This morning, the Minister of Finance, Bill Morneau, announced a major change to the rules regarding the Principal Residence Exemption. A few key points to note, are:

–         Taxpayers will be required to report the disposition of a property for which the principal residence exemption is claimed.

–         The CRA will gain the 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 for the year in which the disposition occurs.

–         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.

–         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. For example, 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.

If you have any questions regarding the the Act, the anti-avoidance rules and / or transactions of concern, or if  you have questions or want more information, please call Paul Barbeau at (604) 688-4900 ext 11, email me, or connect with me on LinkedIn.

 

Department of Finance detail on today’s announced Principal Residence Exemption amendments, are set out below:

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:

  1. 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.
  2. 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:

  1. 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.
  2. 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.

If you have any questions regarding the new principal residence exemption rules, or if  you have questions or want more information, please call Paul Barbeau at (604) 688-4900 ext 11, email me, or connect with me on LinkedIn.