The Canadian government has recently implemented new reporting requirements for trusts[1]. These changes are in accordance with Canada’s international pledge to disclose beneficial ownership information and to maintain the efficiency and honesty of the Canadian tax system. However, the new rules are burdensome and have significant penalties for noncompliance.

Consider the scenario where you co-sign a mortgage for your child on a million-dollar home. This arrangement will likely be using a bare trust arrangement. If you were not aware and did not file tax returns (even though these would be nil returns, with no income), you could be subject to penalties of $50,000 per year plus interest. The current interest rate at the writing of this article is 10% compounded daily.

Unfortunately, these are the rules, and we feel that this new rule unfairly targets average Canadians without access to tax experts. For those Canadians who do have access to a tax specialist, these new rules would mean additional filing costs with little value in return. That is why we prepared a guide. This guide will explain the new rules and provide instructions on how to prepare a simple Nil return yourself for bare trusts with no activity other than legally owning an asset. 

Introduction: Trusts may need to file for the first time

Many trusts will be required to file a Trust return for the first time. Before the introduction of the new reporting requirements, a trust that did not earn income, dispose of capital property, or make distributions of income or capital in a year was generally optional to file a trust return.

The change in reporting requirements means that affected trusts will be required to file the following with the Canada Revenue Agency (CRA) every year:

Chapter 1: Which Trusts need to file a T3 Return?

Generally, all trusts that are required to file a T3 Return, other than:

• graduated rate estates and qualified disability trusts;
• mutual fund trusts, segregated funds and master trusts;
• trusts governed by registered plans (i.e., deferred profit sharing plans, pooled registered pension plans, registered disability savings plans, registered education savings plans, registered pension plans, registered retirement income funds, registered retirement savings plans, registered supplementary unemployment benefit plans and tax-free savings accounts);
• lawyers’ general trust accounts;
• trusts that qualify as non-profit organizations or registered charities; and
• trusts that have existed for less than three months or that hold less than $50,000 in assets throughout the taxation year (provided, in the latter case, that their holdings are confined to deposits, government debt obligations and listed securities).

For an explanation of the above trusts in more detail, please visit CRA’s website by clicking here.

Do Bare Trusts need to file a T3 Return?

Bare trusts are subject to the new trust reporting rules for tax years ending after December 30, 2023[1]. Accordingly, a bare trust is required to file a T3 Return annually unless specific conditions are met. A bare trust is also required to complete Schedule 15 annually. A bare trust with a December 31, 2023 tax year end must file a T3 Return for 2023.

The term “bare trust” is not defined in the Income Tax Act (the “Act”). However, a bare trust for income tax purposes includes a trust arrangement under which the trustee can reasonably be considered to act as an agent for all the beneficiaries under the trust with respect to all dealings with all of the trust’s property.

A bare trust could include a situation where you legally or are named as a legal owner of an asset or property, but the asset is held for the benefit of someone else. Following are some examples of arrangements that may be considered trusts and would be subject to the new reporting rules[2]:

1. Joint Ventures: Joint ventures are common in capital-intensive industries with multiple participants developing a project. Joint ventures usually have one participant to act on behalf of other participants (the “operator”) who may have expertise in certain types of developments. The operator typically holds legal title to the development property in trust for the other participants who beneficially own their proportionate interests in the joint venture property. In other words, the joint venture operator would likely be considered a bare trustee and may be required to file an annual T3 trust return. This is the case even though the income/expenses should already be reported by the property’s beneficial owners in their income returns.
2. Partnerships: At law, a partnership is not considered a legal entity separate from its partners and generally cannot hold title or a registered interest in its name. As such, the general partner typically holds legal title to land in a bare trust arrangement. The partners’ income is already reported, and beneficial owners (being the partners) are disclosed on the T5013 information return.
3. Real Estate: It is common in real estate investments for a nominee corporation to hold the legal title of the property in trust for the beneficial owner for commercial reasons.
4. Co-signing a mortgage for a family member: For example, co-signing for a child’s mortgage so that they can qualify for a mortgage to get into the housing market.
5. Being named to aging parents’ bank account: It is common to have adult children being named to their aging parents’ bank accounts to make it easier to facilitate transactions.
6. Shareholder Registries: Shareholder registries may not always be accurate, as there may be a delay in obtaining up-to-date shareholder information. When dividends are paid, amounts not received by shareholders due to incorrect information are held in trust until they can be corrected. Furthermore, corporations may be required to hold funds from dividends in trust for lengthy periods to the extent that the correct recipient cannot be readily identified.
7. Internal Administrative Arrangements: Many internal administrative arrangements may create bare trust relationships. For example, it is common for companies to centralize treasury and banking functions with one entity in a group. Funds may be received or disbursed on behalf of other entities in the group, with funds temporarily held in trust through this process. The tax consequences of the underlying transactions are reported on the tax returns (T2, T5013, etc.) of the relevant entity.

It is crucial to determine the level at which a bare trust arrangement is constituted once it has been identified. For instance, if there are several assets with distinct beneficial ownership in a joint venture, it becomes necessary to establish whether the bare trust exists at the joint venture level or the individual asset level. Another example is when you are named on your parent’s bank and investment accounts, and there are multiple accounts. The question arises of how many trust returns you need to file. Would you file one at the bare trust level or file for each account level, which could mean filing multiple returns? The CRA has yet to give guidance on this matter.

In Trust for Accounts Likely Considered Bare Trusts

Financial accounts held “in trust for” another individual are likely bare trust arrangements. These also have similar concerns that have yet to be answered. For example, suppose a bare trustee holds the legal title of several investments within one account; it is still being determined whether there is only one bare trust at the investment level or multiple bare trusts for each investment.

All Trusts Need to Complete Sch 15

Generally, all trusts that are required to file a T3 Return will be required to file Schedule 15.

Schedule 15 asks for information on all trustees, settlors, beneficiaries and controlling persons (i.e., persons who have the ability, through the terms of the trust or a related agreement, to exert influence over trustee decisions regarding the appointment of income or capital of the trust) for the trust (collectively referred to as “reportable entities“).

For each reportable entity of the trust, the following information must be provided:

• name
• address
• date of birth (if applicable)
• country of residence, and
• Tax Identification Number (i.e., Social Insurance Number, Business Number, Trust Number, or, in the case of a non-resident trust, the identification number assigned by a foreign jurisdiction)

In addition, if the above information cannot be provided because the beneficiary is unknown at the time of filing the T3 Return and Schedule 15 (for example, unborn children and grandchildren, their spouses), information must be provided on Schedule 15 under Part C detailing the terms of the trust that extend the class of beneficiaries to unknown entities.

Chapter 2: Significant Penalties

The penalty will equal $25 for each day of delinquency, with a minimum penalty of $100 and a maximum penalty of $2,500.

If a failure to file the return was made knowingly or due to gross negligence, an additional penalty will apply. The additional penalty will equal 5% of the maximum value of property held during the relevant year by the trust, with a minimum penalty of $2,500. Also, existing penalties for the T3 return will continue to apply.

Relief for Bare Trusts for the 2023 Tax Year

The CRA will relieve bare trusts by waiving the penalty payable under subsection 162(7) for the 2023 tax year in situations where the T3 Return and Schedule 15 are filed after the filing deadline. For the 2023 tax year, where the trust’s tax year ends on December 31, 2023, the filing deadline of March 30, 2024, is extended to April 2, 2024, the first business day after the deadline.

This proactive relief is for bare trusts only and only for the 2023 tax year.

However, a different penalty may apply if the failure to file the T3 Return and Schedule 15 for the 2023 tax year was made knowingly or due to gross negligence. This penalty will be equal to the greater of $2,500 and 5% of the highest amount at any time in the year of the fair market value of all the property held by the trust.

Bare trusts did not have an obligation in years before the 2023 tax year to file a T3 Return, and the CRA recognizes that the 2023 tax year will be the first time bare trusts will be required to file a T3 Return, including the new Schedule 15.

As some bare trusts may be uncertain about the new requirements, the CRA is adopting an education-first approach to compliance and providing proactive relief by waiving the penalty under subsection 162(7) for the 2023 tax year in situations where the T3 Return and Schedule 15 are filed after the filing deadline.

Chapter 3: How to Prepare a Nil Trust Return for Bare Trusts

Case Study

• Green Inc. and Blue Inc. have agreed to work together to develop, manage, and lease a specific piece of land.
• To make this happen, Orange Inc. has been chosen to hold the legal title to the land as the Bare Trustee for Green Inc. and Blue Inc., who are the beneficiaries.
• Orange Inc. has accepted this responsibility and will fulfill its duty as outlined in the agreement dated February 1, 2023. All are residents of Ontario for tax purposes.
• John Doe is the director of all three companies.

Step 1: Register for a Trust Number

You can apply for a trust account number online. You can do this by logging into the CRA online account of the Trustee.

A trustee can apply for a trust account number. You need to know your:

• trust name (see below for guidance on naming conventions for bare trusts)
• contact information
• type of trust.

You must also provide a signed copy of the trust document or agreement.

In our case study, Orange Inc. will log into its My Business Account from the “More Services” menu to select Trust account registration.

The questions should be intuitive for simple bare trust arrangements. Please see below for guidance on the naming conventions for a bare trust.

Step 2: Download the PDF Trust Return

You can download a copy of the T3 return and the elated schedules on CRA’s website. Links to the 2023 trust return and schedules are below: T3RET T3 Trust Income Tax and Information Return – Canada.ca

You can find the schedules on the following website: Forms listed by number – CRA – Canada.ca

You can download Schedule 15, the new schedule used to disclose information about the trust and its trustees, settlors, and beneficiaries can be found here: T3SCH15 Beneficial Ownership Information of a Trust – Canada.ca

Step 3: Prepare the T3 Return

Complete the Identification and other information.

Trust account number

Enter the trust account number you obtained online.

Fiscal period

In most cases, it should be January 1, 202X, to December 31, 202X.

Name of Trust

When a bare trust has yet to be named, here are some guidelines CRA provides for naming a bare trust.

If there is a written trust deed or other agreement governing the bare trust and the document identifies a name for the bare trust, you can enter it in the name field.

If there is no written trust deed or other agreement governing the bare trust or if the document does not identify a name for the bare trust, list the legal name (e.g., the entire corporate name identified in the articles of incorporation, or the first and last names for an individual) of the beneficial owner(s) with the word “Trust” at the end.

For example, if “Ms. Andrews” is the beneficiary of the bare trust and there is no identified name for the trust, you could list “Ms. Andrews trust” in the name field.  If there is more than one beneficial owner, place the names alphabetically based on the last name with the word “Trust” at the end.

When using our online services, the name field is limited to 60 characters; if the name(s) exceed(s) the 60-character limit, you can stop typing when the limit is reached but include the word “trust.”

In our case study, the name of the Bare Trust should be “Blue Inc. Green Inc. Trust.”

Residence of the Trust

Choose the residence of the trustees, including the province. In our case study, it is Ontario.

Trustee Information

Enter the information about the Trustee who is the CRA’s primary contact. If the trustee is a corporation, please enter the corporation’s contact person, such as a director or an officer of the corporation.

Trust Information

Enter information about the trust.

If all your trustees and beneficiaries are Canadian residents, then most likely, the trust will not be a Deemed resident trust.

Type of Trust

Enter the Bare Trust (code 307) for the “type of trust.”

Also, enter the Date that the trust was created.

Information about the return

Enter information about the return.

If this is your first filing ever, which is likely the case for most Bare Trusts in 2023, please select Yes, as noted below.

You must also provide your trust agreement (i.e., trust document) to the CRA when you apply for a trust number. See above for more details. If you did not upload your trust agreement when you opened your trust account numbers, you can upload it later using the following link.

Reporting foreign income and property

Answer the following required questions.

Certification & Signatures

Complete the certification and sign at the bottom of the return. E-signatures are acceptable.

Calculating total income

Since the Bare Trust only holds legal tile, it generally should not have any income. Therefore, you should not need to enter anything in the following sections:  “Calculating total income,” “Calculating net income,” “Calculating taxable income,” and “Summary of tax and credits” (steps 2 to 5).

Step 4: Completing Schedule 15

As noted, for tax years ending on or after December 31, 2023, a trust (including a bare trust) required to file a T3 return, other than a listed trust, generally must report beneficial ownership information on Schedule 15.

Trusts must report the identity of all trustees, settlors, beneficiaries, and controlling persons (collectively called “reportable entities”) on Schedule 15. It is necessary to include information for all reportable entities of the trust that existed at any time during the tax year, even if the person became a reportable entity at any time during the tax year or is no longer a reportable entity of the trust at the end of the tax year for which a T3 return is being filed.

Please note that if you are submitting beneficial ownership information for your T3 return, it must be done using Schedule 15. Please be aware that alternative methods such as spreadsheets, PDFs, or XML files will not be accepted. If you are filing the T3 return by paper, Schedule 15 must be used, and in case you need multiple copies of Part B of Schedule 15, you can mail them along with the T3 Return. The fillable PDF version of Schedule 15 includes additional Part B sections if required.                                             

Enter the Year

First, enter the tax year. In our case study, we are working on the 2023 tax year.

Part A – Annual beneficial ownership information

If this is the first time completing Schedule 15,  answer as follows:

Part B – Identification of reportable entities and Reportable Entity Type

You will complete Part B for the following:

• Settlors
• Trustees
• Beneficiaries
• Controlling persons 

Identifying Settlors

The term “settlor” generally refers to a person who has provided a loan or transferred property, directly or indirectly, to a trust for its benefit. However, exceptions apply, including situations where the person or partnership has engaged in arm’s length transactions with the trust, such as providing a loan at a reasonable interest rate or making a transfer for fair market value consideration.

In our case, the settlors would be Blue Inc. and Green Inc., the parties that transferred the initial funds to purchase the land.

Identifying Trustees

 Trustees hold legal title to property in trust for the benefit of the trust beneficiaries. The trustee includes an executor, administrator, assignee, receiver, or liquidator who owns or controls property for some other person.

Identifying Beneficiaries

A “beneficiary” of a trust is generally a person (other than a protector) who has a right to compel the trustee to properly enforce the terms of the trust, regardless of whether that person’s right to any of the income or capital is immediate, future, contingent, absolute or conditional on the exercise of discretion by any person.

The requirement to provide the necessary information in respect of beneficiaries of a trust on Schedule 15 will be met if the required information is provided in respect of each beneficiary of the trust whose identity is known or ascertainable with reasonable effort by the person making the return at the time of filing the return. Suppose a beneficiary’s identity is known or ascertainable; complete Part B of Schedule 15. Suppose a beneficiary’s identity is not known or ascertainable with reasonable effort. In that case, the person making the return must provide sufficiently detailed information to determine with certainty whether any particular person is a beneficiary of the trust. In this case, complete Part C of Schedule 15.

Identifying Controlling Persons

For the trust reporting requirements, the term controlling person means a person who has the ability (through the terms of the trust or a related agreement) to exert influence over trustee decisions regarding the appointment of income or capital of the trust. This would include, for example, a protector of the trust.

See the attached Schedule 15 for guidance on applying it to our case study.

Helpful Sources

[1] Subsection 150(1.3) of the Income Tax Act (the “Act”).

[2] Tax Executives Institute (TEI) Commentary, 2023-09-27 — Bare Trust Reporting Rules – 2023-09-27

The post Preparing Trust Returns (T3) for Bare Trusts appeared first on LRK Tax LLP.

• Increase Generational Wealth Through Unique Tax Planning During Recession – Despite the possibility of a recession or sluggish economic growth in 2023, there are ways for entrepreneurs and small business owners to leverage the tax system and boost their long-term financial security. These tax planning opportunities can help them accumulate generational wealth.
  
• Flip the Anti-Flipping Tax on its Head – The government introduced the anti-flipping tax to discourage short-term residential home flips. However, through clever tax planning, taxpayers can use this rule to pay less taxes by structuring real-estate investments through a corporation.  
  
• Non-Residents Getting Out of Canadian Real Estate Need to Pay Attention to Special Tax Filings  – The implementation of policies such as the Underused Housing Tax (UHT) has prompted foreigners to sell their Canadian properties. Failing to engage in effective tax planning prior to selling could result in unexpected financial strain and funds being held by the CRA.

If you found this newsletter useful, please feel free to pass it on to your team of advisors as it will be useful for them as they also consider your financial, estate, and business plan to preserve and grow your hard-earned wealth. 

Sincerely,
LRK Tax Team

The post <strong>February 2023 Newsletter</strong> appeared first on LRK Tax LLP.

Trustees Need to file a UHT Return

If you’re a trustee, there’s no escaping the requirement to file a UHT return*. Failure to do so could result in hefty penalties, with a minimum of $5,000 per year for each trustee. That’s right, each trustee! So, if there are two to three trustees involved, the penalty could easily add up to $10,000-$15,000 per year. And, if the trust only has real estate and no cash to pay the penalty, it could lead to further issues.

*Note, there are exemptions for trustees acting as personal representatives for a deceased individual.

UHT Taxes Owing for Trustees

Trustees who are residents of Canada and have all Canadian resident beneficiaries generally don’t have to pay tax. But, if a beneficiary leaves Canada during the existence of the trust, the trustee could be exposed to paying tax. This could be a headache, especially if the trust only has real estate and doesn’t have the assets to pay the tax.

UHT Tax Planning for Trusts with Non-Resident Beneficiaries

But don’t worry. There are remedies that trustees can use to avoid the UHT. As long as the trust has no non-resident beneficiaries on December 31st of each year, the trustee won’t be liable for the tax. If a beneficiary does leave Canada, the trustee could use a tax-efficient technique to remove the non-resident beneficiary’s interest in the trust.

Conclusion

In conclusion, being a resident of Canada doesn’t necessarily exempt you from the UHT rules. Trustees must be aware of their responsibilities and potential liabilities. They should explore the available remedies to avoid any penalties and tax implications.

If you need consultation on whether you are liable for the UHT, feel free to give us a shout. You can check out our resources on the UHT by clicking here.

The post Trustees: Don’t Fall into the Underused Housing Tax Trap! appeared first on LRK Tax LLP.

CRA’s position on UHT and short-term Airbnb rental properties

To be exempt from UHT, the property must have 180 days of occupancy in a year. In other words, someone must have had the right to live in it for 180 days. In computing the 180 days, the Canada Revenue Agency (CRA), in their form UHT-2900, excludes rentals that are for less than one month at a time. Even if you rented out your Airbnb for more than 180 days in total, none of those days may count if you rented it out for less than one month at a time. This means that most Airbnb rentals, which typically have an average length of 3 to 5 days, may be subject to the tax if no other exemptions are available.

Other Exemptions from the UHT for foreign Airbnb owners?

Some Airbnb owners may still be exempt from UHT. Detached residential homes with more than 3 self-contained “dwelling units” are automatically exempt from the rules. If a detached home has at least 4 separate rentable dwelling units with private kitchen, bath, and living areas, it is exempt from UHT even if the rentals are less than one month at a time. This strategy only works for detached homes and does not apply to semi-detached homes, townhouses, or condos.

If you have at least 3 self-contained units at the moment, a strategy could be to add in a fourth self-contained unit to:

1. Increase your rental revenues;
2. Keep more money in your pocket by not having to pay UHT; and
3. Not have to worry about filing a UHT return every year and be subject to penalties

Note that this strategy does not work with semi-detached homes, townhouse units, or condos and is only available for detached homes. And it may not always be practical, even if possible.

Conclusion

Foreign owners who rent their residential property short-term could be liable to pay UHT unless another exemption is available. A closer look at the tax legislation may suggest that there could be an alternative interpretation to the rules, but that is beyond the scope of this article and one that does not seem to be supported by CRA. Foreign owners of Airbnb properties in Canada should reach out to their accountants well ahead of the May 1, 2023, filing deadline to understand their obligations.

How to prepare the UHT Return Guide

Please feel free to consult our guide on How to Prepare the Underused Housing Tax Return for more information.

The post Foreign Airbnb Owners Face New Underused Housing Tax in Canada appeared first on LRK Tax LLP.

How to prepare the UHT Return – This guide aims to help owners of residential real Property in Canada complete the “UHT-2900 – Underused Housing Tax Return and Election Form” for the most encountered situations. For more unique situations, please feel free to contact us. How to prepare UHT Return.

Please note that for brevity, we may refer to the application of the rules to an individual’s “spouse”; however, the rules also encompass common-law partners.

Download our PDF Guide

To download a PDF copy of the guide, please complete the form below, and we will email you a copy.

What is the Underused Housing Tax (UHT)?

The Underused Housing Tax (“UHT”) is a national, annual 1% on the value of non-resident, non-Canadian-owned residential real estate that is underused. It came into effect on January 1, 2022.

Although the tax is meant to apply to non-residents and non-Canadians, some Canadians – such as Canadian private corporations owning residential properties – may still need to file a tax return, even though they may not have any taxes to pay. We go over this in more detail below.

Step 1: Do You Need to File the Underused Housing Tax Return?

A person who is an “owner” (other than an “excluded owner”) of one or more “residential properties” on December 31 of a calendar year must file a separate tax return for each residential property for the calendar year.

Who is the “owner”?

An “owner” of a residential property is generally the legal owner of the Property (i.e., the person registered on title).

Special Rules for Trustees and Partners of Trusts and Partnerships

Note that you may have to file an Underused Housing Tax Return as a trustee or a partner of a partnership. Unlike the income tax rules, the trustee or the partners must file the Underused Housing Tax Return.

If the Property is owned through a Trust or a Partnership, the legal owners would generally be the trustees or partners. The land registration system should list the trustees and partners as the legal owners, not the trust or the partnership. Unlike corporations, trusts and partnerships are not separate legal persons. This means the trustees and partners would file the tax return and pay the tax. Therefore, the trustees and partners must file the Underused Housing Tax Return for each real property owned through a trust or partnership.

If there are taxes, the trust or Partnership will likely need to reimburse the trustees or partners so they can pay the tax. Note how the UHT slightly differs from income tax, where a Trust is considered a taxpayer and files a tax return (T3 Return).

Excluded Owner

Excluded owners do not have to pay the Underused Housing Tax or file a tax return. An excluded owner includes a person that is on December 31 of the calendar year:

• An individual that is a Canadian citizen or a permanent resident of Canada, except where the individual holds an interest in Property:
  • as a partner of a partnership, or
  • as a trustee of a trust, but not as personal representative of a deceased individual or the estate of a deceased individual;
• a corporation incorporated under the laws of Canada or a province whose shares are listed on a Canadian stock exchange designated for Canadian income tax purposes;
• a registered charity for Canadian income tax purposes;

The list above is not exhaustive. There are other excluded owners, so please refer to the CRA guide for a complete list.

Due Date for Underused Housing Tax

You must file and pay the Underused Housing Tax on or before April 30 of the following calendar year. For example, the Underused Housing Tax for the 2022 calendar year is due by April 30, 2023.

Residential Property

You are liable for the Underused Housing Tax only if you own “Residential Property.” Generally, for purposes of UHT, Residential Property is a property situated in Canada that is either of the following:

• a detached house or similar building that contains not more than three dwelling units, along with any appurtenances and the related land
• a semi-detached house, rowhouse unit, residential condominium unit, or other similar premises, along with any common areas or appurtenances and the related land

Related land refers to the land that is subjacent or immediately contiguous to a residential building, and that is reasonably necessary for its use and enjoyment as a place of residence for individuals. Generally, up to a half hectare of subjacent land immediately contiguous to a residential building is considered reasonably necessary for the building’s use and enjoyment as a place of residence for individuals.

Common Residential Properties include detached homes, duplexes, triplexes, semi-detached homes, townhomes, rowhouses, and residential condo units.

Who is an Affected Owner?

Unless you are an “excluded owner,” you must file the Underused Housing Tax Return (Form UHT-2900) if you owned residential real estate on December 31 of the calendar year. CRA refers to these owners as “Affected Owners.”

All “Affected Owners” must file the Underused Housing Tax Return even if they are exempt from paying tax.

Be careful: Canadians and Canadian Corporations can be Affected Owners

Although most Canadian owners of residential Property are excluded owners, there are situations where some Canadian owners of residential Property are Affected Owners and, therefore, have to file a UHT Return. For example, a private corporation incorporated in Canada that owns residential Property will have to file a UHT Return even if all of its owners are Canadians. As we explain below, this corporation may not have to pay any UHT Tax, but still needs to file a UHT return to declare an exemption.

Step 2: Download the UHT Tax Return

If you are an Affected Owner in step 1, you must file an Underused Housing Tax Return (Form UHT 2900). You can download a fillable version of Form UHT 2900 here.

Step 3: Part 1 – Information about the owner

Example

We will complete the UHT return on a step-by-step basis using the following example:

• Jesse Rogers is a resident and citizen of Switzerland and owns real estate in Canada.
• He owns a detached house in Canada as the sole owner per the land registration documents.
• He purchased the home for $1 million in 2020, the property’s most recent sale price. The most recent value on the property assessment notice is $500,000.
• Jesse noted that the property had decreased in value recently, so he obtains a third-party appraisal of $800,000 on January 5, 2023.

Taxation Year

The UHT applies for a calendar year (January to December), so make sure to enter the calendar year on the top. In our example, it is 2022.

Owner

In this section, you complete information about the owner. As mentioned above, the owner of a residential property is generally the legal owner of the Property (i.e., the person registered on the title).

Tax Number

The owner should register for a tax number by calling the CRA at 1-800-959-8281 if they do not already have a Canadian SIN, Business Number, or Individual Tax Number.

Country Code

You can obtain the country code by clicking here. Please enter the three-letter code.

CRA Authorized Representative

You can provide details of your authorized CRA representative if you want CRA to reach out to them with any questions. If your accountant helped you prepare the UHT form, you could include their contact details.

Partnerships and Trusts

Suppose you own residential property as a trustee of a trust or a partner of a partnership. In that case, you will complete lines 110, 115, 120, and 125 accordingly.

Step 4: Part 2 – Information about your residential property in Canada

Property Address

Enter the residential property’s address. Note if you have multiple properties, you need to file a separate form for each property.

Property Identification Number (Property ID or PIN)

You must enter the Property Identification Number (Property ID or PIN). For example, in Ontario, each has been assigned a unique 9-digit electronic identifier, known as a “Property Identification Number” or “PIN” for short. It serves as a numerical index when identifying the property through its legal description.

Depending on your province or municipality, you may be able to find the Property Identification Number (PIN) by checking the following sources:

• Property assessment notice: The PIN may also be included on the annual property assessment notice.
• Property tax bill: The PIN may be included on the property tax bill.
• Municipal property records: If you have access to the municipal property records, you can find the PIN there.
• Legal documents: Search your legal documents to see if you can find the PIN there.
• Online property search tools: Some municipalities provide online property search tools that allow you to search for property information by address or PIN.

Contact your local municipal government office or the land registry office for assistance if you cannot find the PIN.

Property tax or assessment roll number

In Ontario, the assessment roll number can typically be found on your property assessment notice, which is sent to you annually by the Municipal Property Assessment Corporation (MPAC). You can also find your assessment roll number by checking the property tax bill, which is usually issued by your local municipality and should include the assessment roll number and other relevant property information.

Type of Residential Property

You must select the type of residential property: Detached house, Duplex, Triplex, Semi-Detached, Townhouse or rowhouse unit, and Residential condominium unit.

Year of ownership

Enter the year that you became an owner of the residential property.

What type of ownership do you have?

Select one of the ownership types: sole owner, joint tenancy, or tenants in common.

Joint Tenancy and Tenants in Common are two ways to own property together.

In Joint Tenancy, co-owners have equal and undivided interest with a right of survivorship, meaning upon the death of one joint tenant, the surviving tenant(s) inherit their share.

In Tenants in Common, each co-owner holds separate ownership with no automatic transfer of ownership upon death; their ownership share is distributed according to their will or intestacy laws. Please get in touch with your lawyer if you are unsure which type of ownership applies to you.  

Ownership percentage

If there are multiple owners of the residential property on December 31^st, use the indicated percentage from the land registration. If the land registration does not have a percentage, divide 100% by the number of owners.

If the residential property is jointly owned, you must disclose every owner with an ownership interest of 10% or more.

Assessed Value

The assessed value for residential property is established by an authority that has the power under Canadian law to establish the assessed value of the property for calculating a property tax. The value refers to the “full assessed value” of the parcel of real property, of which the residential property is the whole or a part.

Provincial or territorial assessment and property tax regimes vary across Canada. Under a typical assessment and property tax regime, an authority establishes the assessed value of residential properties in its jurisdiction and sends property assessment notices (or similar documents) to the owners. The authority also sends the assessed value of the residential properties to the applicable municipality. The municipality calculates the property tax for residential properties by applying municipal tax rates to all (or part of) the assessed value of the residential properties and then sends property tax bills to the owners.

A property assessment notice (or similar document) and a property tax bill are generally two separate and distinct documents. However, in some parts of Canada, the property assessment notice and the property tax bill may form one single document.

The assessed value of the residential property, as established by the authority, may not necessarily be the same as the value used by the municipality to calculate the property tax. In some parts of Canada, the property tax may be calculated on only part of the assessed value established by the authority. Therefore, use the full assessed value established by an authority and as stated in the property assessment notice (or similar document).

In Ontario, the Municipal Property Assessment Corporation (“MPAC”) assesses property value for the purposes of calculating municipal property tax. The amount you will need to enter is the full assessed value stated on your most recent property assessment notice. In Ontario, MPAC updates property assessments every four years. A notice of assessment is sent to property owners during the year their property assessment is updated. COVID-19 caused the cancellation of MPAC’s province-wide assessment update. As a result, the fixed valuation date for 2022 and 2023 remains January 1, 2016 – the end of the last assessment cycle.

In our example, the assessed value would be $500,000.

Most Recent Sale Price

Enter the most recent sale price on or before December 31^st of the year.

In our example, the most recent sale was when Jesse purchased the home for $1 million.

Taxable Value

The “taxable value” is the greater of the assessed value or the residential property’s most recent sale price.

Step 5: Part 3 – Multiple Residential Properties

You need to complete Part 3 if you own or your spouse (non-Canadian citizen or permanent resident) together own multiple residential properties in Canada. If you own multiple properties, you must answer the questions on lines 300 and 310 accordingly.

In our example, Jesse or his spouse did not own any other residential properties in Canada, so he will answer “No” to lines 300 and 310.

Step 6: UHT Exemptions

If you qualify for one of the UHT Exemptions listed in the headings below, you will not have to pay the UHT Tax. However, you will still need to file a UHT Return and claim the appropriate exemption.

The following parts of the UHT Return deal with exemptions:

• Part 4 – Exemption for primary place of residence
• Part 5 – Exemption for qualifying occupancy
• Part 6 – Other exemptions

Read through the below headings to see if you qualify for one of the exemptions. We will show you how to claim the exemption on the UHT Return under each heading.

Exemption 1: Exemption for Qualifying Occupancy

If you qualify for the “Exemption for qualifying occupancy,” complete Part 5 – Exemption for qualifying occupancy.

Please refer to Appendix A for a decision tree to see if you meet the Qualifying Occupancy exemption.

A property is exempt from UHT if it passes the “qualifying occupancy test” during the calendar year.

To pass this test, a “qualifying occupant” must have “continuous occupancy” of a “dwelling unit” that is part of the residential property for at least a month at a time, adding up to a total of at least 180 days in a year.

We explain the terms below.

Continuous occupancy is if an individual has the right to occupy a dwelling unit for a period on a continuous basis (without interruption throughout the period). An individual’s continuous occupancy is not necessarily interrupted by the individual’s physical absence from the dwelling unit at a time in the period if it meets all of the following conditions:

• the individual still has the right to occupy the dwelling unit throughout their physical absence
• the right to occupy the dwelling unit is not given to another individual for any part of the physical absence

A dwelling unit is a residential unit that contains private kitchen facilities, a private bath and a private living area.

A qualifying occupant would include the following persons:

• Line 510 and 515: an individual who deals at arm’s length (not related or independent) with the owner and the owner’s spouse and who is given “continuous occupancy” of the “dwelling unit” under an agreement evidenced in writing. If this applies, you will check off line 510 and enter the number of days of continuous occupancy given on line 515*.

• Line 520 and 525: an individual who does not deal at arm’s length with the owner or with the owner’s spouse and who is given “continuous occupancy” of the “dwelling unit” under an agreement evidenced in writing and for consideration that is not below the fair rent, prorated for the period. If this applies, you will check off line 520 and enter the number of days of continuous occupancy given on line 525*.

• Line 530 and 535: an individual who is the owner or the owner’s spouse, who is in Canada to pursue authorized work under a Canadian work permit and who occupies the dwelling unit with that purpose (note if you have multiple properties, you will need to elect one of the properties to be eligible for this exemption). If this applies, you will check off line 530 and enter the number of days of continuous occupancy on line 535*.

• Line 540 and 545: an individual who is a spouse, common-law partner, parent or child of the owner and who is a citizen or permanent resident(note if you have multiple properties, you will need to elect one of the properties to be eligible for this exemption). If this applies, you will check off line 540 and enter the number of days of continuous occupancy on line 545*.

*According to the UHT Return, when calculating the total days of qualifying occupancy periods in the calendar year, do not include periods of continuous occupancy that are less than a month.

*Any common days of overlapping qualifying occupancy periods are only counted once. You will enter any common dates on line 547.

If a qualifying occupant is an owner or the owner’s spouse, child or parent, the property must be where the individual resides for a longer period in a calendar month than any other place for the month to qualify for the qualifying occupancy test. Suppose you owned Home A and rented Home B. You lived in Home B for more than Home A in January 2022. You would not count the days you lived in Home A in January 2022 for the qualifying occupancy test.

If you own multiple properties, you need to elect one of the properties to be subject to this exemption. You will need to complete “Part 3 – Multiple residential properties.”

Exemption 2: Exemption for Specified Canadian Corporations

A property owned by a “Specified Canadian Corporation” is exempt from the UHT Tax; however, they must still file a UHT Return.

If you qualify for this exemption, complete Part 6 – Other exemptions, and report your exemption by completing line 605 and line 625.

A “Specified Canadian corporation” is a corporation incorporated or continued under the laws of Canada or a province other than a corporation that is, on December 31 of the calendar year:

• a corporation where the following persons have ownership or control, directly or indirectly, of shares of the corporation representing 10% or more of the value of the equity in the corporation or carrying 10% or more of the voting rights under all or under some circumstances:
  • an individual who is neither a citizen nor a permanent resident,
  • a corporation that is incorporated or continued other than under the laws of Canada or a province, or
  • any combination of individuals or corporations mentioned above.
• a corporation without share capital having:
  • a chairperson or other presiding officer who is neither a citizen nor a permanent resident, or
  • 10% or more of its directors are neither citizens nor permanent residents; or

You first need to determine if the corporation was incorporated or continued in Canada or a province of Canada. If the corporation has issued shares, you need to determine whether a non-Canadian owns 10% or more of the shares giving them votes or values.

In applying the test, you need to look at direct and indirect ownership. For example, in the ownership structure below, where Corporation A and Corporation B are incorporated in Ontario, Corporation B would not be classified as a “Specified Canadian Corporation.” This is because Mr. Foreign indirectly owns more than 10% of its shares.

Exemption 3: Exemption for Partner of Specified Canadian Partnership

If a partner owns a property in their capacity as a partner in a “Specified Canadian Partnership,” the partner would be exempt from the UHT Tax; however, the partner must still file a UHT Return.

If you qualify for this exemption, complete Part 6 – Other exemptions, and report your exemption by completing line 605 and line 620.

A “Specified Canadian Partnership” is a partnership, each member of which is, on December 31 of the calendar year, an excluded owner or a specified Canadian corporation.

A partnership where all the members are Canadian citizens or permanent residents of Canada would be considered a specified Canadian partnership. The partners would be exempt from the UHT Tax. However, they must still file a UHT Return.

Consider a partnership with Mr. Foreign and Mr. Canadian as partners. This partnership would not be considered a “Specified Canadian Partnership.” Both Mr. Foreign and Mr. Canadian, as registered owners, are obligated to pay the UHT Tax, regardless of Mr. Canadian being a Canadian citizen.

Exemption 4: Exemption for Property Held by Trustee of Specified Canadian Trust

If a trustee owns a property in their capacity as a trustee of a “Specified Canadian Trust,” then the trustee would be exempt from the UHT Tax; however, the trustee must still file a UHT Return.

If you qualify for this exemption, complete Part 6 – Other exemptions, and report your exemption by completing line 605 and line 620.

A “Specified Canadian Trust” is a trust where every beneficiary with a beneficial interest in the residential property is either an “excluded owner” or a “specified Canadian corporation” on December 31^st of the calendar year.

Consider a Trust that owns a residential property for the benefit of Jamie and Tony, Canadian citizens. Mr. Canadian is the trustee and the only person identified in the land registration system as an owner of the property. In this case, the trust would be a Specified Canadian Trust because all the beneficiaries are excluded owners (i.e., Canadian citizens). Mr. Canadian would be exempt from the UHT Tax. However, he must still file a UHT Return and report the exemption.

Exemption 5: Exemption for Property Not Suitable for Year-Round Use or Seasonally Inaccessible

An owner’s interest in a residential property would be exempt from the UHT Tax for a calendar year if the property is not suitable for year-round use as a place of residence. A property may not be suitable for year-round use if it is not winterized.

An owner’s interest in a residential property would be exempt from the UHT Tax for a calendar year if the property is seasonally inaccessible because public access is not maintained year-round. For instance, if the access road is not maintained in winter, making it inaccessible.

If you qualify for this exemption, complete Part 6 – Other exemptions, and report your exemption by completing line 605 and line 630 or line 635.

Exemption 6: Exemption for Property Uninhabitable Due to a Disaster or Hazardous Conditions

An owner would be exempt from the UHT Tax for a calendar year if the residential property is uninhabitable for at least 60 consecutive days in the calendar year as a result of a disaster or hazardous condition caused by circumstances beyond the reasonable control of the owner.

This exemption would be available until the conditions affecting the property are resolved, and the property is safe for occupancy to a maximum of two calendar years. If the property remains uninhabitable for two calendar years due to the same disaster/ hazardous condition, it would no longer be exempt.

Even though the owner is exempt from paying the UHT Tax, they must still file a UHT Return.If you qualify for this exemption, complete Part 6 – Other exemptions, and report your exemption by completing lines 605 and lines 640, 642, and 643.

Exemption 7: Exemption for Property Undergoing Major Renovations

An owner would be exempt from the UHT tax if a dwelling unit that is part of the residential property is uninhabitable for at least 120 consecutive days in the calendar year as a result of a renovation to the residential property. The renovation must be carried on without unreasonable delay. The owner must not have used this exemption in any of the nine prior calendar years. In other words, this exemption would only be available once every ten years

Even though the owner is exempt from paying the UHT Tax, they must still file a UHT Return.

If you qualify for this exemption, complete Part 6 – Other exemptions, and report your exemption by completing lines 605 and lines 645, 647, and 648.

Exemption 8: Exemption for Year of Acquisition of an Interest in Property

An owner would be exempt from the UHT tax if they became an owner of the residential property in the calendar year and was never an owner of the same residential property in the prior nine calendar years.

Suppose an owner acquired a property in Muskoka in 2022. Since they became an owner in 2022, they would be exempt from the UHT tax for 2022. However, this exemption is only valid if they never owned the same property in the prior nine years.

Even though the owner is exempt from paying the UHT Tax, they must still file a UHT Return.

If you qualify for this exemption, complete Part 6 – Other exemptions, and report your exemption by completing line 605 and line 650:

Exemption 9: Exemption for Death

An owner would be exempt from the UHT tax if they died during the calendar year or the prior calendar year. Even though the owner is exempt from paying the UHT Tax, they must still file a UHT Return.

If you qualify for this exemption, complete Part 6 – Other exemptions, and report your exemption by completing line 655:

Exemption 10: Exemption for Personal Representative of a Deceased Individual

An owner would be exempt from the UHT tax if they are the personal representative of a deceased individual who was an owner of the residential property during the calendar year or the prior calendar year. In addition, The owner must not have been an owner of the residential property in either of those calendar years.

This exemption would include a situation where the owner is a trustee of the estate of the deceased individual.

Even though the owner is exempt from paying the UHT Tax, they must still file a UHT Return.

If you qualify for this exemption, complete Part 6 – Other exemptions, and report your exemption by completing line 660.

Exemption 11: Exemption upon Death of other Owners

An owner would be exempt from the UHT tax if another owner of the residential property dies, and on the date of death, the other owner has at least a 25% ownership interest in the property. The owner’s interest in the property would be exempt for the calendar year in which the death occurred and for the subsequent calendar year, provided that the owner was an owner of the property on the date of death.

Even though the owner is exempt from paying the UHT Tax, they must still file a UHT Return.

If you qualify for this exemption, complete Part 6 – Other exemptions, and report your exemption by completing line 665:

Exemption 12: Exemption for Newly Constructed Property

An owner would be exempt from the UHT tax if the property is a newly constructed property that was not substantially completed before April 1^st of the calendar year due to the property being under construction.

The term “substantially completed” is not defined in the Underused Housing Tax Act. The Canada Revenue Agency (CRA) usually considers a house to be substantially complete when construction or major renovations have reached a stage of completion (usually 90% or more) that makes it reasonable for an individual to live there. Minor repairs, adjustments, or remaining upgrades that do not affect the use and enjoyment of the house as a place of residence are not taken into account.

Even though the owner is exempt from paying the UHT Tax, they must still file a UHT Return.  

If you qualify for this exemption, complete Part 6 – Other exemptions, and report your exemption by completing line 670:

Exemption 13: Exemption for New Property Held by a Developer as Inventory for Sale

An owner would be exempt from the UHT tax if the following conditions are satisfied:

• construction of the residential property is substantially completed in January, February or March of the given calendar year;
• the residential property is offered for sale to the public during the same year; and
• and no one has lived in or used it as a place of residence or lodging during that calendar year.

If you qualify for this exemption, complete Part 6 – Other exemptions, and report your exemption by completing line 675:

Exemption 14: Primary Place of Residence Exemption

An owner would be exempt from the UHT tax if a dwelling unit that is part of the residential property is, for the calendar year, the primary place of residence of:

• the individual or the individual’s spouse; or
• a child of the individual or the individual’s spouse, and the child occupies the residential property for authorized study at a designated learning institution as defined in section 211.1 of the Immigration and Refugee Protection Regulations. You can find a list by clicking here.

If you qualify for this exemption, complete Part 4 – Exemption for primary place of residence, and report your exemption by completing lines 405, 415, and 425:

Exemption 15: Primary Place of Residence Exemption If You Own Multiple Properties

If an individual owns a particular residential property on December 31st of a given year, and either the individual or their spouse owns additional residential properties (together, these properties are referred to as “specified residential properties“), one additional requirement needs to be met to qualify for the primary place of residence exemption. To qualify for the primary place of residence exemption mentioned above, you will need to file an election to elect one of the properties to be eligible for the exemption.

Suppose the individual’s spouse also owns a residential property. In that case, the individual and the spouse will jointly only designate one of the properties for the exemption. This election or joint election is made under “Part 3 – Multiple residential properties” of the UHT Return. Once you have made the election, you can complete Part 4 – Exemption for primary place of residence, and report your exemption.

For the other properties, in applying for the “qualifying occupancy exemption” (see above), the individual and their spouse would not be considered “qualifying occupants.” Suppose you have two properties. If one of them qualifies for the Primary Place of Residence Exemption, you cannot claim the Qualifying Occupancy Exemption on the other property.

Step 7: Part 7 – Fair market value (FMV) election

To calculate the underused housing tax, each owner of residential property has to apply the 1% tax rate to the “taxable value” of the residential property prorated by their ownership percentage.

The “taxable value” is the greater of the assessed value or the residential property’s most recent sale price as determined under Part 2 – Information about your residential property in Canada.

Rather than using the taxable value, you may elect to use the fair market value of the residential property instead to calculate your underused housing tax. This election is made under “Part 7 – Fair market value (FMV) election.”

The amount you report as the FMV of the residential property must be supported by a written appraisal prepared by an accredited real estate appraiser operating at arm’s length from you with an effective date for FMV that is between January 1 of the calendar year and April 30 of the following year. For example, for 2022, you can use an appraisal with an effective date of January 1, 2022 to April 30, 2023.

In our example, Jesse obtains an appraisal from an accredited real estate appraiser with an effective date of January 5, 2023, for a value of $800,000.

Step 8: Part 8 – Calculation of tax payable

To calculate the underused housing tax, each residential property owner has to apply the 1% tax rate to the “taxable value” or the fair market value if an election is made (see above). The calculation is done under “Part 8 – Calculation of tax payable“.

In our example, the taxable value is $1 million, whereas the FMV after the election is $800,000. To pay lower taxes, Jesse will use the FMV of $800,000. The UHT will equal $8,000.

Step 9: Part 9 – Election and return certification

We made it to the end! Here you sign and date the UHT Return.

Step 10: Filing the Return

If you are any of the following:

• An individual who lives in:
  • USA, United Kingdom, France, Netherlands, or Denmark
  • Alberta, British Columbia, Manitoba, Saskatchewan, Northwest Territories, Nunavut, or Yukon
  • the following places in Ontario: anywhere except Barrie, Sudbury, or Toronto
    
• A corporation located in:
  • USA, United Kingdom, France, Netherlands, or Denmark
  • Alberta, British Columbia, Manitoba, Saskatchewan, Northwest Territories, Nunavut, or Yukon
  • the following places in Ontario: anywhere except Barrie, Sudbury, or Toronto

Send your UHT Return to:
Winnipeg Tax Centre
Post Office Box 14001, Station Main
Winnipeg, MB  R3C 3M3 Canada
Fax: 204-984-5164

If you are any of the following:

• An individual who lives in:
  • Countries other than the USA, United Kingdom, France, Netherlands, or Denmark
  • New Brunswick, Newfoundland and Labrador, Nova Scotia, Prince Edward Island, or Quebec
  • the following places in Ontario: Barrie, Sudbury, or Toronto
    
• A corporation located in:
  • Countries other than the USA, United Kingdom, France, Netherlands, or Denmark
  • New Brunswick, Newfoundland and Labrador, Nova Scotia, Prince Edward Island, or Quebec
  • the following places in Ontario: Barrie, Sudbury, or Toronto

Send your UHT return to:

Sudbury Tax Centre
1050 Notre Dame Avenue
Sudbury ON  P3A 5C2 Canada
Fax: 705-671-3994 and 1-855-276-1529

File Electronically

You can also file electronically through the following link: https://apps.cra-arc.gc.ca/ebci/sres/ext/pub/ntrUhtFlng?request_locale=en_CA.

Appendix A: Exemption for Qualifying Occupancy Decision Tree

The post How to Prepare the Underused Housing Tax Return appeared first on LRK Tax LLP.

This newsletter highlights the most notable tax developments affecting small business owners. In 2023, the government has or will be looking to introduce new taxes:

• The Underused Housing Tax (UHT) – This new tax is meant to apply to foreigners who own vacant homes in Canada. However, suppose you’re a Canadian and own residential real estate in a corporation. In that case, you must still file a UHT tax return (in addition to your regular tax return) indicating your corporation has no foreign owners. If you fail to file this return, you face a penalty of at least $10,000. If you have a corporation that owns real estate in Canada, please get in touch with your accountant about this new filing requirement. 
  
• A New Minimum Tax (on the Rich) Coming in 2023 – We all know the government needs funds to pay for the spending it did and proposes to do. The liberal government has announced that they will introduce a new minimum tax in the 2023 budget that could thwart the tax planning you have in place. You should have your accountant review the tax planning strategies you have in place and see if you need to accelerate some planning before this tax takes effect. 
  
• Real Estate Investors are Starting to Hit the Sell Button but Need to Watch Out for the New Anti-Flipping Tax – Due to rising costs, Real Estate investors are not making the return they had once hoped for. They are starting to hit the sell button. If they are not careful, they could walk right into the new Anti-Flipping Tax that taxes gains as regular business income and not as capital gains (where only 50% gets taxed). 

The tax rules have become increasingly complex in the last few years with many landmines. Also, these new tax rules are coming with astronomical penalties for non-compliance (i.e., $10,000 for even filing the UHT return one day late!). The CRA has become stricter with the penalties. This is why we analyze the latest legislation day and night, even before it is passed into law, to give our clients peace of mind knowing that they are paying the least amount of taxes possible and that their filings are taken care of. 

If you found this newsletter useful, please feel free to pass it on to your team of advisors as it will be useful for them as they also consider your financial, estate, and business plan to preserve and grow your hard-earned wealth. 

We wish you and your family a happy, healthy, and prosperous 2023! 

Sincerely,
LRK Tax Team

The post LRK Tax Newsletter – January 2023 appeared first on LRK Tax LLP.

If you own residential property, you should be aware of the newly proposed Underused Housing Tax (“UHT “) that took effect on January 1, 2022. The UHT is a national, annual 1% tax on the value of non-resident, non-Canadian-owned residential real estate that is vacant or underused. We published a more detailed article explaining the UHT here.

The UHT generally applies to non-Canadians and corporations with non-Canadian owners. However, it is important to note that even if your corporation is 100% owned by Canadians, it may still be required to file the UHT Tax Return if it owns residential real estate in Canada.

The Canada Revenue Agency has made it clear that even if a corporation’s ownership of a residential property is exempt from the underused housing tax, it still has to file a return (Form UHT-2900) for the residential property and indicate the applicable exemption in the tax return.

Failing to file Form UHT-2900 on time could result in minimum penalties of $5,000 for individuals and $10,000 for corporations. These penalties can increase the longer the return is late.

The deadline to file your Annual Declaration for 2022 is April 30, 2023. So, if you own real estate in a corporation, reach out to your accountant immediately to ensure compliance with this new requirement.

The post The New Underused Housing Tax Return Applicable to all Corporations owning Canadian Real-Estate appeared first on LRK Tax LLP.

Inflation is often thought of as a gradual increase in prices, but it’s important to remember that it’s also like a tax. As prices rise, the purchasing power of your income decreases, meaning you can buy fewer goods and services with the same amount of money. This can significantly impact your finances over time, especially if you’re not aware of how it’s affecting you.

Recent data reveals inflation is still high

Recent data released by Statistics Canada showed that the inflation rate in December was 6.3%, which is lower than the peak of 8.1% seen in June. While this may seem like a positive development, it’s important to note that 6.3% is still considered a high inflation rate. Additionally, when you look at the data more closely, you’ll see that the overall Consumer Price Index (CPI) actually fell by 0.1% from November. However, this decrease was largely due to lower gas prices. When you exclude energy and food, the inflation rate is still above 5%.

Inflation is a compounding tax

The compounding effect of inflation can be particularly impactful when you’re making large purchases, such as buying a car. For example, suppose at the beginning of 2022, a Toyota Camry was priced at around $35,000. If the inflation rate is 5%, the price of the car will increase to $36,750 at the start of 2023, which is $1,750 more than the previous year. If the inflation rate stays at 5% in 2023, the price of the car will increase to $38,564 at the start of 2024, which is $1,814 more than the price two years earlier. Even though the inflation rate remains the same, the price increases get bigger each year.

Inflation increases HST

Also, keep in mind that, inflation can indirectly affect the amount of HST you pay. As prices rise due to inflation, the overall cost of goods and services increases, and this can lead to an increase in the amount of HST you pay. With an HST rate of 13% in Ontario, The HST on a Toyota Camry priced at $35,000 would be $4,550. With 5% inflation, the HST would increase by $236.5 in 2023 and $478.2 in 2024. This increases the effective inflation rate on the price of a Toyota Camry including HST in 2023 to 5.5% and in 6.1% in 2024.

In conclusion, it’s important to be aware of how inflation can impact your finances. While it may seem like a small increase in prices, over time, the compounding effect of inflation can add up and significantly impact your purchasing power. Understanding the inflation rate and how it affects you can help you make more informed financial decisions.

The post Don’t forget: Inflation is a compounding tax appeared first on LRK Tax LLP.

Utilizing capital losses to maximize a tax refund

Capital losses can only offset capital gains. If you don’t have capital gains to offset using capital losses, you can carry forward the capital losses indefinitely or carry them back 3 years, and offset capital gains, to reduce taxes.

You have a choice in this. Therefore, in an ideal world, you would want to use up the losses in a year you were in a higher tax bracket because every dollar would mean more tax savings. You get more bang for your buck.

If you expect to be in a higher tax bracket in the future and expect to have capital gains, it may make sense to carry the capital loss forward. However, in most cases, people don’t have the benefit of hindsight and carry their capital losses back to one of the three previous years.

If you are triggering capital losses, speak to your accountant about possibly utilizing the capital loss to recover the most taxes.

Preserving the Capital Dividend Account when you have capital losses

In Canada, you only pay taxes on 50% of capital gains, whether you earn it directly or through a corporation. If you earn capital gains inside a corporation, the corporation gets a credit to the capital dividend account (“CDA”) equal to 50% of the capital gain.

The corporation can pay out an amount accumulated in the CDA to its shareholders tax-free through a capital dividend.

The CDA is an accumulation of all the capital gains and capital losses. Capital gains increase the CDA, while capital losses reduce the CDA. Because of this, you must be careful when to trigger capital losses. Trigging a capital loss – selling your investments at a loss – before you pay a capital dividend could lower your CDA balance.

For this reason, it is wise first to pay a capital dividend to reduce your CDA balance to zero and then trigger capital losses. If you end up triggering a loss first, then your CDA balance will go down, and you will not be able to pay as much of a tax-free capital dividend.

Before you sell your investments to trigger capital losses in a corporation, please ask your accountant whether it makes sense to clear out the CDA balance first.

Using a bad market to draw money tax-free from your company

A more fancy tax plan is often best when there is a lacklustre market.

You could consider selling investments – that you want to hold long-term –  to your corporation in exchange for a promissory note. As you need money from the corporation, you can draw on the promissory note.

With a bad market, there should be little or no capital gains on which you must pay taxes.

With this strategy, you can accomplish the following:

1. Extracted corporate funds at a low tax rate or for by paying no tax;
2. Stayed invested in the investments you wanted to hold long-term but through a corporation.

With a tax strategy like this, there are many pitfalls to watch out for, and implementation is critical. For this reason, it is essential that you work with an experienced tax practitioner. We are happy to sit down with you and look at strategies like the above as you make key investment decisions for 2023.

The post How investors can use lacklustre returns to their benefit in 2023 by diligent tax planning appeared first on LRK Tax LLP.

According to the federal government, “wealthy Canadians” pay comparatively little personal income tax as a share of their income. As a result, as part of the 2022 fall economic statement, the liberal government reiterated their commitment to introducing a new minimum tax regime to ensure that all wealthy Canadians pay their “fair share” of tax.

What will this minimum tax for wealthy Canadians look like?

We don’t yet know how this tax will work exactly. However, in their 2021 election platform, the Liberal government announced their intention to create a minimum tax rule so that everyone in the top tax bracket pays at least 15 % each year, removing their ability to artificially pay no tax through “excessive” use of deductions and credits.

The top federal tax bracket in 2023 is $235,675. Therefore, this minimum tax would likely apply to people earning more than $235,675 (or whatever the highest bracket in the year will be) before factoring in certain deductions. The minimum tax ensures that these taxpayers pay at least 15% in taxes (assuming this is the rate that the government will announce in Budget 2023). If they already pay a 15% tax, this minimum tax will likely not apply. If they don’t – because of additional deductions or tax planning – the minimum tax is intended to apply.

Is this the right policy?

We don’t know whether this minimum tax would exempt one-time transactions. For instance, many Canadians who would not consider themselves “wealthy” may have one year with high income. For instance, after decades of hard work and risk, they may have sold their business in the year or received a lump-sum pension. We think it would be unfair to levy this minimum tax in such cases, which could significantly affect peoples’ retirement.

Moreover, the Income Tax Act provides certain deductions and tax benefits for good reasons, such as encouraging investments in small businesses, hiring people, and taking on risks. By levying a minimum tax, it could undo these objectives. Even worse, it may cause entrepreneurs to rethink whether Canada is the right place for them. We think that rather than a blanket minimum “tax on the rich, ” the government should look at the tax benefits more carefully and restrict them if they are worried people are inappropriately accessing them. We hope the government finds a way to exclude some tax benefits from the minimum tax to encourage entrepreneurs to invest in Canada while preserving the tax base.

What should I do now?

A minimum tax could significantly shut down the benefits of many tax strategies you have in place. Assuming this minimum tax is not grandfathered to start from 2023 onwards, it may be prudent to accelerate some tax planning involving deductions (i.e., the lifetime capital gains exemption, etc.). It would be best if you began conversations with your tax advisor in early 2023 to review your overall tax plan and see the potential impact of the minimum tax. For instance, if you were planning on taking advantage of the lifetime capital gains exemption on selling your business or farm, a minimum tax could result in a significant amount of tax.

We expect details to emerge in the 2023 Federal Budget (around March to April 2023).

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