CRA principal residence exemption crackdown: What it’s worthwhile to know

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In case you bought your principal residence in 2021, it’s worthwhile to report that sale in your 2021 tax return, typically due on Might 2, 2022, even when it absolutely qualifies for the principal residence exemption (PRE).

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The designation of your principal residence is reported on the second web page of Schedule 3 of your return, and you will need to additionally full the suitable sections of Kind T2091(IND), Designation of a Property as a Principal Residence by an Particular person.

For a property to qualify as your principal residence for a selected tax 12 months, 4 standards beneath the Revenue Tax Act have to be happy: the property have to be a housing unit; you will need to personal the property (both alone or collectively with another person); you or your partner (or common-law associate) or children should “ordinarily inhabit” the property; and you will need to “designate” the property as a principal residence.

Be aware {that a} seasonal residence, similar to a cottage, cabin, lake home and even ski chalet, might be thought of to be “ordinarily inhabited within the 12 months” even if you happen to solely use it throughout trip intervals “supplied that the principle cause for proudly owning the property is to not achieve or produce revenue.”

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A rental property, nevertheless, is mostly not thought of a principal residence, and you would be on the hook for capital positive aspects tax if you happen to bought one in 2021. Equally, you could be precluded from claiming the PRE if you happen to purchased or constructed a house with the aim of promoting it for a revenue.

In recent times, the Canada Income Company has been cracking down on perceived abuse of the exemption, most not too long ago with a letter marketing campaign, during which it despatched letters to people “who might have utilized the principal residence exemption (PRE) in error.”

Starting in January, academic letters had been despatched to roughly 1,700 taxpayers who claimed the PRE in two particular eventualities. The primary letter went to taxpayers who claimed the PRE for 2 consecutive years in a row, and the second letter was directed at taxpayers who claimed the PRE and had beforehand reported gross rental revenue on their return.

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“The CRA is utilizing an education-first method aimed toward serving to recipients perceive the right way to correctly report a property disposition,” CRA spokesperson Hayley Hanks stated in an e-mail. “People who acquired a letter had been supplied a possibility to contact a CRA agent to offer a proof for the usage of the PRE, or to amend their return if relevant.”

The CRA letters 

The primary letter was despatched to taxpayers who claimed the PRE in each their 2018 and 2019 tax returns. The letter identifies the properties on which the taxpayer claimed the PRE and goes on to clarify that whenever you promote your private home, you don’t often need to pay tax on any revenue from the sale due to the PRE.

Nonetheless, if you happen to purchase a property with the principle intention of promoting it, you’ll owe tax on any ensuing achieve (or revenue). The CRA additional factors out the achieve on these gross sales could also be thought of enterprise revenue, which is 100-per-cent taxable, or might be thought of a capital achieve, during which case solely half the quantity must be included in revenue.

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The letter then politely asks the taxpayer, or consultant, to “assessment” their return “to make sure that you precisely reported your actual property inclinations and that you simply had been eligible to assert the principal residence exemption for each properties.” The CRA encourages taxpayers who have to make any corrections to alter their returns, and indicated it will likely be following up by cellphone within the coming weeks.

The CRA is utilizing an education-first method aimed toward serving to recipients perceive the right way to correctly report a property disposition

Hayley Hanks

The CRA has additionally been profitable in courtroom when the PRE has been claimed a number of occasions over various years, as in a 2021 case during which a Vancouver taxpayer bought, demolished, constructed after which bought three houses in a six-year interval, and tried to assert the PRE, unsuccessfully, on every sale.

The second set of CRA letters was despatched to taxpayers who claimed the PRE on the disposition of actual property, but additionally reported a “discount of gross rental revenue.” Within the letter, the CRA reminds these taxpayers that if you happen to bought your rental property, the PRE is barely out there if the property was beforehand your principal residence and you filed the suitable election. As well as, the PRE is probably not out there for all years of property possession.

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The CRA additionally encourages these taxpayers to amend their returns, if acceptable, and shall be following up by cellphone.

Modifications afoot? 

Within the upcoming federal price range, we may see the formal introduction of the Liberals’ anti-flipping tax meant to “cut back speculative demand within the market and assist to chill extreme value development,” in addition to make it simpler for the CRA to reassess perceived abusers of the PRE.

Promised as a part of the get together’s pre-election platform, the plan requires eradicating the PRE from people who promote their principal residence inside 12 months of buy (or switch of title), and treating the positive aspects from the sale as taxable capital positive aspects starting within the 2022 tax 12 months.

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There could be some notable exceptions: the sale of vacant land; the sale of a house destroyed, condemned or broken attributable to pure or man-made catastrophe through the 12-month interval; the proprietor’s earlier residence having been destroyed or condemned; or a dying, divorce, separation, critical sickness/harm or change of employment of the helpful proprietor through the 12-month interval.

In September 2021, the Parliamentary Funds Workplace estimated this new measure may herald roughly $36 million in extra tax revenues through the first 5 years.

Jamie Golombek, CPA, CA, CFP, CLU, TEP is the managing director, Tax & Property Planning with CIBC Non-public Wealth in Toronto. Jamie.Golombek@cibc.com 

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