New measures impacting the principal residence exemption
By Greg Ott, CPA, CFP, Wealth Planning Group, Assante Private Client, a division of CI Private Counsel LP.
The principal residence exemption (PRE) provides a way to shield an economic gain arising on the sale of a qualifying residence, such as your home or cottage, from taxation. This would also apply on a deemed sale, such as on death.
In October 2016, some significant proposals were announced relating to the PRE:
Tax reporting requirements
For many years, the Canada Revenue Agency (CRA) did not enforce the formal tax reporting and filing requirements for the sale of a qualifying residence if the property was the individual’s principal residence in all years owned and if the entire gain was exempt from taxes due to the PRE.
The CRA now requires any individual wishing to claim the PRE on the disposition of a principal residence to report the disposition and also file a principal residence designation within their tax return for the year of the disposition. An additional form must also be filed if the property is not being designated as the individual’s principal residence for every year of ownership. These changes are effective for transactions on or after January 1, 2016, so if you sold a qualifying property at any time in 2016, these changes will apply to you.
If a disposition of real property is not reported, the CRA can re-assess the taxpayer beyond the normal assessment period.
Stricter rules for trusts claiming the PRE
Historically, trusts that owned a qualifying residence could claim the PRE in certain situations. The Department of Finance has proposed that effective January 1, 2017, only the following more limited group of eligible trusts can claim the PRE:
- Alter ego or joint spouse or common-law partner trusts, spousal or common-law partner trusts, and so called “exclusive protective”/ “self-benefit” trusts
- Qualified disability trusts (QDT), provided the electing beneficiary is the deceased settlor’s child or current (or former) spouse or common-law partner
- A trust for a child under 18 created by one of the child’s deceased parents.
In addition to meeting certain specific requirements, at least one eligible beneficiary of the trust must be a Canadian resident during the year in order for a post-2016 ownership year to qualify for the PRE.
Furthermore, if an eligible trust acquires a qualifying residence after October 2, 2016, the terms of the trust must give the eligible beneficiary of the trust the right to the use and enjoyment of the housing unit as a residence throughout the period in the year in which the trust owns the property in order for the property to be considered eligible for the PRE by the trust.
If an existing trust owns a residence that was acquired before January 1, 2017 but will not qualify as an eligible trust under the new rules, the PRE could still be available for the period of ownership from the date of acquisition up to December 31, 2016 under the previous rules, but any appreciation in value after 2016 would not be eligible for the PRE. Accordingly, these trusts should consider obtaining a valuation of appreciated qualifying properties held as of December 31, 2016 to assist in claiming the PRE in the future for pre-2017 years.
New rules can affect the ability to claim the PRE by individuals who are non-residents of Canada at the time they acquire a residence.
These changes are significant and will affect many individuals and trusts, including trusts set up to hold a principal residence for various non-tax reasons. You should carefully review these rules with your tax and legal advisors in order to assess the implications in your situation.