Principal residence exemption: You’ve got obtained questions, we have solutions

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Canada Income Company’s latest 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 lately despatched out academic letters to people “who might have utilized the PRE in error,” giving them an opportunity to appropriate 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 lately offered our house and plan to buy our daughter/son-in-law’s condominium to allow them to buy a townhome. At the moment, we are going to occupy their condominium and reside in it as our principal residence. Our plan is to reside there for about six months, at which period our new townhome (at present below building) will probably be prepared to maneuver into. Do we now have to reside within the condominium for one full 12 months earlier than we will resell it with out tax implications? We had been instructed by our accountant that if we purchased their condominium and it’s our principal residence, we will promote it at any time when we select with out tax points.

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JG: Your accountant is appropriate that there’s at present no minimal period of time that you could reside in a house earlier than designating it as your principal residence. Have in mind, nevertheless, that one of many federal Liberal social gathering’s platform proposals earlier than the final election was the introduction of an “anti-flipping tax.” Underneath this proposal, the PRE wouldn’t be accessible for a property offered 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 may 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, nevertheless it included two tons. The 2 tons 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 reside 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 any home on it, are we topic to capital beneficial properties tax if we promote the land?

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JG: Provided that the vacant lot has its personal tax invoice and authorized tackle, and could be offered individually from the lot upon which your home is situated, it’s unlikely its sale would qualify for the PRE. Even when each tons had been finally offered collectively, you’ll run up towards the “half-hectare rule.” Underneath the Earnings 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 pleasure of the housing unit. 

This half-hectare rule was the topic of a 2018 Tax Court docket case wherein a taxpayer bought 4 adjoining items of land in rural Quebec, in 4 separate actual property transactions, amassing a complete of roughly 4.17 acres. Her housing unit was situated on the land acquired within the first transaction. The opposite three items of land had been finally merged to type a second lot, on which a pool, barn, storage, septic discipline and sugar shack had been constructed.

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The taxpayer ultimately offered 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 decide agreed with the CRA, concluding the taxpayer couldn’t set up “on a stability of possibilities” that the land offered was essential for the use and pleasure of her housing unit as a residence. 

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Q: What when you get rid of your metropolis house 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 house, as a result of the cottage had generated a far higher improve in worth and would generate an enormous capital achieve when offered. You don’t intend to promote the cottage within the close to future. Are you able to amend your tax return to get rid of the designation of town home and pay the tax, curiosity and penalties that the disposition of town home generated?

JG: Tax regulation offers the CRA the facility 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 stated, you’ll be able to actually strive. It’s finally the CRA’s discretion whether or not to permit the revocation.  

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Proudly owning each a metropolis house 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 offered 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 beneficial properties from the pre-separation years when he finally sells the home because the spouse had already used it. 

“Many separation agreements fail to handle this potential drawback, leading to surprises when properties are offered years down the highway,” Lorne Wolfson, a household regulation lawyer at Torkin Manes LLP, stated. “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. Jamie.Golombek@cibc.com 

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