Tax Tip Thursday

One thing that comes up a lot is principal residences and the associated principal residence exemption. Pretty much everyone is familiar with the terminology, but not all know or understand all the implications of that little phrase!

I find most of the questions around them are to do with the view of building and selling the property, flipping it after a quick reno, or even severing part of it (we’ll talk more about that next week). When filing personal income tax returns, how to report a property sale can be confusing and expensive, depending on the value appreciation and the capital gains tax owed. Luckily, the sale of a residence can be exempted from this tax under the Principal Residence Exemption (PRE).

In 2016, the CRA started requiring people to report the sale of a principal residence on the seller’s income tax in order to qualify for the PRE and to tighten up eligibility requirements. This made everyone nervous and suspicious, but there’s no need! You just need to understand the rules. Here are four questions you will want to consider to make sure you are on the right side of this exemption:

1. How long do I need to live in a residence to claim it as a principal residence and qualify for the PRE?

Short answer: it depends.

• The CRA does not specify an exact duration of time one must reside in a dwelling for it to qualify as a principal residence for a given year.
• The tax rules refer to the residence being “ordinarily inhabited” within the calendar year, which is a relatively low bar.
• The real issue will be if you made money on the property. If you didn’t, they won’t care!
• The CRA will review all aspects of the transaction and any other transactions they believe to be relevant including, but not restricted to:
  • Other sources of income,
  • real estate buying patterns,
  • the type of business you own or your job,
  • family members involved,
  • address on your bills, and of course,
  • how long you lived there.

At the end of the day, it is not necessarily about the length of time you lived there, but instead it will come down to intent and documentation supporting your claim for the PRE.

2. Can any property I own be designated a principal residence and become eligible for the PRE?

Again, it depends.

• You need to own the property personally (not through a company),
• there needs to be a habitable building on it,
• the owner or their family needs to ordinarily inhabit it during each calendar year being claimed,
• the property does NOT need to be in Canada,
• only one property can be designated your principal residence per year and per family, and
• the property is generally restricted to 1.2 acres or less (any land in excess will not be considered principal residence unless it is required for the use and enjoyment of the property).

The CRA can be very restrictive when applying the last rules, but there are many outs.

You can potentially designate different properties as principal residences for all or part of the years of ownership to take best advantage of the exemption and minimize the amount of capital gains tax paid. There are a lot of considerations though, and you should schedule an appointment to evaluate and plan for your specific situation!

3. Can a property that generates income be deemed a principal residence and be eligible for the PRE?

(now for something completely different…) It depends!

We talked about this a couple of weeks ago, but suffice it to say there are some opportunities to have a rental property and have it qualify for the Principal Residence Exemption. If you have a rental property, please do not plan on it qualifying for the PRE and say that Owen told you so! You need to schedule an appointment with me to evaluate and plan for your specific situation.

4. What penalties are incurred when the sale of a principal residence is not reported to the CRA?

There are a few penalties that can be incurred:

• If an owner fails to report the selling of a principal residence, they could be subject to a late filing penalty of $100 per month, up to a maximum of $8,000 (CRA reference)
• If an owner doesn’t report the sale, the exemption may be denied and therefore the owner would be taxed on the capital gains.
• Although the new reporting requirements have been in place for several years now, many individuals may still believe that they do not have to report the sale of the principal residence when they only own one property. This can lead to expensive mishaps!
• Failing to report the sale can result in significant costs

Do Your Homework!

This can be an expensive thing to mess up, especially if you own multiple properties! If you’re looking to learn more on your own, click here to read what the CRA has to say about the topic. If you’d rather have someone help you apply this to your specific situation and guide you to the best possible outcome, give us a call or make an appointment!

Disclaimer:

This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal or tax advice nor can it or should it be relied upon. All tax situations are specific to each individual. If you have specific tax questions you should book an appointment for a 1 on 1 consultation.