Part 1: Personal Federal Taxes Changes

6.  Principal Residence Exemption

Principal Residence Exemption, as the name stated, allows people selling their primary residence home to be tax exempt on capital gain.  Before we go into the changes, let’s talk a bit about what happened with this exemption before the changes.

Principal Residence Exemption is calculated using the following formula:

Per the income tax act, in order for principal residence exemption to apply, the person had to be a Canadian tax residence for the number of years designated and the number of years owned.  However, the act didn’t state clearly that the “+1” had to be for Canadian tax residence as well.  Therefore, non-residents could use this “+1” rule to get the 1 year exemption.  In addition, if the property is eligible for full exemption, the form for calculating the exemption didn’t have to be sent to CRA for record, nor the gain is needed to be shown on personal tax returns.  Finally, as long as the trusts have beneficiaries ordinarily inhabiting the home, the trusts can also claim the principal residence exemption.

On October 3, 2016, federal government has tightened the exemption rules.  Now the “+1” rule is no longer available for non-resident of Canada.  Therefore, those who purchase the principal residence an year before becoming a resident of Canada will not be able to use the rule to get the first-year exemption.  In addition, the disclosure of the principal home sales is now required and the gain on sales must be reported on the personal tax returns for the year.  Without including the sales information with the returns, CRA can review or audit the returns beyong the normal assessment limitation period until they receive the information.  Finally, only certain types of trusts can apply the exemption: 

1. Alter ego trusts, spousal or common-law partner trusts and joint spousal or common-law partner trusts
2. Qualified disability trusts
3. Trust for the benefit of a minor child of deceased parents

The beneficiary of the trust must be a Canadian resident, has the property to be his/her primary residence and must be a family member of the individual who created the trust.

In Summary:

Principal Residence Exemption

Changes to Principal Residence Exemption:

1. "+1" Rule changes to disallow non-residence to use the exemption
2. Only certain types of trusts can use the principal residence exemption
3. Reassessment period is extended beyond the normal assessment limitation period of a tax year until CRA obtains the sales of property information
4. All sales of princicpal residence are now required to send the property information to CRA.

For more information, please contact us @ 778-374-1865 or info@theresalocpa.ca

Note:  All information relating to the exemption above is available from CRA website.

By Theresa Lo, CPA, CGA

February 4, 2017