Beware capital gains tax exemption myths for a principal residence

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As soon as upon a time, capital gains weren’t taxable in Canada. However the federal authorities instituted a tax on capital positive factors when main tax reform was launched on Jan. 1, 1972, but solely 50 per cent of the ensuing capital achieve was included in revenue.

The inclusion price for capital positive factors has modified through the years: growing within the late Eighties to two-thirds, additional growing to three-quarters within the early Nineteen Nineties after which going again right down to 50 per cent within the early 2000s, the place it has been ever since.

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In an effort to encourage house possession, and never tax Canadians on their most essential monetary asset, the principal residence exemption was additionally launched in 1972. It primarily exempts from taxation any capital positive factors realized on the disposition of a housing unit and its contiguous land to the extent that property qualifies because the taxpayer’s principal residence.

There was some minor tinkering with the exemption since then, however the structure has just about stayed the identical. However, it is likely one of the most misunderstood tax provisions in Canada’s Earnings Tax Act and is the topic of a lot mythology.

Let me inform you an outdated story as an example. Within the late Eighties, some mates of my mother and father had been shopping for and promoting houses in Alberta (given the sluggish restoration of house costs from the disastrous implementation of the Nationwide Vitality Program earlier within the decade). They’d transfer into their new houses for very quick intervals of time (generally solely days), record the house they had been at present residing in after which promote.

Over a three-year interval, they moved into and offered 11 completely different houses. Seems, they believed the revenue on every house was tax free due to the principal residence exemption. Again then, the Canada Revenue Agency (or Income Canada because it was then recognized) had an administrative coverage that any positive factors on the disposition of a principal residence weren’t required to be reported on a taxpayer’s tax return. Accordingly, the chums by no means reported any of the 11 inclinations.

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Have been their positive factors actually tax free? Let’s analyze this for the reason that definition of a “principal residence” within the act is surprisingly advanced. A number of the extra essential parts are:

* It should be owned by you and “ordinarily inhabited” by you, your partner/common-law accomplice or different relations in sure circumstances. There isn’t any scarcity of myths as to what ordinarily inhabited means, however it doesn’t imply at some point. Given the chums’ quick intervals of time residing on the property and the explanations for acquisition, it’s uncertain they ordinarily inhabited any of the houses they lived in.

* Even when they did, nonetheless, the property disposed of should be a “capital property” and never “stock,” which implies it should be acquired for a long-term maintain and never bought to flip. That is why flippers usually are not eligible to say the principal residence exemption — the property they eliminate shouldn’t be capital property. Have been the chums’ properties capital properties or stock? In my view, such properties had been clearly stock and, subsequently, not eligible for the principal residence exemption.

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As an apart, the federal government earlier this yr went forward and carried out a really foolish flipping tax, which is able to deal with any positive factors on the disposition of a property held for lower than a yr (topic to some sure “life occasion” exceptions) as absolutely taxable and never a capital achieve. This duplicative and nonsensical new provision must be repealed.

* Ever since 1981, a married/common-law couple should share eligibility to the principal residence exemption. Previous to such date, every taxpayer may declare a principal residence exemption. This was not a difficulty within the mates’ case.

* The land contiguous to the housing unit should not exceed half a hectare except it’s essential for the use and delight of the property. And, no, way of life circumstances comparable to lengthy driveways, tennis courts, and so on., don’t make such extra land essential for the use and delight of the property. Sometimes, however not all the time, the courts take a look at what’s the minimal subdivision lot dimension within the municipality, with such minimal subdivision lot sizes being known as “essential.” Once more, this was not a difficulty within the mates’ case since they had been shopping for and promoting metropolis houses that had lot sizes a lot lower than half a hectare.

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To summarize, the chums’ inclinations and ensuing income on the 11 inclinations had been seemingly not eligible for the principal residence exemption due to the easy reality that every property they disposed of was stock and never capital property.

As a result of the CRA didn’t require inclinations the place the principal residence exemption was claimed to be reported, it was not simple for them to change into conscious of the tax place taken by my household’s mates. This lastly modified in 2016 when the CRA’s administrative place was altered to make it obligatory for inclinations of principal residences and the exemption to be reported. About time. Provided that, the chums would seemingly not have the ability to get away with claiming the principal residence exemption 11 instances with out scrutiny at this time.

There isn’t any ceiling on the quantity of principal residence declare. When you’re eligible, then the quantum of the exemption may very well be $1 or it may very well be $10 million, clearly relying on the precise quantity of the achieve on the disposition of the property.

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Is that honest? Did Canada’s parliamentarians ever envision multi-million-dollar positive factors in Vancouver and Toronto being exempt from taxation? Ought to there be a ceiling? Not simple inquiries to reply.

However don’t change into my mother and father’ mates and depend on tax myths. As an alternative, be certain that any positive factors on the disposition of your own home are certainly on a “house candy tax-free house.”

Kim Moody, FCPA, FCA, TEP, is the founding father of Moodys Tax/Moodys Non-public Shopper, a former chair of the Canadian Tax Basis, former chair of the Society of Property Practitioners (Canada) and has held many different management positions within the Canadian tax group. He might be reached at [email protected] and his LinkedIn profile is www.linkedin.com/in/kimmoody.

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