Wealth Strategies: Principal residence exemption changes

Principal residence exemption changes

The principal residence exemption (PRE) is a longstanding benefit that we as Canadians are able to take advantage of upon selling a qualified property.  Specifically, we’re able to avoid paying capital gains tax on the property noted as a primary home.  However, some recent changes passed by the Federal Government (as of October 3rd, 2016) have made this exemption unavailable to non-residents going forward.  That being said, there are other changes to the PRE that will affect Canadian residents as well.

The rule still applies that a family unit (defined here as being the taxpayer, their spouse, and any unmarried children) is able to designate one property per year as their primary residence.  Those families with more than one property can decide which of the properties to designate for the PRE each year.  As noted in the Advisor.ca article on this subject by Melissa Shin, “While the family member must “ordinarily inhabit” the principal residence, CRA has said living in a property for “short periods” will qualify it for the PRE.  CRA has a formula to calculate what exemption to claim when selling one of those homes”:

(1+ number of years designated x gain)/number of years owned = exemption amount

The above formula, however, has been changed for those that are non-residents by simply removing the plus-one from the formula. This addition to the formula was meant to still offer an exemption on two properties if a person simultaneously bought and sold a property within the same calendar year.  This consideration will obviously benefit those that are Canadian residents as it’s not uncommon to have this situation occur.  With respect to the family unit, there weren’t any changes made to the definition as noted prior; however, a non-resident with a Canadian-resident spouse or child could still qualify for the plus-one PRE calculation if the Canadian resident claims the PRE.

Reporting obligations did, however, change for everyone.  All taxpayers will now be required to complete additional reporting upon claiming the PRE as well as disclosure of capital property on Schedule 3 of the T1 return. The current form used to gather applicable information is Form T2091, although it’s unclear if CRA will continue use of this form going forward.

The last area affected by the PRE changes, which should be noted, is trust ownership.  Prior to the new ruling, personal trusts could also take advantage of the PRE for property held within the trust - provided that the beneficiaries “ordinarily inhabited” the home.  Also noted in the above referenced Advisor.ca article, “under the new rules, the only trusts that will be eligible (for the PRE) are alter ego, spousal or common-law partner, joint-spousal /partner, and qualified disability trusts (QDT), and trusts for minor children of a deceased parent.”  Not surprisingly, the trusts’ beneficiary must also be resident in Canada in order to qualify for the PRE.  Regarding QDT’s, this is only available for those that also qualify for the Disability Tax Credit (DTC).

The main political goal of these somewhat overdue changes was certainly to curtail foreign ownership. That being said, even Canadian residents will have changes to bear in mind going forward.  As is often the case, pre-planning is essential in trying to minimize taxes and take advantage of the options available to us.