New Principle Residence Exemption Income Tax Rules
Department of Finance Information (release)
Canada Revenue Agency Information (release)
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The exemption from taxable income of gains from the sale of a taxpayer’s principal residence is found in in the Income Tax Act. The changes are generally positive in principle, but there is some risk of potential unintended problems or inconsistencies depending on how the provisions are drafted.
“Principal residence” is defined in section 54 for each taxation year to mean a property that is a “housing unit, leasehold interest in a housing unit or a share of the capital stock of a cooperative housing corporation” that is owned in any way in the year by a taxpayer if the statutory conditions are met. Where the taxpayer is an individual other than a personal trust, the condition is that the unit “was ordinarily inhabited in the year by the taxpayer, by the taxpayer’s spouse or common-law partner or former spouse or common-law partner or by a child of the taxpayer”. There are some exclusions, including a designation requirement in paragraph (d) of the definition, and some relief from the ordinary inhabited requirement in section 54.1. The exemption is claimed either under paragraph 40(2)(b) or (c) on the basis of a formula. See generally Folio S1-F3-C2. (See additional information provided by CRA)
In part due to concerns about foreign ownership and tax avoidance by foreign owners of property, the Government of Canada as proposed to change the principal residence exemption. This is accompanied with new mortgage rules that won’t be covered here.
There are both substantive and administrative changes proposed. The proposed rules would operate from October 2, 2016, on and transitional relief will be provided.
Substantively, the changes are meant to ensure that the exemption is only available in what the government considers to be appropriate cases in line with the (i) one property per family and (ii) Canadian residence limitations. Under the proposed rule:
- An individual who purchased a property at a time they were not a Canadian resident won’t be able to claim the exemption for that year;
- Trusts designating a property as a principal residence for a tax year will have to meet additional eligibility criteria, particularly the trust will (i) have to be one of a spousal or common-law partner trust, an alter ego trust, a qualifying disability trust, or a trust for the benefit of a minor child of deceased parents; (ii) and the individual or eligible family member will have to be resident in Canada for the year AND will have to be a family member of the settlor of the trust.
Administrative Changes are meant to allow the CRA to monitor compliance with eligibility requirements by giving the CRA necessary information that has hereto been unavailable to it. The proposed changes are:
- A taxpayer will be required to report the disposition for which a principal residence exemption is claimed on the entirety of the gain (not previously required);
- Late filed designations will be accepted by the CRA;
- A new exception to the normal reassessment period limitation period will be added in respect to real estate disposition where the disposition is nor reported for the year of the disposition.
Sas Ansari, BSc BEd PC JD LLM PhD (exp) CPA In-Depth Tax 1, 2 &3
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