By: Haroon Khan, CPA, CA (Canada), CPA (USA)
On 13 September 2023, we encountered a series of interesting FAQs at our Professional Development Hours session on Underused Housing Tax. The FAQs were regarding the classification of properties according to the rules of Underused Housing Tax. The main discussion surfaced around the properties used for residential and commercial purposes and whether they should come under the residential properties for UHT purposes. This blog aims to clearly understand this concept while exploring all these aspects in detail.
Background:
The UHT rules only apply if you own a residential property and not an excluded owner i.e., you are an affected owner. As an affected owner, you are obligated to either pay the UHT tax or may qualify for a potential exemption, whatever the scenario you will still have to file the annual compliance. This discussion will solely focus on the classification of a property as residential or non-residential.
The Rule:
The basic principle to remember is that the UHT rules do not apply if the property is classified as non-residential. Therefore, you don’t need to worry about the owner definitions, affected owner status, or the exemptions if the property is not a residential property.
The Answer:
The CRA gives clarity, in the UHT Notice#1, which reads, ‘A building does not qualify as a residential property for UHT purposes if it is primarily (more than 50%) being used for office, or retail purposes. This rule helps in making tax implications more transparent by differentiating between residential and non-residential properties.
Follow-up Question:
Another intriguing question was about the kind of businesses that does not come under the definition of retail and office categories. For Instance, business-like funeral homes, do they follow the same treatment as above?
The Answer:
The CRA responds through the example of Notice#1 in UHT stating, ‘specific conditions must be met for a business to be recognized as non-residential:
- The property consists of an area that is used as a dwelling unit.
- A distinct part of the property is designated for business purposes.
- These two areas are part of one building and are not separated by another compound.
- The property doesn’t completely identify as a dwelling unit.
Through this explanation, it is evident that any building primarily used for a commercial purpose, exceeding the 50% threshold will be categorized as a non-residential property. Thus, exempting the property from the UHT rules, regardless of the type of business.
