes of studying at a designated learning institution. Long-term Rental properties (i.e. Rented for periods of at least one month for a period spanning a total of 6 months during the year) will also be excluded from the tax.
The filing and any balance of tax will be due on or before April 30th of the following calendar year. Failure to file a return on time will be subject to significant penalties, and potential disqualification for exemption from the tax that might otherwise be applicable.
3) Vacant Home Tax (“VHT”) (Toronto)
A new annual tax will be levied on vacant Toronto residences that have been unoccupied for more than 6 months during the previous calendar year. All residential property owners in Toronto will be required to submit a declaration of their property’s occupancy status for the 2022 calendar year.
Declarations will need to be received by the city on or before February 2, 2023. Where an owner fails to make the annual declaration by the deadline and/or provide supporting documentation, a residential property will be deemed vacant.
Toronto residences that are declared, deemed or determined vacant during the previous year will be assessed a municipal vacant home tax equal to 1% of the current value assessment of the property. There are exceptions for limited circumstances including death, hospital / care stays, renovations, transfer of legal ownership, occupancy for full-time employment, and court orders.
A fine of $250 to $10,000 can also be applied where the occupancy status of a property is not accurately declared.
Should you have any questions regarding the Municipal Toronto VHT, please refer to the City of Toronto website or contact the City directly.
4) Bare trustee T3 reporting rules
If you have a bare trustee or other informal trust arrangement, you might have a new reporting requirement next year.
Bare trusts and other informal trust arrangements are commonplace in ordinary commercial activities, particularly in the real estate sector. Nominee corporations are frequently used to hold legal title of a property on behalf of a group of owners in a joint venture or partnership structure, simplifying transactions.
Bare Trusts and other informal trusts will now be required to file an information return reporting detailed information, whereby these arrangements did not previously have any tax filing or reporting requirements under the Income Tax Act.
Informal trusts are broadly used, including in common arrangements to allow convenient banking where legal title is separated from beneficial ownership. For example, parents setting up “In Trust for” accounts for children.
Previous articles published on November 3, 2020 (New Trust Reporting and Disclosure Requirements) and March 11, 2022 (Delayed Implementation of New Trust Reporting and Disclosure Requirements) detailed these new reporting requirements for Trusts.
The new rules are now proposed to be effective for all Trusts’ tax years ending after December 30, 2023, after a one year extension was recently provided by the government.
Accordingly, T3 Trust returns with extensive information reporting will be required to be filed in countless situations. Failure to file and/or report as required may be liable to significant penalties, including up to 5% of the maximum value of the property held during the taxation year by the trust where a failure to file was made knowingly or due to gross negligence.
Clients that identify any Trust, Bare Trust, or other informal trust arrangements in their organizational structure are encouraged to contact their Shimmerman Penn LLP advisor as soon as possible for further advice and planning with respect to the incoming requirements.
Wondering how any of the above changes might affect you? For further details or to discuss your specific situation, please get in touch with a member of our team.
The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity.
Accordingly, the information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers.
While we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future.
Again, no one should act upon any information contained herein without seeking appropriate professional advice after a thorough examination of their particular situation.
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