CRA principal residence exemption crackdown: What you want to know

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If you happen to bought your principal residence in 2021, you want to report that sale in your 2021 tax return, usually due on Could 2, 2022, even when it absolutely 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 could additionally full the suitable sections of Kind T2091(IND), Designation of a Property as a Principal Residence by an Particular person.

For a property to qualify as your principal residence for a specific tax yr, 4 standards beneath the Revenue Tax Act should be glad: the property should be a housing unit; you could personal the property (both alone or collectively with another person); you or your partner (or common-law accomplice) or youngsters should “ordinarily inhabit” the property; and you could “designate” the property as a principal residence.

Be aware {that a} seasonal residence, similar to a cottage, cabin, lake home and even ski chalet, will be thought-about to be “ordinarily inhabited within the yr” even in case you solely use it throughout trip intervals “offered that the primary cause for proudly owning the property is to not achieve or produce earnings.”

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A rental property, nonetheless, is mostly not thought-about a principal residence, and you could possibly be on the hook for capital beneficial properties tax in case you bought one in 2021. Equally, you could be precluded from claiming the PRE in case you purchased or constructed a house with the aim of promoting it for a revenue.

In recent times, the Canada Income Company has been cracking down on perceived abuse of the exemption, most lately with a letter marketing campaign, by which it despatched letters to people “who might 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 correctly report a property disposition,” CRA spokesperson Hayley Hanks mentioned in an e mail. “People who acquired a letter had been provided a possibility to contact a CRA agent to supply a proof for using 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 clarify that if you promote your own home, you don’t normally should pay tax on any revenue from the sale due to the PRE.

Nonetheless, in case you purchase a property with the primary 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 could possibly 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 “overview” their return “to make sure that you precisely reported your actual property inclinations and that you just had been eligible to assert the principal residence exemption for each properties.” The CRA encourages taxpayers who have to make any corrections to vary their returns, and indicated it is going to be following up by telephone within the coming weeks.

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

Hayley Hanks

The CRA has additionally been profitable in courtroom when the PRE has been claimed a number of instances over plenty of years, as in a 2021 case by which a Vancouver taxpayer bought, demolished, constructed after which bought three houses in a six-year interval, and tried to assert 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 in case you bought your rental property, the PRE is just obtainable if the property was beforehand your principal residence and you filed the suitable election. As well as, the PRE will not be obtainable for all years of property possession.

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The CRA additionally encourages these taxpayers to amend their returns, if applicable, and can be following up by telephone.

Adjustments afoot? 

Within the upcoming federal finances, we may see the formal introduction of the Liberals’ anti-flipping tax meant to “cut back speculative demand within the market and assist to chill extreme value progress,” 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 beneficial properties from the sale as taxable capital beneficial properties starting within the 2022 tax yr.

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There can be some notable exceptions: the sale of vacant land; the sale of a house destroyed, condemned or broken resulting from pure or man-made catastrophe in the course of the 12-month interval; the proprietor’s earlier house having been destroyed or condemned; or a loss of life, divorce, separation, critical sickness/harm or change of employment of the useful proprietor in the course of the 12-month interval.

In September 2021, the Parliamentary Funds Workplace estimated this new measure may herald roughly $36 million in further tax revenues in the course of the first 5 years.

Jamie Golombek, CPA, CA, CFP, CLU, TEP is the managing director, Tax & Property Planning with CIBC Non-public Wealth in Toronto. Jamie.Golombek@cibc.com 

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