By now, we are all familiar with the super heated real estate market where prices in Vancouver and Toronto are reaching the stratosphere. Some have claimed that this bubble is as a result of foreign investment. Some have claimed that foreign investment is making real estate unaffordable for Canadians. The Government of Canada and the Minister of Finance have acted by making changes to the Principal Residence Exemption (PRE).
The thinking goes that 1) property values in major urban centres such as Vancouver and Toronto are expanding too quickly, 2) part of this growth in price is due to purchases by foreign non residents, 3) foreign non-resident purchasers are making tax free gains in Canada because of the Principal Residence Exemption and 4) this foreign tax free exemption is driving up price and decreasing affordability for Canadians.
The Minister of Finance has elected to make changes to the Principal Residence Exemption (PRE) to protect the tax base and affordability for Canadians.
Major Changes to the Principal Residence Exemption (PRE):
- Closed the Principal Residence Exemption loophole for Foreigners. The Principal Residence Exemption will only be available to Canadian residents. It should be noted that foreign investors could expose their worldwide income to Canadian tax with Canadian Resident status. The new rules also mean the end of the one-plus rule for non-residents, whereby you could own two properties in a transition year.
- New rules will require every person selling a principal residence to fill out a T20191 whether you owe tax or not. Previously this was not required if the PRE eliminated taxes. Here is Form T2091.
- The Ministry has also given CRA the authority to assess taxpayers beyond the normal assessment limitation – ordinarily three years. That means the CRA has the authority to reassess prior years should you found to have been playing fast and dirty with the PRE.
- CRA will have the authority to levy penalties of up to $100 per month for unfiled T2091s.
Our Recommendations – PRE action items to optimize your taxes
- Talk to your accountant about your sale.
- File a T2091 if you have a property sale closing in 2016 or later whether you owe taxes or not.
- Assess whether the special one plus rule would apply to your sale.
- Keep your receipts: Outlays to improve your properties of a capital nature can be added to your ACB – Adjusted Cost Basis to reduce tax.
- If you hold multiple properties such as cottages or rental properties, make a plan to claim the PRE to get the maximum benefit.
The text of the Government ways and means is as follows:
The income tax system provides a significant income tax benefit to homeowners disposing of their principal residence, in the form of an exemption from capital gains taxation (“the principal residence exemption”). However, there are limits to the exemption. The exemption is intended to be available only to Canadian resident individuals and trusts. Also, families are able to designate only one property as the family’s principal residence for any given year.
The proposed tax measures announced today would improve tax fairness and the integrity of the tax system. The first two measures would better ensure that the principal residence exemption is available only in appropriate cases, and in a manner consistent with the Canadian resident and one-property-per-family limits. Specifically, under these measures:
- An individual who was not resident in Canada in the year the individual acquired a residence will not—on a disposition of the property after October 2, 2016—be able to claim the exemption for that year. This measure ensures that permanent non-residents are not eligible for the exemption on any part of a gain from the disposition of a residence.
- Trusts will be eligible to designate a property as a principal residence for a tax year that begins after 2016 only if additional eligibility criteria are met. These criteria will improve fairness and integrity by better aligning trust eligibility for the principal residence exemption with situations where the property is held directly by an individual. A trust will be required to be—in each year that begins after 2016 for which the designation applies—a spousal or common-law partner trust, an alter ego trust (or a similar trust for the exclusive benefit of the settlor during the settlor’s lifetime), a qualifying disability trust, or a trust for the benefit of a minor child of deceased parents. In addition, the trust’s beneficiary who, or whose family member, occupies the residence for the year will be required to be resident in Canada in the year, and will be required to be a family member of the individual who creates the trust. Transitional relief is provided for affected trusts for property owned at the end of 2016 and disposed of after 2016.
Today’s announcement also includes changes to improve compliance and administration of the tax system with respect to dispositions of real estate. In this respect, the following additional changes are announced for tax years that end after October 2, 2016:
- The Canada Revenue Agency (CRA) will require a taxpayer to report the disposition of a property for which the principal residence exemption is claimed. The CRA currently does not require this reporting where a property is eligible for the full principal residence exemption. The change means that, when a taxpayer disposes of a principal residence, the taxpayer will be required to provide basic information in the taxpayer’s income tax return for that year in order to claim the exemption. In addition, the CRA will be explicitly authorized to accept late-filed principal residence designations. More details are available on the CRA’s website.
- A proposed measure would provide the CRA with authority to assess taxpayers, beyond the normal assessment limitation period for a tax year, in respect of a disposition of real estate by the taxpayer (or a partnership of which the taxpayer is a member), in cases where the disposition is not reported in the taxpayer’s tax return (or in the case of a partnership, the partnership return) for the year in which the disposition occurs. In the case of property disposed of by a corporation or partnership, the measure would apply only to property that is capital property.
The CRA will continue to work with provincial partners to seek ways to further improve information collected on real estate transactions, and to ensure the effective sharing of this information with tax authorities.
A Notice of Ways and Means Motion with respect to the proposed income tax measures, together with related explanatory notes, are included in today’s release. References in the Notice of Ways and Means Motion and explanatory notes to Announcement Date refer to October 3, 2016.
Source: Department of Finance Website.
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James Abbott, CPA and Associates