New regulations which tighten the ability of some home owners to claim the principal residence exemption (PRE) are targeted primarily at market speculators and non-residents and likely will not significantly impact the average Canadian.
For a long time the PRE has been a great advantage because it exempts you from paying tax on any capital gains on selling your home provided it is your principal residence. This usually means your home is a one-family unit, the taxpayer and/or spouse and child(ren) ordinarily reside at the property and have lived there for at least one year.
Given the recent increases in housing prices in Canada generally, and in hot housing markets such as Toronto in particular, the gains in the value of your home can be significant, especially if you’ve owned it for a long time.
According to the Canadian Real Estate Association (CREA), the average price of a detached, single-family home in Canada in January this year was $470,253.
Of course, prices vary greatly by province and city.
The average price in Victoria BC in January was $589,082, $451,242 in Calgary, $272,553 in Winnipeg, $351,255 in Montreal, $174,058 in Fredericton, $301,824 in St. Johns, NL, and $770,745 in Toronto, all according to the CREA’s national survey of prices on its web site.
The Building Industry and Land Development Association recently pegged the average price of single-family low-rise homes, including detached, semi-detached, row and townhomes, in the Greater Toronto Area at more than $1 million for the first time.
The purpose of the new regulations is to better ensure that the PRE is available in appropriate cases, to clamp down on speculators who are “flipping” properties and make claiming the exemption more difficult for non-residents.
Before the changes the CRA did not require taxpayers to file forms claiming the exemption if the property was eligible for the full PRE.
Now, however, all taxpayers claiming the exemption will have to file form T2091. They will have to include certain information such as the address of the property, the date of acquisition, proceeds from the disposition and what years they’re claiming the PRE.
This information will help the CRA keep better track of activity and potential abuses. It has the normal three years from filing to reassess exemption claims but can extend that up to seven years if it suspects there was deception.
“The CRA can audit exemption claims for up to seven years, overturn them and come back and say you owe us this much tax on the capital gains,” says Carol Bezaire, senior vice-president of tax, estate and strategic philanthropy with Mackenzie Investments.
The CRA is changing the formula it uses to calculate the PRE for non-residents by eliminating what is known as the “one-plus” factor.
Families with just one home have only one principal residence, so they get the full exemption from tax on any capital gains. The one-plus provision provides a full exemption on two homes in cases where people might move from one home to another in the same year.
For example, a family sells its home in one city to move to a new one for a new job and buys another home there, all in the same year.
This is a big bonus for Canadian residents but is no longer available for people where were non- residents in the year they acquired the property.
“The Canada Revenue Agency has really thought this through,” says Bezaire. “It makes it a lot more difficult for non-residents to claim the exemption and for people who buy properties and then flip them. The CRA is going to watch things a lot more closely now to see how many times this is being done and whether people are trying to do this as if it were a business.”
Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors.
Copyright 2017 Talbot Boggs