CRA principal residence exemption crackdown: What you should know

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When you offered your principal residence in 2021, you should report that sale in your 2021 tax return, usually due on Could 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 could additionally full the suitable sections of Type 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 selected tax 12 months, 4 standards below the Revenue Tax Act have to be happy: the property have to 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 children should “ordinarily inhabit” the property; and you could “designate” the property as a principal residence.

Be aware {that a} seasonal residence, comparable to a cottage, cabin, lake home and even ski chalet, will be thought-about to be “ordinarily inhabited within the 12 months” even when you solely use it throughout trip intervals “supplied that the primary motive for proudly owning the property is to not acquire or produce revenue.”

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A rental property, nevertheless, is mostly not thought-about a principal residence, and you would be on the hook for capital positive aspects tax when you offered one in 2021. Equally, you could be precluded from claiming the PRE when 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, through which it despatched letters to people “who might have utilized the principal residence exemption (PRE) in error.”

Starting in January, instructional letters had been despatched to roughly 1,700 taxpayers who claimed the PRE in two particular situations. 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 revenue on their return.

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“The CRA is utilizing an education-first strategy aimed toward serving to recipients perceive how one can correctly report a property disposition,” CRA spokesperson Hayley Hanks mentioned in an e mail. “People who obtained a letter had been provided a chance to contact a CRA agent to offer an evidence 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.

Nevertheless, when you purchase a property with the primary intention of promoting it, you’ll owe tax on any ensuing acquire (or revenue). The CRA additional factors out the acquire on these gross sales could also be thought-about enterprise revenue, which is 100-per-cent taxable, or may very well be thought-about a capital acquire, through which case solely half the quantity must be included in revenue.

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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 alter 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 how one can 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 various years, as in a 2021 case through which a Vancouver taxpayer bought, demolished, constructed after which offered three houses in a six-year interval, 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 additionally reported a “discount of gross rental revenue.” Within the letter, the CRA reminds these taxpayers that when you offered your rental property, the PRE is barely obtainable if the property was beforehand your principal residence and you filed the suitable election. As well as, the PRE might not be obtainable for all years of property possession.

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The CRA additionally encourages these taxpayers to amend their returns, if acceptable, and will likely 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 “scale 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 positive aspects from the sale as taxable capital positive aspects starting within the 2022 tax 12 months.

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There can be some notable exceptions: the sale of vacant land; the sale of a house destroyed, condemned or broken as a consequence of pure or man-made catastrophe throughout the 12-month interval; the proprietor’s earlier dwelling having been destroyed or condemned; or a demise, divorce, separation, critical sickness/damage 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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