How Principal Residence Tax Changes Affects Canadians

For years, the Principal Residence Exemption (PRE) was lucrative to Canadians because it allowed an exemption on tax from capital gains as long as the person was selling their primary home. However, back in October of 2016, the rules changed and tightened on the Principal Residence Exemption (PRE). Not only does a person have to be a resident of Canada to take advantage of this benefit, there are now changed parts of the Tax Act as well as additional imposed tax reporting. Here is more on what you should know about how principal residence tax changes affects Canadians.

Why the Change?

The changes on the Principal Residence Exemption (PRE) were changed for a reason. According to the Department of Finance:

“The changes are meant to better ensure that the principal residence exemption is available only in appropriate cases, and in a manner consistent with the Canadian resident and one-property-per-family limits.”

This is basically to prevent those who flip houses or those who buy and sell within the same year, known as speculators. Instead, it is meant to help real Canadian residents who are not selling their home as a means just to make a quick buck but instead are selling so that they can move or whatever the legitimate reason may be.

What is the Formula?

The formula is quite simple, it calculates the exemption by using the amount of years plus one. How this works in layman’s terms is easier explained in this example:

A person buys a townhouse July of 2005 and a condo in September of 2012 then sells the townhouse in October of 2011, and sells the condo in October of 2016, they then get to claim the Principal Residence Exemption (PRE) twice – the full PRE on the townhouse 2005 till 2011, and the full Principal Residence Exemption (PRE) on the condo from 2012 to 2016.

This does not apply to those who were not Canadian residents the year that they acquire the property and instead, provides full exemption to those who are residents and sell two properties in the same year.

Why Was the Tax Change Implemented?

The tax change is there to help those who are legitimate residents and have to sell for whatever reason like a change in location or moving for a job offer. According to Keith Masterman who is a Tax, Retirement, and Estate Planner, some people do have to buy and sell their property in the same year and this does not mean that they are flipping houses or acting as a speculator. Some simply have a change in life plans such as the mentioned job offer.

This way, those who should benefit from the Principal Residence Exemption (PRE) actually do and those who are simply looking to make money fast are not eligible. It also is in place to deter foreign speculators.

What Else Has Changed?

Another change is that there is additional tax paperwork that must be filled out with the Principal Residence Exemption (PRE). Right now, the Form T2091 can be used just like in the past but there may be another form of paperwork that is required in the future. To claim the exemption, you will have to provide your basic information on the tax return for that year.

If you have questions about the Principal Residence Tax Rule or how a real estate lawyer can help, Oakville Real Estate Law is one of the top firms in Canada for real estate transactions. The firm’s team led by Robert Rose has worked on thousands of transactions the years and have the knowledge and experience you need. For more information on what you need to know about being able to afford a home, please contact us and we will be glad to help.