Are You a Property Manager with Foreign Owners?

Do you manage short-term rental properties for property owners who are not Canadian citizens or permanent residents? Are the properties located in British Columbia or any major Canadian municipality that has, or will be, imposing bans or restrictions on short-term rentals?  If you answered “Yes” to either of these questions, then this article is for you. 

What Property Managers need to know about Underused Housing Tax (UHT) tax returns?  

Many property managers are not aware of their offshore owners’ obligations to file a new type of tax return in Canada, because of the federal Underused Housing Tax (“UHT”) legislation. In our series of articles on the UHT, we have highlighted the basics of this new tax and the implications for Canadians and offshore owners. 

The UHT was originally intended to apply only to offshore owners, such as non-citizens, foreign companies, etc., but once enacted, the new rules applied to many Canadian companies, Canadian citizens and permanent residents. Due to an overwhelming amount of negative feedback, the federal government is now proposing to amend the law to exclude most Canadians and companies from having to file the annual return and claim any applicable exemptions from paying the tax.   

Are 2022 UHT returns not impacted by the 2023 Fall Economic statement? 

Here’s the catch: new definitions only apply for the 2023 calendar year forward, so any Canadians whom the new rules, and proposed exemptions, apply to will still need to file the 2022 calendar year return to avoid late filing penalties. This very important issue may have been lost on some, amongst the other good news that the proposed changes brought. 

Overall, the changes are welcome news, however foreign owners must still file annual UHT returns starting with the 2022 calendar year. 2022’s returns are now due on or before April 30, 2024, because of various filing deadline extensions provided by the Canada Revenue Agency (“CRA”).   The 2023 calendar year returns must also be filed by the same date, and we do not expect the CRA to offer any further filing deadline extensions. Property Managers are regularly surprised when they read our article on the UHT, which discusses the rules for foreign owners.  

What are the implications of the Reduction of UHT penalties?

Some other good news from the 2023 Fall Economic Statement is that the proposed changes include a reduction of the minimum late filing penalty to $1,000 per return per individual on title and $2,000 per corporation on title. These penalty reductions apply for the 2022 and forward reporting years and apply equally to Canadian owners and offshore owners. 

What are the Condos and Strata’s exempt from UHT? 

Another proposed change confirms that most unitized (condos or strata’s) apartment buildings are not “residential property” for UHT purposes. This change would be retroactive to the 2022 reporting year and all subsequent calendar years. As such, “affected owners” (generally most offshore or non-citizen owners) of such properties will not need to file a UHT return. 

What Property managers or owners of short-term rental properties need to know? 

If you manage or own one or more short-term accommodation rentals, you’ve likely seen a perfect storm of regulations and new taxation regimes in the last few years. From the UHT to local or provincial restrictions, or outright bans of such residential rentals, and the federal government’s 2023 announcement to deny income tax deductions to any owners of such properties, to regional or provincial bans or restrictions; you’re likely feeling pretty defeated at this point. 

If you’re managing one of these properties for any person (Canadian or foreign), it’s likely that the owners will want to comply and move their property into the long-term rental market, which is the general intent of all these policy decisions either that or they may end up selling the property and taking their investment dollars entirely out of Canada, and how could you blame them?   

However, that’s not the end of the potential tax outcomes once a short-term rental property is converted into long-term rental stock. GST or HST may apply as well, depending on where the property is located as detailed further in our article on this very topic. The short version is that once a long-term (greater than 30 days) tenancy is in place, GST or HST becomes payable. 

Even if a GST or HST refund was never claimed and the tax was never paid to a previous seller, the tax will come due if the short-term rental was last used more than 50% in a short-term rental business operation. In other words, you may have purchased a used residence (like a condo) and did not pay GST or HST where the seller lived in it, or it was a long-term rental at one point.   

In this case, GST or HST becomes due based on the fair market value, which has likely greatly increased since it was first purchased for use in short-term rentals. If eligible, the owner may be able to claim a GST/HST rebate on a portion of the tax that became payable due to the change in use. 

Let’s take an example to highlight how the numbers might work out. Assume that Fred purchased a new 1-bedroom condo for $350K in Vancouver in 2010 (after the Olympics) to live in as his principal residence. Fred would have paid GST of $17,500 to the developer, but since Fred purchased it for use as his principal residence, the developer credited Fred $6,300 of GST since he was eligible for the GST/HST new home rebate.  

In 2013, Fred got a job in Kelowna and had to move, but he wanted to keep his Vancouver condo, so he decided to rent it out on a short-term basis through Airbnb, until he was able to decide what to do with it after seeing how his new job worked out. By 2023, Fred’s 1-bedroom condo is now worth $800,000 and because of Vancouver’s ban on short-term rental properties, Fred could now be forced to rent his condo out on a long-term basis.   

What Fred has not yet realized is that he will owe $40,000 of GST to the CRA when he rents it out on a long-term basis. Fred will also not be able to claim any GST/HST residential rebate because the current fair market value of his condo is higher than the allowable rebate threshold. Sadly, Fred may have to refinance or sell it, or maybe just move back into it, if his Kelowna employer will let him work remotely. However, if Fred moves back into the condo as his principal residence, there will also be a GST event triggered and he will have to pay CRA the GST for the same reason as if he were to convert it to long-term rental. 

Not to add insult to injury, but there are also income tax consequences of such conversions from a business or rental property back to a principal residence. For income tax purposes, “Every time you change the use of a property, you are considered to have sold the property at its fair market value and have immediately reacquired the property for the same amount. You have to report the resulting capital gain or loss (in certain situations) in the year the change of use occurs.” 

This means that when Fred moved out of his home in 2013, he would have had to report its FMV, and he was deemed to have disposed of the property at that point. Let’s assume that the gain between 2010 and 2013 was $100,000. Since Fred was living in the property prior to 2013, that $100,000 should be sheltered by his Principal Residence Exemption. The gain between the property’s cost as an income earning property, $450,000 ($350k purchase price + $100k gain 2010-2013) and its value in 2023 ($800,000) is $350,000 which becomes a capital gain taxable in 2023 if Fred sells the property or moves back into it as his principal residence. 

What are the tax implications for non-residents of Canada selling residential property? 

When a non-resident individual sells residential property located in Canada, they are subject to Canadian withholding tax on the sale proceeds. The CRA requires a buyer or the buyer’s agent to withhold 25% of the sale price for properties sold by non-residents (which may increase to 50% of the proceeds for rental property), unless and until a certificate of compliance is obtained. This withholding tax is designed to ensure that non-residents pay their Canadian tax obligations on the sale of Canadian property. 

To reduce the 25% withholding tax, a non-resident seller can apply for a certificate of compliance from the CRA before the property title is transferred.  Once the certificate is obtained, the buyer may withhold a reduced amount of tax based on the estimated gain on sale of the property. It’s important for non-resident sellers to plan for this process well in advance of the property sale to avoid delays in closing transactions.  The non-resident is still required to file a Canadian non-resident income tax return for the year of sale, reporting the final gain and tax and the tax withheld. 

If non-resident individuals selling residential property in Canada do not reduce the tax withholding through the certificate process, they may also need to fulfill NR4 reporting requirements. An NR4 form is issued by Canadian payers (such as property managers or the non-resident’s agents) to report payments made to non-residents, including the withholding tax amount on the sale of the rental and the rental income. This form is typically issued after the end of the calendar year and must be filed with the CRA. 

At Achen Henderson CPAs, we help you to take the complexity out of taxes for property managers and their clients. Call us today for help getting your sales tax collection and reporting “on the mark”, so that you can rest easy by ensuring your business is not offside with these indirect tax rules across Canada. 

Ready to get a head start on 2024 taxes or need help with 2023?