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

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Jamie Golombek: CRA’s current crackdown on perceived abuse of the PRE has sparked a barrage of reader curiosity

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

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To recap, the CRA lately despatched out instructional 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 bought our dwelling 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 reside in it as our principal residence. Our plan is to reside there for about six months, at which era our new townhome (presently underneath building) will probably be prepared to maneuver into. Do we’ve got to reside within the rental for one full yr earlier than we are able to resell it with out tax implications? We have been instructed by our accountant that if we purchased their rental and it’s our principal residence, we are able to promote it at any time when we select with out tax points.

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JG: Your accountant is appropriate that there’s presently no minimal period of time that you need to reside in a house earlier than designating it as your principal residence. Be mindful, nonetheless, that one of many federal Liberal get together’s platform proposals earlier than the final election was the introduction of an “anti-flipping tax.” Beneath this proposal, the PRE wouldn’t be accessible for a property bought inside 12 months after buy. To this point, 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 yr. Maybe subsequent month’s federal finances can have extra data on when this will probably be launched. 

The Canada Revenue Agency's headquarters in Ottawa.
The Canada Income Company’s headquarters in Ottawa. Picture by Errol McGihon/Postmedia

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 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 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 handle. 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 handle, and might be bought individually from the lot upon which your home is situated, it’s unlikely its sale would qualify for the PRE. Even when each heaps have been finally bought collectively, you’ll run up towards the “half-hectare rule.” Beneath 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 crucial for the use and pleasure of the housing unit. 

This half-hectare rule was the topic of a 2018 Tax Court docket case during which 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 have been finally merged to kind 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 growth of the municipal aqueduct and claimed the PRE on the sale. The CRA denied the PRE and the matter went to courtroom. The decide agreed with the CRA, concluding the taxpayer couldn’t set up “on a steadiness of possibilities” that the land bought was crucial for the use and pleasure of her housing unit as a residence. 

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Q: What in the event you eliminate your metropolis dwelling and designate it as your principal residence. On the time, you had additionally owned a cottage. You then understand you shouldn’t have designated your metropolis dwelling, as a result of the cottage had generated a far higher enhance in worth and would generate an enormous capital achieve when bought. You don’t intend to promote the cottage within the close to future. Are you able to amend your tax return to eradicate the designation of town home and pay the tax, curiosity and penalties that the disposition of town home generated?

Owning both a city home and a cottage can also pose unique problems in claiming the PRE in the case of divorce or separation.
Proudly owning each a metropolis dwelling and a cottage may pose distinctive issues in claiming the PRE within the case of divorce or separation. Picture by Getty Photographs/iStockphoto

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 stated, you possibly can actually attempt. It’s finally the CRA’s discretion whether or not to permit the revocation.  

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Proudly owning each a metropolis dwelling and a cottage may 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 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 deal with this potential downside, leading to surprises when properties are bought years down the street,” Lorne Wolfson, a household regulation lawyer at Torkin Manes LLP, stated. “The events ought to agree on which property must 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 Non-public Wealth in Toronto. [email protected] 

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