Home Sweet Home

Topic: Tax Planning

Dianne C. White CPA, CA, CFP, TEP

April 24, 2017

Image used with permission: iStock/TAW4


Print & Share

Print

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.

More Like This...

See another CRM2 blog post that may be of interest to you.

CRM2: The Nexus Approach to our CRM2 Reports

Topic:
CRM2
Excerpt:
With changing securities regulations coming into effect, investment firms are now required to provide individual investors with specific additional in

More Like This...

See another Foundations & Endowments blog post that may be of interest to you.

Increasing the Charitable Disbursement Quota – Well Meaning, but Wrong

Topic:
Foundations & Endowments
Excerpt:
Most Canadians have probably been focused on the recent Federal election. So, it wouldn’t be surprising if some missed an important consultation that

More Like This...

See another Human Interest blog post that may be of interest to you.

COVID: An Uneven – and Unequal – Recovery

Topic:
Human Interest
Excerpt:
Canadians have had enough of the lockdown. Here we are 18 months after you first heard of the then mysterious Wuhan flu. Today, but for any curve ball

More Like This...

See another Inside Nexus blog post that may be of interest to you.

The Nexus IT Crowd

Topic:
Inside Nexus
Excerpt:
We are happy to announce Ian Ligertwood as the newest member of our team. As Vice President, Operations & Technology, Ian will be responsible for

More Like This...

See another Investments blog post that may be of interest to you.

The Future of Money: a Digital Currency Primer

Topic:
Investments
Excerpt:
As a bottom-up investment management firm, we spend a lot of time looking at specific companies. But keeping an eye on evolving industry trends can be

More Like This...

See another Pearls of Wisdom blog post that may be of interest to you.

“Work, Work, Work, Work, Work, Work”

Topic:
Pearls of Wisdom
Excerpt:
This has been a busy year. I’ve had lots happening on the home front (a wedding!) and lots going on at the office (too long to list!) Managing work

More Like This...

See another Tax Planning blog post that may be of interest to you.

The Great Transition – A Tax Efficient Withdrawal Strategy

Topic:
Tax Planning
Excerpt:
The change from “saver” to “spender” is what I call the great retirement transition. Figuring out how to draw on your retirement savings to meet your

More Like This...

See another Wealth Planning blog post that may be of interest to you.

Living to 100… Is 100 the New 80?

Topic:
Wealth Planning
Excerpt:
It’s a common saying that there are two certainties in life, death and taxes. While we have a pretty good idea when we get taxed, which feels like all

On a Side Note…

See another CRM2 Nexus Notes Quarterly article that may be of interest to you.

No posts found.

On a Side Note…

See another Foundations & Endowments Nexus Notes Quarterly article that may be of interest to you.

No posts found.

On a Side Note…

See another Human Interest Nexus Notes Quarterly article that may be of interest to you.

COVID: An Uneven – and Unequal – Recovery

Topic:
Human Interest
Excerpt:
Canadians have had enough of the lockdown. Here we are 18 months after you first heard of the then mysterious Wuhan flu. Today, but for any curve ball

On a Side Note…

See another Inside Nexus Nexus Notes Quarterly article that may be of interest to you.

The Nexus IT Crowd

Topic:
Inside Nexus
Excerpt:
We are happy to announce Ian Ligertwood as the newest member of our team. As Vice President, Operations & Technology, Ian will be responsible for

On a Side Note…

See another Investments Nexus Notes Quarterly article that may be of interest to you.

The Future of Money: a Digital Currency Primer

Topic:
Investments
Excerpt:
As a bottom-up investment management firm, we spend a lot of time looking at specific companies. But keeping an eye on evolving industry trends can be

On a Side Note…

See another Pearls of Wisdom Nexus Notes Quarterly article that may be of interest to you.

A Table for None, Please; Working From Home on the Rise

Topic:
Pearls of Wisdom
Excerpt:
Reading is one of the principal occupations in our profession. As we digest a wide range of material, interesting ideas and surprising facts – some

On a Side Note…

See another Tax Planning Nexus Notes Quarterly article that may be of interest to you.

The Great Transition – A Tax Efficient Withdrawal Strategy

Topic:
Tax Planning
Excerpt:
The change from “saver” to “spender” is what I call the great retirement transition. Figuring out how to draw on your retirement savings to meet your

On a Side Note…

See another Wealth Planning Nexus Notes Quarterly article that may be of interest to you.

Living to 100… Is 100 the New 80?

Topic:
Wealth Planning
Excerpt:
It’s a common saying that there are two certainties in life, death and taxes. While we have a pretty good idea when we get taxed, which feels like all