written on behalf of Feigenbaum Law
This October, the Minister of Finance announced changes to the Income Tax Act relating to the principal residence exemption, including disclosure obligations following the sale of a principal residence, and the elimination of the “one-plus” exemption for non-residents. The amendments are designed to tighten loopholes and prevent misuse of the capital gains exemptions intended to protect a taxpayer’s principal residence.
Ordinarily, the sale of real estate for an amount greater than its original cost will incur a heavy capital gain tax on any increase. Where a piece of property can be designated a “principal residence,” such taxes can be reduced or even eliminated. The extent of the exemption is calculated based on the number of years during which the property was the taxpayer’s principal residence, including the year that it was sold, eliminating any gain made in those years.
Generally, only one property may be designated a principal residence in each tax year. However, it is possible for a taxpayer to have two properties in one tax year if they have sold their home and purchased a new one; both of these properties are technically their principal residence, and should both qualify for the exemption. To get around the restriction, a “one-plus” rule was created, allowing the principal residence exemption to be claimed for each year that the taxpayer owned a property, plus one extra year. Upon disposition of the property, this is applied to the year it was purchased: if a principal residence was sold that year, the exemption can still be claimed for both properties, eliminating any capital gains.
Beginning in 2017, this “one-plus” year will not be available to taxpayers that were not residents of Canada in the year that they purchased the property in question. If you were not a Canadian resident when you bought your principal residence, speak with your tax consultant about the possible implications of these changes.
In addition to structural changes to the rules, there are now requirements to report the disposition of a principal residence, with harsh penalties for failure to comply. While this was always technically required, it was also an understood administrative position of the Canadian Revenue Agency to look the other way when taxpayers did not report a sale, that is, where the entire gain was within the principal residence exemption.
That will change starting with 2016’s tax returns. For any sale where the principal residence exemption will be claimed, taxpayers must describe the property, set out the year it was purchased and the years that it was their principal residence, in addition to the proceeds from its sale subject to the claimed exemption.
Although it is possible to cure any failure to report through late-filing an additional form, this action may be a red-flag to auditors, giving rise to possible reassessment. If you are selling your principal residence, or have been a non-resident for some of the time that you owned your home, consider speaking to one of our tax experts.
Feigenbaum Law offers personal, tailored services to high net worth and professional clients from Canada, the United States, and worldwide. If you are unsure about the status of your home as a principal residence, or have any other questions related to your personal tax planning, we can assist. Contact us by email, or toll free at (877) 275-4792.