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When you offered your principal residence in 2021, you could report that sale in your 2021 tax return, usually 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 have to 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 underneath the Earnings Tax Act should be happy: the property should be a housing unit; you have to personal the property (both alone or collectively with another person); you or your partner (or common-law associate) or youngsters should “ordinarily inhabit” the property; and you have to “designate” the property as a principal residence.

Observe {that a} seasonal residence, akin to a cottage, cabin, lake home and even ski chalet, may be thought-about to be “ordinarily inhabited within the yr” even should 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 usually not thought-about a principal residence, and you may be on the hook for capital features tax should you offered one in 2021. Equally, it’s possible you’ll 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 not too long ago with a letter marketing campaign, through 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 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 earnings on their return.

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“The CRA is utilizing an education-first method geared toward serving to recipients perceive the way to correctly report a property disposition,” CRA spokesperson Hayley Hanks mentioned in an e-mail. “People who obtained a letter had been provided a possibility to contact a CRA agent to supply 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 clarify that once you promote your private home, you don’t often should pay tax on any revenue from the sale due to the PRE.

Nevertheless, should 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 may very well be thought-about a capital achieve, through 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 inclinations and that you just had been eligible to say the principal residence exemption for each properties.” The CRA encourages taxpayers who have to make any corrections to alter their returns, and indicated will probably be following up by cellphone within the coming weeks.

The CRA is utilizing an education-first method geared toward serving to recipients perceive the way to 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 quite a few 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 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 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 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 value progress,” in addition to make it simpler for the CRA to reassess perceived abusers of the PRE.

Promised as a part of the celebration’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 features from the sale as taxable capital features 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 attributable to pure or man-made catastrophe in the course of the 12-month interval; the proprietor’s earlier dwelling having been destroyed or condemned; or a dying, divorce, separation, severe sickness/harm or change of employment of the helpful proprietor in the course of the 12-month interval.

In September 2021, the Parliamentary Price range Workplace estimated this new measure may usher in roughly $36 million in extra 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. [email protected] 

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