This article discusses primary or principal residencies in Canada and what the government has recently changed through a new implication of the CRA. A primary/principal residence is a person’s main dwelling or residence where they regularly reside. It can be a house, apartment, condominium, a cottage, houseboat, a trailer or mobile home. On October 3rd, 2016 the Canada’s Revenue Agency made changes to the reporting requirements for the sale of a principal residence.
Previously, in the situation where a person has sold their primary residence, or wants to sell, they were not required to report the sale on their income tax and benefit return and not have to pay tax on any gain from the transaction. This would be the case if a person were eligible for full income tax exemption like the principal residence exemption because the property was a principal residence for every year it was owned.
The changes that take effect starting in 2016. The government will now require a person to report basic information such as date of acquisition, description of the property on their income tax and benefit return when selling a principal residence to claim full principal residence exemption
The federal government cracked down on rules for the principal Exemption (PRE) which allows a person to be exempt from tax on capital gains only if they are selling they’re principal residence. On October 3rd the government made PRE only available to Canadian residents. To get a better understanding of PRE it is important to know that a family unit (tax payer, spouse, unmarried minor children) is entitled to one PRE per year. Those who have two or more properties must choose which one to identify as their principal residence. Previously the CRA has indicated that living in a property for “short periods” will also qualify for the PRE. Those with only one principal residence get full exemption from tax on all capital gains.
The CRA formula to calculate exemption is:
- (1+ number of years x gain) /number of years owned = exemption amount
To conclude, the difference now is the formula for non-residents, reporting obligations and trust ownership. These changes are said to ensure that principal tax residence exemption is only available in appropriate scenarios and in a consistent manner with respect to the Canadian resident and one property per family limits.
If you are in a position where you own more than one residence, firstly congratulations, secondly, talk to your accountant and legal advisor about these new issues and how you can reduce your tax consequences.