Skyrocketing housing prices in Vancouver and Toronto have been dominating the news. In light of this, the federal government announced changes to the reporting of real estate sales, and the Principal Residence Exemption (PRE). The new measures aim to collect data on home sales in order to plug any tax leakages by ensuring only eligible claimants take advantage of the exemption rules.
Under Canada’s Income Tax Act, when a principal residence is sold, the capital gain realised during the years a taxpayer owned and occupied the property are tax exempt.
Prior to October 3, 2016, if you sold your principle residence, you did not need to report the sale on your income tax return if it was your principal residence for every year you owned it. However, to ensure the spirit of the PRE is adhered to, the new rules now require all home owning taxpayers to designate and report it. When you sell your home, you must now designate and report the sale of your principal residence on your income tax return in order to qualify for the exemption. Failure to do so can result in penalties as high as $8,000.
A principal residence does not need to be located in Canada and can be a house, cottage, a condo or apartment unit, a townhouse, a duplex, or a trailer, mobile home, or houseboat.
In order for a property to be deemed your principal residence, there are 4 basic requirements that need to be satisfied. The property must be:
- a residential housing unit;
- owned either by you alone or, jointly with another individual;
- occupied by you, your current (or former) spouse or common-law partner, or children at some time during the year; and
- designated by you as your principle residence.
Since 1982, only one property can be designated by a family unit as a principle residence in a given year. If you, your spouse or common-law partner own more than one personal-use property, you must determine which property you will designate as your principle residence.
It is important to note when there is a change in the use of your principal residence, for example, if you convert your principal residence to a rental property (or vice versa), the CRA considers it a deemed disposition of the property. Whenever a deemed disposition takes place, you are required to disclose it with your tax return.
Prior to October 2016 a wide range of personal trusts were eligible for the PRE claim. However, only alter ego, spousal, common-law partner, joint spousal/partner, qualified disability trusts, and trusts for minor children of a deceased parent can now claim the exemption. In addition, the beneficiary who occupies the residence must be a resident of Canada and a family member of the individual who created the trust in order for the trust to be eligible to claim the PRE.
The laws governing the Principle Residence Exemption are complex. If you have any questions or need help navigating the new rules, feel free to contact GB Pilley & Associates Ltd., Chartered Professional Accountants at 604 926 3522.