CRA principal residence exemption crackdown: What you need to know

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Should you offered your principal residence in 2021, you have to report that sale in your 2021 tax return, typically due on Might 2, 2022, even when it totally 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 Form T2091(IND), Designation of a Property as a Principal Residence by an Individual.

For a property to qualify as your principal residence for a specific tax 12 months, 4 standards underneath the Revenue Tax Act should be happy: the property should 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 companion) or youngsters should “ordinarily inhabit” the property; and you will need to “designate” the property as a principal residence.

Observe {that a} seasonal residence, comparable to a cottage, cabin, lake home and even ski chalet, might be thought-about to be “ordinarily inhabited within the 12 months” even should you solely use it throughout trip durations “supplied that the principle purpose for proudly owning the property is to not achieve or produce earnings.”

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A rental property, nonetheless, is usually not thought-about a principal residence, and you would be on the hook for capital positive factors tax should you offered one in 2021. Equally, you could be precluded from claiming the PRE should you purchased or constructed a house with the aim of promoting it for a revenue.

Lately, the Canada Income Company has been cracking down on perceived abuse of the exemption, most just lately with a letter marketing campaign, by which it despatched letters to people “who could 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 earnings on their return.

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“The CRA is utilizing an education-first strategy aimed toward serving to recipients perceive learn how to correctly report a property disposition,” CRA spokesperson Hayley Hanks stated in an e mail. “People who acquired a letter had been provided a chance 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 elucidate that whenever you promote your house, you don’t normally should pay tax on any revenue from the sale due to the PRE.

Nonetheless, should you 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-about enterprise earnings, which is 100-per-cent taxable, or might be thought-about a capital achieve, by which case solely half the quantity must be included in earnings.

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The letter then politely asks the taxpayer, or consultant, to “evaluation” their return “to make sure that you precisely reported your actual property tendencies and that you just had been eligible to say the principal residence exemption for each properties.” The CRA encourages taxpayers who must make any corrections to vary their returns, and indicated it is going to be following up by cellphone within the coming weeks.

The CRA is utilizing an education-first strategy aimed toward serving to recipients perceive learn how to correctly report a property disposition

Hayley Hanks

The CRA has additionally been profitable in court docket when the PRE has been claimed a number of occasions over a variety of years, as in a 2021 case in which a Vancouver taxpayer purchased, demolished, constructed and then sold three homes in a six-year period, and tried to say 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 in addition reported a “discount of gross rental earnings.” Within the letter, the CRA reminds these taxpayers that should you offered your rental property, the PRE is barely accessible if the property was beforehand your principal residence and you filed the appropriate election. As well as, the PRE might not be accessible for all years of property possession.

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

Modifications afoot? 

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

Promised as a part of the occasion’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 factors from the sale as taxable capital positive factors 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 as a result of pure or man-made catastrophe throughout the 12-month interval; the proprietor’s earlier residence having been destroyed or condemned; or a dying, divorce, separation, severe sickness/harm or change of employment of the helpful proprietor throughout the 12-month interval.

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

Jamie Golombek, CPA, CA, CFP, CLU, TEP is the managing director, Tax & Property Planning with CIBC Personal Wealth in Toronto. [email protected] 

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