Introduction: A Canadian Property Owner's Increasing Tax and Reporting Obligations
Canada has a housing crisis. The government of Canada openly admits that the "national housing crisis presents one of Canada's greatest social and economic challenges." However, for the past several years, the new policies in relation to the housing issue have yet to show any results. Instead, there has been a noticeable increasing pressure on property owners in Canada, including but not limited to hiked property tax, increased capital gains tax, additional occupancy-based taxes, a vacancy tax and restrictions on short-term rentals. As the government imposes more and more rules on property owners, it becomes increasingly difficult for property owners to comply with their tax obligations. Property owners may also feel like that they are getting taxed more no matter what they choose to do with their properties. In addition, with the threat of high mortgage interest rates and the difficulties to dispose of their properties in the current real estate market, property owners are undoubtedly having a challenging time.
To help property owners better understand their tax obligations, this series provides a basic guide for Canadian property owners who are subject to various types of taxes. This is Part I of the series, which introduces some of the general rules and taxes applicable to Canadian property owners, including: property tax, vacancy tax, and reporting obligations for foreign real properties. Part II of the series will discuss more about the applicable tax on selling a property in Canada, including capital gains tax and land transfer tax. In Part III of this article series, we will then take a closer look at the existing restrictions and additional taxes on short-term rental units, in contrast to traditional long-term landlords.
Property Tax: How Are Property Taxes Calculated In Canada?
Property taxes are the taxes property owners in Canada pay based on the type of real property, the assessed value of the property, and the location of the property. Unlike income taxes and GST/HST, a property owner's city or local municipality, instead of the Canada Revenue Agency (CRA), is responsible for assessing and collecting property tax each year. Consequently, property tax will form part of the annul budget of the city/municipality, which includes both residential property taxes and commercial property taxes. Each province also has its own assessment cycle for property taxes. In Ontario and Saskatchewan, a property is reassessed every four years to determine the applicable property tax. Quebec has a slightly shorter assessment cycle set at three years while some provinces reassess property value on an annual basis.
The assessment cycle is different from a property tax hike. A property owner cannot appeal a city-wide property tax hike. However, if a property owner disagrees with reassessment of the value of his or her property, the property owner likely can appeal to the city/municipality. A property tax hike is an overall increase of the property tax rate, while the reassessment of a property only determines the value of the property. A property tax rate increase is usually decided by the city/municipality that applies to all properties within their jurisdiction. In February 2024, for example, the Toronto City Council approved the city's largest property tax hike in more than 25 years, a 9.5 per cent residential property tax hike. If an individual owns a detached house in City of Toronto, prior to the property tax hike, with the property value assessed at $1 million and the property tax rate at 0.65%, the annual property tax would be $1,000,000 * 0.65% = $6,500. Upon the 2024 hike, the annual property tax will increase to $1,000,000 * 0.65% * (1+ 9.5%) = $7,117.50, without a reassessment of the property value. If a reassessment is also due in 2024 and the city increased the property value by $100,000, then the annual property tax will increase to $1,100,000 * 0.65% * (1+9.5%) = $7,829.25. This results in a 20.45% increase of payable property taxes. It is therefore important for property owners to be aware of their property tax obligations and to be financially prepared for the increase. Penalties, interests, and fee charges will apply if the property taxes become overdue. The city can also take collection actions, including but not limited to registering a lien against property and personal belongings, forcing a sale of the property, withholding provincial payments to which the property owner is otherwise entitled, and even pursuing civil claims to garnish salaries and wages of the property owner.
Vacancy Tax and Declaration Obligations: Additional Taxes on Vacant Residential Properties
Property owners in Canada may have quite a few declarations to file at the beginning of each year. For taxpayers with vacant residential properties, the amount of occupancy-related taxes payable each year can be significant. For example, if a Canadian non-resident owns a condo unit in Vancouver, the maximum of occupancy-related taxes that the owner needs to pay is 6% of the value of the property, which includes three levels of occupancy-related tax: federal, provincial, and municipal.
The federal Underused Housing Tax Act took effect on January 1, 2022, which imposes an annual 1% federal tax on the ownership of vacant or underused housing in Canada. A property owner in Canada must file an Underused Housing Tax (UHT) return for each of his or her properties in Canada if 1) the property is a residential property for UHT purposes, and 2) if the property owner is not exempt from the tax under the list of "excluded owners". Examples of excluded owners include a public Canadian corporation, a cooperative housing corporation, a hospital authority, and an indigenous governing body or a corporation which is wholly owned by such a body. For more information, please refer to our article on the Underused Housing Tax.
Provinces can also impose similar taxes. For example, the speculation and vacancy tax in British Columbia is an annual tax that applies based on 1) how property owners use the property, 2) the property owner's residence status, and 3) where property owners earn and report their income. Different tax rates may apply depending on the status of the property owner. A property owner in the designated taxable areas must declare every year for the speculation and vacancy tax, even if there is no change in his or her information.
Various municipalities, including Vancouver, Toronto, and Ottawa, have also enacted vacancy taxes and required annual declaration on residential properties. For example, in Toronto, owners of residential properties are required to declare the occupancy status of their properties on an annual basis. If the property is found to be vacant and is not subject to any exemptions, the applicable Toronto Vacant Home Tax is 3% of the property value. The Vancouver Empty Homes Tax is also currently set at 3% of a property's assessed taxable value.
Reporting Obligations for Foreign Real Estate Properties: T1135 Foreign Income Verification Statement
Property owners who are tax residents of Canada should be aware of their potential reporting obligations if they own foreign assets, including foreign real estate properties. If the aggregated value of a taxpayer's specified foreign property exceeds $100,000 CAD in a year, the taxpayer must file a Form T1135, Foreign Income Verification Statement every year, together with the taxpayer's Canadian income-tax return. The determination of the aggregated value of one's specified foreign property can be tricky as assets that may not be foreign at first glance can be captured under this category. For example, if you have cryptocurrency, the value of your specified foreign property includes the estimated value of your cryptocurrency assets and your foreign rental property.
At a minimum, failure to file T1135 for one year is the greater of either $100 or $25 per day, for up to $2,500. If the CRA determines that a taxpayer, knowingly or under circumstances amounting gross negligence, is late with a T1135 by more than 24 months, additional penalty may also be imposed, up to 5% of the cost of the property, less any penalties already levied. For taxpayers who have failed to comply with the T1135 reporting obligations, they may qualify for relief under the CRA Voluntary Disclosure Program.
Pro Tips – Make Sure You Understand Your Tax Obligations As A Property Owner
It is very difficult to keep track of the new rules and regulations for any property owners who do not have a background in law, accounting or tax. For example, a property owner who resides in his own property in Toronto may not be aware that he is required to declare occupancy status every year. Increase of property taxes can also come as a surprise if a property owner does not follow the latest city news diligently.
If you are unsure about whether you are required to file any types of declarations or report with respect to your real estate property in Canada or anywhere else in the world, you should engage with one of our expert Canadian tax lawyers. Our top tax lawyers can provide legal advice and assist you with understanding your tax and reporting obligations, to prevent CRA's penalties and interest in relation to your property.
FAQ
What Happens If I Owe Property-Related Taxes?
Depending on what types of taxes you owe, the CRA or the provincial/municipal government can initiate collection activities, including registering a lien against your property, withholding any tax refunds, and even garnishing your wages. However, collection activities may be suspended subject to any ongoing appeals. To avoid further interests, nevertheless, you can choose to make payments towards the amount owing while disputing the taxes.
If you struggle to understand what property-related taxes you are dealing with or if you are disputing property-related taxes imposed on you, we recommend that you consult with one of our experienced Canadian tax lawyers to learn more about your tax obligations and to avoid paying necessary property-related taxes.
What Can Be Used To Prove That My Property Is Not Vacant?
There is no exhaustive list of documents to be provided in order to show that your property is not vacant. Proof permitted and required may also differ depending on where your property locates and the type of property you own.
In general, if you have a tenant, make sure that you and the tenants enter into a written rental agreement. You should also keep copies of utility bills, proof of rental payments, the rental agreement, and any rent increase/agreement renewal notices.
If the property is for personal use, whether it is for you personally or for your family members and friends, make sure that you keep records of utility bills, statements that use the property as mailing address, and any official documents that were delivered to the property or used the property as a mailing address.
Before you start gathering evidence to prove that your property is not vacant, however, you should first identify whether your property is exempt from any occupancy-related taxes. If you require assistance in determining your property-related taxes, please contact one of our expert Canadian tax lawyers for legal advice specific to your case.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.