07 Oct CHANGES TO THE PRINCIPAL RESIDENCE EXEMPTION:
Canadians have long been utilizing the Principal Residence Exemption (PRE) in order to be exempt of capital gains tax on the sale of their primary home. Effective October 3, 2016, the federal government has imposed some changes with the intent to ensure the PRE is only available in appropriate cases and only for Canadian residents.
Some of the notable changes include the formula calculation and reporting requirements.
The prior formula for calculating your PRE would use the number of years owned (or designated) plus one. Effective October 3, 2016 this formula of designating one additional year for exemption will no longer be available for home owners who were a non-resident in the year of purchase. The one additional year of exemption will be strictly for Canadian residents only. The goal of this is to deter foreign speculators from coming in.
For an illustration of the change, please see the example further below in this blog.
An additional change will be the reporting obligations for taxpayers claiming a PRE, which will include additional disclosure and an increase in audits. The CRA has not yet announced whether it will be using existing forms or developing a new form for the additional disclosure, but we will be sure to keep you posted.
You own two properties: House – purchased in 2001 for $350,000 and Cottage – purchased in 2005 for $150,000.
In 2014 you decided to sell your house for $500,000. You then sell your cottage in 2016 for $225,000
Under the old rules – same for Canadians and non-residents:
(1 + # of years designated / total # of years owned) x Capital Gain = Principal Residence Exemption
House: (1 + 13 years designated / 14 years owned) x $150,000 capital gain = $150,000 exemption and $NIL capital gain
Cottage: (1 + 3 years designated / 12 years owned) x $75,000 capital gain = $25,000 exemption and a $50,000 capital gain
Under the new rules – non-residents only:
(# of years designated / total # of years owned) x Capital Gain = Principal Residence Exemption
House: (14 years designated / 14 years owned) x $150,000 capital gain = $150,000 exemption and $NIL capital gain
Cottage: (2 years designated / 12 years owned) x $75,000 capital gain = $12,500 exemption and a $62,500 capital gain
Total increase in capital gain for this example of $12,500 – applicable only to non-residents
Note: since you had to designate one extra year to the house to receive a full exemption, there is one less year to designate to the cottage
If you are unsure of any of these new rules with regards to PRE and how they may impact you, we advise you to speak with your accountant today!
This publication is produced by Andrews & Co. as an information service to clients and friends of the firm, and is not intended to substitute for competent professional advice. No action should be initiated without consulting your professional advisors.