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.
New rules for ownership by a trust, changes to the plus one rule, and
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.
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.
© 2017 by Fund Library. All rights reserved. Reproduction in whole or in
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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.