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Principal Residence Exemption: the rules, they are a-changing!
6/26/2017 6:20:02 PM
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TAX PLANNING
Tax-saving tips and strategies from a leading Canadian tax-planning expert.



By Samantha Prasad  | Thursday, March 30, 2017


 



By Samantha Prasad and Ryan Chua, Minden Gross LLP

Back on October 3, 2016, the Department of Finance introduced significant changes to the principal residence exemption (PRE) rules in order to “improve tax fairness by closing loopholes surrounding the capital gains exemption” as they relate to the sale of your home. The changes were aimed primarily at foreign investors of Canadian real estate, but they also catch many Canadian residents who, in the past, have been able to access the PRE and avoid paying capital gains tax on the sale of their principal residences. In this article, we will review what these changes mean for you. Before we get into the nitty gritty of the changes, let us first review the rules.

Key rules and requirements

In order to take advantage of the PRE, certain requirements must be met:

* The home must be ordinarily occupied for personal use by you, your spouse or former spouse, or a child at some time during the year.

* The home must be “capital property.” If the home was renovated and “flipped” a short time after it was acquired, there is a risk it might not be considered capital property but rather the inventory of a business.

* To claim the PRE on a large lot (over ½ hectare – about 1¼ acres), you must be able to establish that the excess land is necessary for the “use and enjoyment” of your home.

* Restrictions also apply if part or all of your home is rented out or is not used by a family member, or if you have not been a resident in Canada throughout the period of ownership (other than in the year of purchase).

* As a general rule, a family can claim the PRE on only one home at a time. Claiming a second home is more of a problem. To stop you from trying to claim a separate exemption for another home by putting it in the name of a child, the rules restrict children from claiming the exemption unless they have reached age 18 in the year or are married.

* Where specific conditions are met, non-Canadian properties may also qualify for the PRE.

* It is possible for a trust to claim the PRE, provided that a corporation is not a beneficiary and the trust designates a beneficiary (or their spouse, common-law partner, or child) of the trust who ordinarily inhabits the property (referred to as a “specified beneficiary”).

PRE not cut-and-dried

Most people think of the PRE as a black-and-white matter – either you qualify to sell tax-free or you do not. Actually, this is not the case. When you sell your home, you must calculate the gain on your residence just like any other capital gain, then PRE itself reduces your gain.

Moreover, eligibility for the exemption is on a year-by-year basis, which might come as a surprise. The more years you qualify relative to your total period of ownership, the more your gain gets reduced. To be more precise, here is the basic formula that normally applies:

Despite only allowing one property to be claimed, the rules allow a full exemption on two residences in a particular tax year, i.e., where one residence is sold and another is purchased in the same year. That is why the above formula adds “1” to the number of years the property was a principal residence (the “plus one rule”).

As you can see from the above formula, to get the tax reduction, you must designate the home as a principal residence on a year-by-year basis. If your gain is completely covered by the principal residence exemption, under the previous rules, the CRA did not require you to file the designation form with your tax return. This has changed.

Next time: New rules for ownership by a trust, changes to the plus one rule, and reporting requirements

Samantha Prasad, LL.B., is a Partner with Toronto law firm Minden Gross LLP, a Meritas Law Firm Worldwide affiliate, and specializes in corporate, estate, and international tax planning. She writes frequently on tax issues, and is the co-editor of various Wolters Kluwer Ltd. tax publications.

Ryan Chua is an Associate in the Minden Gross Tax Group and focuses on corporate, estate, and international tax planning.

This article is reprinted from The Minden Brief – Winter 2017, © 2017 by Minden Gross LLP. Used with permission.

Disclaimer

© 2017 by Fund Library. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited.

The foregoing is for general information purposes only and is the opinion of the writer. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.

 
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