4 common questions about the CRA’s principal residence exemption

CPA expertise can help clients maximize this exemption and minimize taxes when it is time to sell property

When filing personal income tax returns, how to report a property sale can be confusing and expensive, dependent on value appreciation and the capital gains tax owed.

Luckily, under Canada’s Income Tax Act (ITA), the sale of a residence can be exempted from this tax under the Principal Residence Exemption (PRE).

In 2016 CPAs will remember the Canada Revenue Agency (CRA) requiring the sale of a principal residence to be reported on the seller’s income tax in order to qualify for the PRE and to tighten up eligibility requirements.

With this in mind, there are several things Canadian property owners need to consider when filing for PRE, particularly if they own multiple properties.

Here are four questions clients may ask you and how CPAs can adequately respond.

1) How long do I need to live in a residence to claim it as a principal residence and qualify for PRE?

The CRA does not specify an exact duration of time an individual or their family members, including a spouse, common-law partner or children, must reside in a dwelling for it to qualify as a principal residence for a given year. The tax rules refer to the residence being “ordinarily inhabited” within the calendar year, which is a relatively low bar. A more significant issue is whether a property held for a short period will produce an income gain or a capital gain when sold.

Clients should beware that the CRA will analyze evidence, such as length of time in the dwelling, sources of income and real estate buying patterns, to establish if the dwelling is indeed a principal residence or perhaps part of a business venture, such as real estate flipping.

“If the CRA challenges your claim of exemption, they’re going to look at all the facts in the scenario,” says CPA Michael Espinoza, senior manager, national tax office, Grant Thornton LLP. “[Such as] what was your intention of moving in and did something happen that forced you to sell [the property]?”

2) Can other properties, such as a cottage, be designated a principal residence and eligible for PRE?

Most properties (home or cottage, for example) can be designated a principal residence—even those seasonal residences located outside of Canada, such as in the U.S. or Caribbean— as long as the owner or their family ordinarily inhabit it during each calendar year being claimed.

Clients should be aware that only one property per year, per family (spouse or common-law partner and children under 18), can be designated a principal residence. Although it is becoming rare now, each spouse can designate a different property as a principal residence for years before 1982. Once sold, a property that isn’t deemed a principal residence will be subject to capital gains tax for the years it was not designated. A gain may also arise if the residence is designated for some, but not all, of the years of ownership.

There is also a restriction on land size that qualifies for the PRE. Property that exceeds one-half hectare (roughly 1.2 acres) will generally not qualify for the exemption. For example, if the property is a farm, only one-half of a hectare of land plus the home would qualify for the exemption, while the remaining acreage would be subject to capital gains tax based on value appreciation. If the excess land is required for the use and enjoyment of the property, then the land that qualifies can be larger. However, CRA is very restrictive when applying this rule.

When selling one of multiple properties owned, an owner can designate it as a principal residence for all or part of the years of ownership to take best advantage of the exemption and minimize the amount of capital gains tax paid.

“Generally speaking, it makes sense to designate the property that has the highest average gain per year of ownership,” says Bruce Ball, FCPA, FCA, vice-president of taxation at CPA Canada. “However, there are a number of factors to consider and getting advice from a CPA may help reduce your tax.”

Clients should speak to a tax professional to assess how best to calculate this, experts say.

3) Can a property that generates income be deemed a principal residence and eligible for PRE?

The mandatory income tax reporting of a principal residence sale was introduced by the CRA to limit when the exemption could be applied. Overall, it increased monitoring over foreign property ownership, “quick flips” or short holdings (on properties that may not qualify for principal residence status), properties that were not “ordinarily inhabited” every year by the owner, a well as serial builders who build and occupy a property before selling it.

Therefore, property that is used mainly to generate income or that is considered inventory does not qualify for PRE. This includes property that is solely rented out on a long- or short-term basis, or one where the owner occupies one unit and rents out the others.

Exceptions include renting out property for the short term, such as a cottage for a couple of weeks in the summer or a house as an Airbnb while on vacation, which an owner occupies otherwise; and if a family member (spouse or common-law partner or child) rents out the property.

“If, for the most part, you are using [the property] for your own purposes … then it will qualify for a principal residence, even if you use Airbnb,” says Espinoza. “Which means you could have people coming in frequently, as long as you are living there [regularly, in some capacity].”

4) What penalties are incurred when the sale of a principal residence is not reported to the CRA?

If an owner fails to report the selling of a principal residence, they could be subject to a late-filing penalty of $100 per month, up to a maximum of $8,000, according to the CRA. In addition, if an owner doesn’t report the sale, the exemption may be denied and therefore the owner would be taxed on the capital gains.

“Although the new reporting requirements have been in place for several years now, many individuals may still believe that they do not have to report the sale of the principal residence when they only own one property,” Ball says. “Failing to report the sale can result in significant costs.”

STAY UP-TO-DATE ON TAX SEASON

Make filing easier for your clients with these pandemic tax season tips. Here’s a breakdown on home office expense claims for those who have been working from home during COVID-19, plus learn what information to gather for incorporated and unincorporated businesses.

Also, stay current on Canadian tax news and COVID-19 updates, and get practical information and fresh perspectives on tax with our tax blog.

About the Author: Sophie Nicholls Jones

Source: CPACanada

Government launches consultations on proposed tax on vacant homes owned by non-resident, non-Canadians

From: Department of Finance Canada

The federal government is committed to ensuring all Canadians have a safe and affordable place to call home.

In communities across the country, the recent and rapid rise in housing prices has made finding an affordable place to call home increasingly difficult. For many Canadians, the most important investment they will ever make is the purchase of a home. Increasingly, however, that dream is becoming unaffordable and unattainable for middle class Canadians and for Canadians working hard to join the middle class.

Houses should not be passive investment vehicles for offshore money. They should be homes for Canadian families. That is why, in the recent federal budget, the government announced its intention to implement Canada’s first-ever national tax on non-resident, non-Canadian owned residential real estate that is considered to be vacant or underused. This one per cent tax would go into effect on January 1, 2022, to help support investments in housing affordability.

Today, the Government of Canada, through the Department of Finance, is launching consultations with stakeholders on the design of this proposed new tax.

Full details on the government’s proposed approach can be found in the related background paper. Stakeholders are invited to provide their views on the government’s proposed approach by September 17, 2021.

Back to the office: Expert tips to help you prepare mentally

Thinking about the new workplace routine can be anxiety-inducing, but there are things you can do to ease the transition

After working from home for nearly 18 months, the idea of heading back to the office can bring up a lot of feelings. Whether this has been a time filled with additional daily stress or a period marked by enjoying a commute-free workday or something in-between, experts all agree the return to in-person work will have challenges no matter which lense you’re looking through. 

“The return to the office is proving to be so much more complicated because work from home was basically a tech solution,” says Michael French, regional vice-president at Robert Half Canada. “But the return of the office is way more of a human solution.”

“The effects of the pandemic are probably going to be with us for some time,” says Liz Howarth, manager of workplace mental health at the Mental Health Commission of Canada. “There’s an increased fear among some people about being back out there. And that’s very normal when we’ve been isolated.”

The good news? You can help prepare yourself for the return to the workplace. Here’s how:

1. ACKNOWLEDGE THE SITUATION

From adjusting to new protocols or even mental health up and downs, people have learned to adapt to the continually changing pandemic situation, says Katy Kamkar, clinical psychologist for CAMH and assistant professor in the department of psychiatry at the University of Toronto. Preparing for a return to the office is one more hurdle. 

“This is again, readjusting to a new structure and new routine,” she says. “A lot of the changes that people go through invite a range of emotions. But it’s also incredible the amount of strength and resilience that we have shown this last year.” 

And it’s a normal reaction to have anxiety whenever we face uncertainty, says Kamkar. Being upfront about concerns, she says, and seeking help and support when needed, can help manage negative thoughts before they become overwhelming. 

2. MANAGE EXPECTATIONS

Don’t plan on returning to your pre-pandemic office routine, says Horvath, but do plan for an adjustment period. “One of the major things is being prepared that we’re not going back to normal life,” she says.

Being realistic about the current situation—and what new office culture will be—helps approach the idea of change successfully. “Look forward to new routines and be mindful of what we need to do to care for our physical and mental health,” says Horvath.

Do be proactive, she adds, by eating well, getting enough sleep and exercising to help calm some of the stress being experienced.

3. FOCUS ON THE NOW

Focusing on current worries should be the objective, say Kamkar, as opposed to future worries, which are things that may or may not happen.

To ease some of the stress, she recommends looking to available information including employer updates on return-to-office timelines and in-office health protocols. When armed with knowledge, “we feel more empowered, we feel more resilient,” she says, “And really, resiliency is when we are able to optimize our resources, strength and support.”

4. CREATE A PLAN

Dr. Bill Howatt, president of HowattHR, which focuses on workplace psychological health and safety, says worry management is about managing contingencies. 

“Build a plan,” he says. “Structure how much you’re going to go to work. Maybe you can return to work gradually.” He also recommends thinking ahead to put carpooling plans in place, if there are concerns about public transportation, getting enough rest and planning your day to accommodate for work-life balance. 

Also important is implementing a mental-fitness strategy that can be incorporated into a daily or weekly routine. This should be personalized to individual needs, Howatt says, whether that includes daily movement, meditation or a walk around the block to create inward focus and relaxation. 

“It’s about ‘what am I going to do to charge my batteries to build my resiliency?’,” he says. “Mental fitness is your ability to build your resiliency to get ready for today or tomorrow, understanding that, ‘I have control over my happiness’ and being mindful that ‘I’m the one ultimately responsible for my own private victories that will create my happiness.’” 

5. THINK POSITIVELY

Adverse thoughts have a way of developing in our minds, especially in times of stress. Kamkar recommends trying to recognize these thoughts before they manifest into something bigger. 

“We know that our self-talk really matters,” she says. “Reassure yourself that we have done that [worked in the office] before the pandemic and we have been able to readjust to the changes of the pandemic, too.”

Perspective and mindset play an important role, says Horvath. And this starts at home. “We need to look at ‘how can I reduce the overall burden so that I can keep my stress levels down?’” she says, suggesting simple tasks such as organizing your wardrobe early and preparing lunch in advance to knock things off the to-do list. 

FINDING SILVER LININGS

The good news is that these challenging times have also spurred some positive changes. Not only has the pandemic proven people can work remotely and from all over the globe, Howatt says, but it has shown that employees have more opportunities than they used to. “I think we’re going to be realizing that we have choices,” he says, adding that “brain health” will be where both employees and employers focus much effort. 

Although experts agree this is a time of high stress, it is also one of great opportunity. “It’s probably going to be a once in a generational time to do a corporate reset on work-life balance,” says French. “There are lots of changes, hopefully a lot for the better, too.”

TAKING CARE

Find out why managing mental health in the workplace matters and learn stress management techniques to help cope during this uncontrollable time. 

Also, see how some organizations are preparing to welcome their employees back into their workspaces and how CPAs have been faring working from home.

About the Author: Michelle Singerman

Source: CPA Canada