A for rent sign outside a home in Toronto on July 12, 2022.COLE BURSTON/The Canadian Press
A federal tax targeting foreign real estate investors has turned into a bureaucratic headache for many Canadian couples owning rental property who may be among the domestic homeowners required to file a special return by April 30 this year, experts say.
Ottawa’s underused housing tax (UHT), which took effect at the beginning of 2022, imposes a yearly 1-per-cent levy on foreign-owned residential properties considered to be underused or vacant.
But tax experts have long warned that, while Canadians don’t generally have to pay the tax, they may be required to file a UHT return – if only to claim an exemption – in certain cases. Common scenarios involve many who own rental property with their spouse or have had their name added to the title of a family member’s home.
In November, Ottawa proposed amendments that would drop those filing requirements for domestic homeowners, but only for 2023 and following years. Updated UHT tax forms recently published by the Canada Revenue Agency suggest the agency will uphold those proposed changes even if they aren’t yet law, according to tax experts. But affected Canadians must still send in their paperwork for 2022 by the end of April or risk facing penalties.
Accountants and tax lawyers have warned that assessing whether Canadian homeowners have to file often involves complex legal interpretations. And those interpretations can be particularly uncertain when it comes to couples with rentals, they say.
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In many cases, the legislation requires Canadians to file a UHT return if they hold real estate through a partnership. The issue is that a couple with rental property may be legally considered a partnership, said Hugh Neilson, director of taxation services at Kingston Ross Pasnak LLP.
The problem is that neither the Income Tax Act nor the law introducing the UHT provide a definition of partnership. Instead, Canadians must look at other legislation and case law. From a legal standpoint, a partnership is a relationship between two or more persons who carry on a business in common with a view to profit, Mr. Neilson said.
Do two spouses who derive income from rental property fit that description? “It’s very much a fact-dependent question,” Mr. Neilson said. Answering it requires digging into provincial partnership law, he added.
That’s a tricky task for accountants, but even Canadians willing to engage a lawyer may not get a clear-cut answer.
In Ontario, Anna Malazhavaya, a tax lawyer and founder of Advotax Law Professional Corp., said most case law on whether a relationship is a partnership involves unrelated business partners.
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It’s hard to apply those legal precedents to married or common-law spouses, she said.
The CRA has indicated that, if a couple with rental property has previously described their relationship as a partnership in their income tax returns, “it may be difficult for them to characterize their relationship as something else for UHT purposes.”
For those who haven’t done so, however, the tax agency has provided little counsel.
A government webpage on the UHT indicates that taxpayers uncertain about whether they are in a partnership may be able to request a CRA ruling on the matter. (A ruling is a written statement laying out the CRA’s position on how certain provisions apply to a taxpayer’s specific situation.)
In fact, however, “the CRA will not rule on the existence of a partnership,” CRA spokesperson Kim Thiffault said in an e-mail statement.
Ms. Thiffault pointed to previous guidance in which the agency had stated it may not provide rulings on whether a specific arrangement constitutes a partnership.
Couples who remain uncertain about whether they’re a partnership under UHT rules face unappealing options.
On the one hand, not filing could be costly. Current legislation sets the minimum penalty for failing to file on time at $5,000 a year per individual per property – meaning $10,000 for a couple with a single property – although the recent amendments would lower that minimum to $1,000. The instructions of the newly updated UHT forms only mention the lower penalties.
On the other hand, couples who are considering filing just to avoid potential UHT penalties should be aware of potentially significant legal consequences of calling themselves a partnership, Ms. Malazhavaya warned.
In Ontario, for example, partners are considered “jointly and severally liable,” she said. Among other things, this means creditors or lawsuits targeting one spouse would be able to pursue the other spouse’s share of the partnership property as well, she added.
