Home Sweet Home
Topic: Tax Planning
April 24, 2017
Image used with permission: iStock/TAW4
Home Sweet Home
The red-hot housing market in the GTA continues to make headlines as the average home now costs 12 times the average household’s gross income1. All three levels of government are reacting to political pressure to make housing more affordable. This is based on the notion that home prices are being driven higher not by people who want to own a home to live in, but rather, by those buying properties to make a profit.
The Wynne government has announced measures that will make speculation in residential real estate less profitable by introducing a foreign buyers tax. Other measures include expanding rent control to all private rental units in Ontario and allowing municipalities, such as Toronto, to introduce a vacant homes tax.
Most people know that the sale of their primary residence is totally exempt from capital gains tax by claiming the principal residence exemption or “PRE”. The use of the PRE is a significant and important financial planning tool and a huge windfall for property owners who use it to tax-shelter profits on real estate. No wonder there is speculation in the real estate market – credit is cheap and any gains realized on the sale could be tax free using the PRE. Until recently, it was easy to sell real estate and fly under the CRA’s radar screen because you did not have to report the sale of a principal residence claiming the PRE on your tax return.
The Federal government quietly made changes in October to tighten and reinforce the requirements necessary for claiming the PRE on the sale of a home. The main change is that you now actually have to report the sale to the CRA in your tax return starting with the 2016 tax year. This reporting will apply to every property sold in Canada, even if the gain is fully protected by the PRE. The goal is to improve compliance and accountability of those who sell properties that may not qualify as a principal residence. If you fail to report, the CRA can reassess you at any time, despite the normal statute of limitations period of three years on the sale of property.
The rules are targeting those who sell properties that may not qualify for the PRE. These include individuals or builders who ‘flip’ homes. These are folks who renovate or build, then occupy the home for a short time before they sell it and do it all over again. For those that do this regularly, the homes may be considered inventory instead of capital property, which is a condition of it being a principal residence. The new rules will also ensure other conditions related to claiming the principal residence exemption are adhered to, such as the requirement to ordinarily inhabit the home.
Here is a recap of key rules that apply in order to claim the principal residence exemption on a home sale:
You can only claim one principal residence per family.
A family unit is defined as you, your spouse or common-law partner, your former spouse or common-law partner or your children who are under the age of 18.
You must have ordinarily inhabited the home for some time during the year.
There is no specific minimum period for which you need to live in the home in order for it to qualify, but you are only allowed to designate one home as your principal residence for a particular year. If you own two properties at the same time, a home and a cottage, you have a choice as to which property you designate as your principal residence for the years of ownership.
Earning rental income on your property limits your ability to treat your home as a principal residence.
If you move out and rent your home, you can continue to treat the house as your principal residence for 4 additional years. There are also rules that apply when you own a property for the purpose of earning rental income and then subsequently convert the property to a primary residence. You have to be careful, because a ‘change of use’ can trigger the requirement to report a capital gain. There is an election to defer the gain until sale, but this is not available if you have claimed depreciation on the property.
The size of your property matters.
The land that your home sits on cannot be greater than 1.2 acres. Anything in excess doesn’t qualify for the PRE unless you can prove that the additional land was required for your use and enjoyment of the property.
1 CBC “Ontario’s curbs on hot housing market coming Thursday” April 18, 2017.