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

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 extra questions regarding varied elements of the exemption.

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To recap, the CRA just lately despatched out academic letters to people “who could 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 just lately offered our dwelling and plan to buy our daughter/son-in-law’s condominium to allow them to buy a townhome. At the moment, we’ll occupy their condominium and dwell in it as our principal residence. Our plan is to dwell there for about six months, at which era our new townhome (at present underneath building) shall be prepared to maneuver into. Do we’ve got to dwell within the condominium for one full yr earlier than we will resell it with out tax implications? We had been informed by our accountant that if we purchased their condominium and it’s our principal residence, we will promote it at any time when we select with out tax points.

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JG: Your accountant is appropriate that there’s at present no minimal period of time that you could dwell in a house earlier than designating it as your principal residence. Consider, nonetheless, that one of many federal Liberal celebration’s platform proposals earlier than the final election was the introduction of an “anti-flipping tax.” Beneath this proposal, the PRE wouldn’t be obtainable for a property offered inside 12 months after buy. Thus far, no draft laws on this proposal has been launched, though info offered previous to the election indicated it was to be efficient for the 2022 yr. Maybe subsequent month’s federal finances may have extra info on when this shall be launched. 

The Canada Revenue Agency's headquarters in Ottawa.
The Canada Income Company’s headquarters in Ottawa. Photograph 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. toes. One lot (about 35,000 sq. toes) has a home on it, which is our principal residence the place we dwell full time, and the opposite lot (about 37,000 sq. toes) is vacant. Each are lakefront properties and visually one lot, however the vacant lot has its personal tax invoice and deal with. We’re contemplating promoting the vacant lot. Since there is no such thing as a home on it, are we topic to capital good points tax if we promote the land?

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JG: Provided that the vacant lot has its personal tax invoice and authorized deal with, and will be offered individually from the lot upon which your home is positioned, it’s unlikely its sale would qualify for the PRE. Even when each heaps had been in the end offered collectively, you’d run up towards the “half-hectare rule.” Beneath the Revenue 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. toes) until the taxpayer can present that the surplus land was vital for the use and pleasure of the housing unit. 

This half-hectare rule was the topic of a 2018 Tax Courtroom 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 positioned on the land acquired within the first transaction. The opposite three items of land had been in the end merged to type a second lot, on which a pool, barn, storage, septic subject and sugar shack had been constructed.

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The taxpayer finally offered 1.47 acres of the property, a woodlot representing 33 per cent of the second lot, to the native municipality for the enlargement of the municipal aqueduct and claimed the PRE on the sale. The CRA denied the PRE and the matter went to courtroom. The choose agreed with the CRA, concluding the taxpayer couldn’t set up “on a steadiness of chances” that the land offered was vital 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 improve in worth and would generate an enormous capital achieve when offered. You don’t intend to promote the cottage within the close to future. Are you able to amend your tax return to remove the designation of the town home and pay the tax, curiosity and penalties that the disposition of the 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 also pose distinctive issues in claiming the PRE within the case of divorce or separation. Photograph by Getty Photos/iStockphoto

JG: Tax regulation provides the CRA the facility to allow taxpayers to file late or revoke a PRE (after paying a penalty), however the CRA reserves the appropriate to disclaim a revocation if “it’s cheap to conclude you made the request for retroactive tax planning functions.” That stated, you may actually strive. It’s in the end 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 also 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 offered 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 shall be unable to make use of the PRE to shelter the good points from the pre-separation years when he in the end sells the home for the reason that spouse had already used it. 

“Many separation agreements fail to deal with this potential drawback, leading to surprises when properties are offered years down the highway,” Lorne Wolfson, a household regulation lawyer at Torkin Manes LLP, stated. “The events ought to agree on which property ought to 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. Jamie.Golombek@cibc.com 


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