Exemption from primary residence: you have questions, we have answers

Posted on by Duane Roberts

Taxes Personal Finances

Jamie Golombek: CRA’s recent crackdown on alleged abuse of the PRE has sparked a barrage of reader interest

The CRA has recently sent educational letters to individuals The CRA recently sent educational letters to individuals “who may have incorrectly applied the PRE,” giving them the opportunity to correct or amend their previous years’ returns if they were found to have incorrectly claimed the PRE. Photo by Gavin Young/Postmedia files

Reviews and recommendations are unbiased and products are selected independently. Postmedia may earn an affiliate commission for purchases made through links on this page.

The Canada Revenue Agency’s recent crackdown on alleged abuses of the Primary Residence Exemption (PRE) has sparked a barrage of interest from readers, with many asking additional questions about various aspects of the exemption.

This ad hasn’t loaded yet, but your article continues below.

To sum it up, the CRA recently sent educational letters to individuals “who may have applied the PRE incorrectly,” giving them the opportunity to correct or amend their previous years’ returns if they are found to have the PRE claimed incorrectly. Here’s a sample of your questions (edited for brevity and clarity) and my answers.

Q: We recently sold our house and are planning to buy our daughter/son-in-law’s apartment so they can buy a townhome. At that time, we will inhabit their apartment and live in it as our primary residence. Our plan is to live there for about six months after which our new townhome (currently under construction) will be ready to move in. Do we have to live in the apartment for a whole year before we can resell it without tax consequences? Our accountant told us that if we bought their apartment and it is our main residence, we can sell it whenever we want, without any tax problems.

This ad hasn’t loaded yet, but your article continues below.

JG: Your accountant is right that there is currently no minimum amount of time that you must live in a property before designating it as your primary residence. Keep in mind, though, that one of the federal Liberal Party’s platform proposals before the last election was the introduction of an “anti-flipping tax.” Under this proposal, the PRE would not be available for a property sold within 12 months of purchase. To date, no draft legislation has been submitted on this proposal, although information provided ahead of the election indicated it would be in effect for the year 2022. Perhaps next month’s federal budget will have more information on when this will be. implemented.

The Canada Revenue Agency headquarters in Ottawa. The Canada Revenue Agency headquarters in Ottawa. Photo by Errol McGihon/Postmedia

Q: My husband and I own a property in the Laurentians. We bought it as a single sale seven years ago, but it included two lots. The two lots together measure approximately 72,000 square meters. One lot (about 35,000 square feet) has a house, our primary residence where we live full-time, and the other lot (about 37,000 square feet) is empty. Both are lakefront properties and visually one lot, but the vacant lot has its own tax bill and address. We are considering selling the vacant land. Since there is no house on it, are we subject to capital gains tax if we sell the land?

This ad hasn’t loaded yet, but your article continues below.

JG: Since the vacant lot has its own tax bill and legal address and can be sold separately from the lot your house is on, it is unlikely that the sale will qualify for the PRE. Even if both lots were eventually sold together, you’d run into the “half acre rule.” Under the Income Tax Act, the definition of “principal residence” limits the amount of land eligible for the exemption to half an acre (about 54,000 square feet), unless the taxpayer can demonstrate that the excess land was necessary for the use and enjoyment. of the residential unit.

This half-acre rule was the subject of a 2018 tax lawsuit in which a taxpayer purchased four adjacent tracts of land in rural Quebec, in four separate real estate transactions, totaling approximately 4.17 acres. Her housing unit was on the land obtained in the first transaction. The other three pieces of land were eventually merged into a second plot, on which a swimming pool, barn, garage, septic field and sugar shack were built.

This ad hasn’t loaded yet, but your article continues below.

The taxpayer eventually sold 1.47 acres of the property, a forest plot representing 33 percent of the second lot, to the local council for the extension of the municipal aqueduct and claimed the PRE on the sale. The CRA denied the PRE and the case went to court. The judge agreed with the CRA and concluded that the taxpayer could not determine “on a probable basis” that the land sold was necessary for the use and enjoyment of her housing unit as a home.

No

What you need to know now that the CRA is tightening restrictions on primary residence exemptions

The detailed claim method requires you to add up all the costs incurred and ensure that you have receipts and backup documentation for each claim.

Everything you need to know about declaring home office expenses on your tax return

You are required to declare to the CRA if you have more than $100,000 (based on the total expense amount) in foreign stock, such as Apple Inc., Microsoft Corp. or Meta Platforms Inc., in a Canadian unregistered brokerage account.

Own foreign real estate, including inventories? Tell the CRA in time, otherwise you will be fined

The Liberals could soon formally introduce their anti-flipping tax that would make it easier for the Canada Revenue Agency to reassess alleged abusers of the Primary Residence Exemption (PRE).

Liberals plan to go after house fins, but the CRA is already doing it

This ad hasn’t loaded yet, but your article continues below.

Q: What if you own your town home and designate it as your primary residence. You also had a house then. You then realize that you should not have designated your town house, because the house would have generated a much greater increase in value and would provide an enormous added value when sold. You do not intend to sell the house in the near future. Can you amend your tax return to remove the townhome designation and pay the taxes, interest and penalties generated by the townhome disposition?

Owning both a townhome and cottage can also present unique difficulties in claiming the PRE in the event of a divorce or separation. Owning both a townhome and cottage can also present unique difficulties in claiming the PRE in the event of a divorce or separation. Photo by Getty Images/iStockphoto

JG: Tax law gives the CRA the power to allow taxpayers to late or revoke a PRE (after payment of a penalty), but the CRA reserves the right to deny withdrawal if “it is reasonable to conclude that you have filed the retroactive tax request for planning purposes.” That said, you can certainly try it, it is ultimately the discretion of the CRA to allow the withdrawal.

This ad hasn’t loaded yet, but your article continues below.

Owning both a townhome and cottage can also present unique difficulties in claiming the PRE in the event of a divorce or separation. For example, suppose a couple separates and the wife keeps the cottage and the husband keeps the house, but the parties do not specify in their divorce agreement who is entitled to the PRE when the properties are sold in the future. If the wife sells the house five years later and claims the PRE for all the years they owned it, the husband will not be able to use the PRE to protect the profits from the years before the divorce when he finally sells the house, since the wife have already used it.

“Many divorce agreements fail to resolve this potential problem, which results in surprises when properties are sold years later,” said Lorne Wolfson, a family law attorney at Torkin Manes LLP. “The parties must agree on what property should be entitled to the PRE for the years of separation and include that benefit in settling their family law issues.”

Jamie Golombek, CPA, CA, CFP, CLU, TEP is the General Manager, Tax & Estate Planning at CIBC Private Wealth in Toronto. Jamie.Golombek@cibc.com

†

Sign up for the FP Investor newsletter for more stories like this.

†

This ad hasn’t loaded yet, but your article continues below.

By clicking the sign up button, you agree to receive the above newsletter from Postmedia Network Inc. receive. You can unsubscribe at any time by clicking the unsubscribe link at the bottom of our emails. Postmedia Network Inc. † 365 Bloor Street East, Toronto, Ontario, M4W 3L4 | 416-383-2300

Comments

Postmedia is committed to maintaining a lively yet civilized discussion forum and encourages all readers to share their thoughts on our articles. It can take up to an hour for comments to be moderated before appearing on the site. We ask that you keep your comments relevant and respectful. We’ve enabled email notifications – you’ll now receive an email when you get a reply to your comment, there’s an update to a comment thread you’re following, or a user follows comments. Visit our Community Guidelines for more information and details about customizing your email settings.

This post Exemption from primary residence: you have questions, we have answers

was original published at “https://financialpost.com/personal-finance/taxes/youve-got-questions-about-the-cras-principal-residence-exemption-weve-got-answers”

Related Posts