Principal residence exemption: You’ve got questions, we’ve got answers

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Canada Income Company’s recent crackdown on perceived abuse of the principal residence exemption (PRE) has sparked a barrage of reader curiosity, many posing further questions regarding numerous elements of the exemption.

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To recap, the CRA not too long ago despatched out instructional letters to people “who could have utilized the PRE in error,” giving them an opportunity to right or amend their prior years’ returns if it seems they incorrectly claimed the PRE. Right here’s a pattern of your questions (edited for brevity and readability) and my responses. 

Q: We not too long ago bought our residence and plan to buy our daughter/son-in-law’s rental to allow them to buy a townhome. At the moment, we are going to occupy their rental and dwell in it as our principal residence. Our plan is to dwell there for about six months, at which period our new townhome (at the moment below building) will probably be prepared to maneuver into. Do we now have to dwell within the rental for one full 12 months earlier than we are able to resell it with out tax implications? We have been informed by our accountant that if we purchased their rental and it’s our principal residence, we are able to promote it each time we select with out tax points.

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JG: Your accountant is right that there’s at the moment no minimal period of time that you need to dwell in a house earlier than designating it as your principal residence. Bear in mind, nevertheless, that one of many federal Liberal occasion’s platform proposals earlier than the final election was the introduction of an “anti-flipping tax.” Below this proposal, the PRE wouldn’t be accessible for a property bought inside 12 months after buy. So far, no draft laws on this proposal has been launched, though data offered previous to the election indicated it was to be efficient for the 2022 12 months. Maybe subsequent month’s federal price range could have extra data on when this will probably be launched. 

Q: My husband and I personal a property within the Laurentians. We bought it seven years in the past as a single sale, however it included two heaps. The 2 heaps collectively measure roughly 72,000 sq. ft. One lot (about 35,000 sq. ft) has a home on it, which is our principal residence the place we dwell full time, and the opposite lot (about 37,000 sq. ft) is vacant. Each are lakefront properties and visually one lot, however the vacant lot has its personal tax invoice and tackle. We’re contemplating promoting the vacant lot. Since there isn’t a home on it, are we topic to capital positive factors tax if we promote the land?

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JG: On condition that the vacant lot has its personal tax invoice and authorized tackle, and could be bought individually from the lot upon which your home is positioned, it’s unlikely its sale would qualify for the PRE. Even when each heaps have been in the end bought collectively, you’ll run up in opposition to the “half-hectare rule.” Below the Revenue Tax Act, the definition of “principal residence” limits the quantity of land that qualifies for the exemption to half a hectare (roughly 54,000 sq. ft) until the taxpayer can present that the surplus land was essential for the use and delight of the housing unit. 

This half-hectare rule was the subject of a 2018 Tax Court case in which a taxpayer purchased four adjacent pieces of land in rural Quebec, in 4 separate actual property transactions, amassing a complete of roughly 4.17 acres. Her housing unit was positioned on the land acquired within the first transaction. The opposite three items of land have been in the end merged to type a second lot, on which a pool, barn, storage, septic area and sugar shack have been constructed.

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The taxpayer ultimately bought 1.47 acres of the property, a woodlot representing 33 per cent of the second lot, to the native municipality for the enlargement of the municipal aqueduct and claimed the PRE on the sale. The CRA denied the PRE and the matter went to court docket. The choose agreed with the CRA, concluding the taxpayer couldn’t set up “on a stability of possibilities” that the land bought was essential for the use and delight of her housing unit as a residence. 

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Q: What for those who eliminate your metropolis residence and designate it as your principal residence. On the time, you had additionally owned a cottage. You then notice you shouldn’t have designated your metropolis residence, as a result of the cottage had generated a far better improve in worth and would generate a large capital acquire when bought. You don’t intend to promote the cottage within the close to future. Are you able to amend your tax return to remove the designation of the town home and pay the tax, curiosity and penalties that the disposition of the town home generated?

JG: Tax regulation offers the CRA the ability to allow taxpayers to file late or revoke a PRE (after paying a penalty), however the CRA reserves the correct to disclaim a revocation if “it’s cheap to conclude you made the request for retroactive tax planning functions.” That mentioned, you’ll be able to actually strive. It’s in the end the CRA’s discretion whether or not to permit the revocation.  

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Proudly owning each a metropolis residence and a cottage may also pose distinctive issues in claiming the PRE within the case of divorce or separation. For instance, say a pair separates and the spouse retains the cottage and the husband retains the home, however the events fail to specify of their separation settlement who’s entitled to the PRE when the properties are bought sooner or later. If the spouse sells the cottage 5 years later and claims the PRE for all of the years they owned it, the husband will probably be unable to make use of the PRE to shelter the positive factors from the pre-separation years when he in the end sells the home for the reason that spouse had already used it. 

“Many separation agreements fail to deal with this potential downside, leading to surprises when properties are bought years down the highway,” Lorne Wolfson, a household regulation lawyer at Torkin Manes LLP, mentioned. “The events ought to agree on which property needs to be entitled to the PRE for the pre-separation years and issue that profit into the settlement of their household regulation points.”

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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