Skyrocketing housing prices in the GTA and Vancouver have been all over the news with record-setting sales difficult to ignore. Over the years, the government has tried a few different strategies to try and calm the market but to no avail.
Last week the federal government tried again.
Currently, when a person sells their principal residence or is considered to have sold it, the Canada Revenue Agency’s (CRA) administrative practice does not require the sale to be reported on an income tax return if it was the principal residence for every year of ownership. If this is the case then the gain qualifies for the full principal residence exemption and no tax would be payable on any gain from the sale.
Starting with the 2016 tax year however, the CRA is requesting additional information for individuals selling (or deemed to have sold) a house and wishing to claim the principal residence exemption. The upcoming tax year will require people to report basic information (date of acquisition, proceeds of disposition and description of the property) on their income tax and benefit return when they sell a principal residence. The reporting will be required for sales that occur on or after January 1, 2016. In addition, the CRA will be allowed to assess taxpayers beyond the normal assessment period for a tax year in which a disposition of real estate was not reported on the tax return (applicable for 2016 and onward).
Another change is that individuals who were not residents in Canada in the year that they acquired a principal residence, will not be allowed to claim the exemption with respect to that year by virtue of the “plus one rule”. The formula used to calculate the exemption is:
1 + number of years designated x gain
Number of years owned
The “plus one” in the numerator allows residents to eliminate the full gain if they own a home for the first part of a calendar year and another home for the last part of a calendar year. Non-residents (when they acquire a principal residence) will no longer be able to use the “plus one” in the numerator.
Trusts and its beneficiaries seeking to designate a property as a principal residence will also be affected by the new CRA changes. More stringent criterion will be required.