Could any member of this forum please clarify whether, in the scenario of jointly owning a residential rental property and reporting rental income jointly with a spouse, both husband and wife are considered affected owners, and if they are required to file a UHT (Undeclared Home Transaction) return, especially when the property is owned as a family investment and the income is split evenly between the spouses on their tax returns, despite not operating a formal partnership business? I’m seeking guidance on how to address this situation based on the recent issue of TAX TIPS CA (October 31, 2023) which says “ that UHT return is probably required if you are the joint owner of a residential rental property, and the rental income is reported jointly. Before reading TAX TIPS as referred above, my understanding was very clear that individual Canadian citizens and Permanent residents are not obliged to file UHT returns unless they own the property as a trustee or under a partnership in partnership business
The question is whether your husband and wife are considered a partnership even though no partnership type forms are filed. There was another thread where this was debated back and forth and I think the final conclusion was that straight rental was not subject to it but if additional services were provided (ie snow clearing, bed and breakfast, short term rentals) then it could be considered a partnership operating a business which would be subject to the UHT form. I really hope this is the case otherwise I am going to have a lot of forms to file by next April.
Me too. But I won’t file any until we have some official clarification.
As has been stated multiple times, in multiple different threads on this forum:
NOBODY KNOWS THE ANSWER TO THAT QUESTION!
- CRA doesn’t know the answer.
- The politicians that enacted this legislation don’t know the answer.
- The Department of Finance that authored the legislation doesn’t know the answer.
- The Tax Court of Canada doesn’t know the answer (because no cases have been brought before it yet).
- Tax lawyers may be able to give “an answer”, but it would depend on the specific circumstances of each individual case, and even then, none of those “answers” have been tested in court.
The definition of a partnership is not specified in the UHT act, nor in the Income Tax Act. The definition of a partnership is specified in by each province in their own legislation, and those definitions differ from province to province.
So, it is a BIG GREY AREA. All of the above groups acknowledge this. As accountants, we have to tread carefully for the next few years until there is enough evidence - from TCC cases or CRA administrative practices - to state with certainty whether spouses who own a house will be considered “excluded owners”
Right now, the only thing you can say for certain is that NOT ALL jointly-owned residential properties would be considered partnerships.
Part 1, Section 2 of the Underused Housing Tax Act contains pages of definitions to words the drafters presumably felt were important enough to form part of the UHT Act. Either deliberately or through incompetence the words “Partner” or “Partnership” are not important enough to be defined in the Act. Instead, the authors felt it necessary to define words such as “Bank”, “Business Number”, “Credit Union”, and “Judge” otherwise the reader would likely be lost and confused by those terms.
Ironically enough; included plethora of definitions the writers felt important enough to include in the act they actually make reference to the words partner and partnership in their attempt to defining other terms such as “Excluded Owner”.
The script kiddies drafting these legislation documents seem to have no idea their reckless actions have consequences to people who live and work in the real world.
They don’t differ much. I’ve looked up all 13 provincial and territorial acts on CanLII. Except for Quebec’s (surprise!), the basic definitions are substantially the same, using almost the same words derived from English law: “[A] Partnership is [or means] the relation which [ or that] subsists [or exists] between persons carrying on [a] business in common, with a view to [or of, or to make a] profit.”
Even Quebec’s English version, in section 2186 of the Civil Code, has much the same meaning, especially if you take into account that it must conform to the official French version: “A contract of partnership is a contract by which the parties, in a spirit of cooperation, agree to carry on an activity, including the operation of an enterprise, to contribute thereto by combining property, knowledge or activities and to share among themselves any resulting pecuniary profits.”
Granted there are nuances in the ways that the various acts exclude the relationship between corporation shareholders from the definition of partnership, and the rules they provide to determine whether a partnership exists, but they all seem to come to the same result: No business, no partnership.
What would be the implications if CRA had to revise its longstanding distinction between income from a business and income from property? Think, for example, of the replacement property rules.
I stand corrected. Thanks @keith1 for doing the tedious work of looking up all the provincial statutes.
However, there is still the issue that the UHT is federal legislation, and relies on provincial/territorial legislation for the definition of a partnership. That means it “could” be interpreted differently in different regions of the country. And, given that UHT returns may be assessed and/or audited by CRA agents across the country, each individual assessor/auditor may have his/her own view of what constitutes a partnership.
So, again, we will not have a definitive answer until we see how CRA responds to a number of different scenarios. In particular, what will they do about all the affected owners who have NOT FILED a return? How will they FIND those people and determined they SHOULD HAVE filed? I know, CRA has access to some of the information through tax returns, and can employ legal methods to obtain additional information, but:
Will they expend the effort to gather and compile that required info? That is, do they have sufficient staff to allocate to such a project?
Will it be worthwhile to incur the cost (i.e. employees salaries, etc) to track down the affected owners, most of whom won’t be liable for the tax anyway? I suppose the $5,000 late-filing penalty will offset that cost, but that seems rather corrupt - to track down people who aren’t liable for the tax, just so that CRA can extract a $5,000 penalty. I don’t believe our politicians devised this plan with the intention to generate a majority of the revenue through penalties charged to their voters.
If they were going to use the existing information in provincial property registries and municipal property tax databases to determine who must file, they wouldn’t need affected owners to voluntarily file a UHT return.
1. Will they expend the effort to gather and compile that required info? That is, do they have sufficient staff to allocate to such a project?
Answer: They will first need to review all T776 returns, then analyze the taxpayer to check their status. This will surely be a time consuming project; if they are looking for ROI, they won’t do it.
They will finally have to determine the definition of “partnership” that they will use. They won’t have a final definitive answer until someone takes this too tax court.
They will need to prepare instructions that the tax prepaer and auditor can read and understand.
2 Will it be worthwhile to incur the cost (i.e. employees salaries, etc) to track down the affected owners, most of whom won’t be liable for the tax anyway?
Obviously Baker Tilly and some of the other large firms are taking advantageous of the ambiguity here to increase billable income. I am going back to my position from the original brief reading that my customers do not need to file. Our tax system is based on self-assessment; they are using the threat of large penalties to get all possible affected property owners to file the UHT.
There’s nothing new in that. Constitutionally, partnership comes under provincial jurisdiction as part of property and civil rights. We have a similar situation with respect to the medical expense tax credit, in that provincial law determines who is a “medical practitioner”.
True! And, when the politicians first enacted legislation to allow medical expenses as a tax deduction, how many years did it take until all the provinces published their official lists of medical practitioners? I don’t know, but my point is that it will take time for all the nuances to be identified.
Alternatively, one could argue that UHT is a different situation. If a taxpayer neglects to claim allowable medical expenses, there is no penalty, and CRA will not make any effort to track down the taxpayer to ensure they claim all allowable expenses. However, if an affected partner of a partnership neglects to file a UHT return, there could be a penalty levied. It remains to be seen whether CRA will (or even can) track down those negligent filers, particularly if they have not filed a T776 on their tax return (or have not filed a tax return at all).
I wonder what will happen when a property is sold. Do lawyers have to file some kind of certificate regarding beneficial ownership? I don’t know if they do, but if they do they might catch a lot of people that they determine should have filed because they are a bare trust. And how many years will they go back?
What worries me more is the bare trust idea for a parent being on title for their child for financing purposes.
Questions 1.11 & 1.12 of CRA Notice UHTN15 says:
1.11. How do I know if an arrangement constitutes a trust?
A trust arrangement is usually governed by a written document. Whether an arrangement is a trust is a question of fact. Canada’s tax system is based on self-assessment, which requires persons to determine the facts themselves. The CRA then assists persons to understand how the tax laws apply to a given set of facts.
1.12. What is a bare trust?
The term bare trust is not defined in the UHTA. Generally, a bare trust is a trust where the trustee holds legal (titled) ownership of the trust property and is not required to perform any active duty to carry out the trust. The beneficiaries of the trust hold the beneficial ownership of the trust property. Whether a trust is a bare trust is a question of fact. Canada’s tax system is based on self-assessment, which requires persons to determine the facts themselves. The CRA then assists persons to understand how the tax laws apply to a given set of facts.
Taxtips.ca seems to think that all owners that are on title but don’t have beneficial ownership are bare trusts [and a T3 return has to be filed]:
Is your name on the title of a residential property, but you do not have beneficial ownership? This is a bare trust.
A “bare trust” owning residential property is affected by the UHT, and the trustee must file the UHT return. Most people are not even aware of what constitutes a bare trust. There are many examples, including when a property is placed into joint ownership with one of the joint owners having legal ownership but not beneficial ownership.
A few examples, but there are many more:
- Parent who puts adult child on title for estate-planning purposes only, no beneficial ownership transferred. The residence is the primary place of residence of the parent.
- Adult child who puts parent on title for financing purposes only, no beneficial ownership transferred. The residence is the primary place of residence of the adult child.
- Trustee of a family trust which holds residential property in trust for the beneficiaries.
But can you really say that there is a trust when there is no written agreement between a parent and child spelling out why the parent is on title?
I think we can all agree, this whole thing is one horrendous shit show. We can either file now based on what we think we know, or wait until next April when we’ll all be up to our eyeballs in work. If we file now, get a documented acknowledgement from our clients that they realize we’ve done our best with incomplete CRA guidance and we’re not responsible for any unfavourable consequences.