In October, the Federal Government created some major headlines when they announced changes to the principal residence exemption rules for Canadian taxpayers.
The details of the principal residence exemption rule changes were outlined in this BDO Canada article, but as a real estate investor, what do they mean for you?
- Starting in 2016, anyone who sells a principal residence, meaning the capital gain may be tax free, must now report it on their personal tax return. Previously, if you had no tax to pay on a property, nothing needed to be reported. Therefore, since a principal residence was normally exempt from the capital gain, its sale infrequently showed up on a tax return. For real estate investors who are operating ethically, this really will have no effect on them. What it will do, however, is make life more difficult for those who were essentially flipping houses, for example, but claiming those houses as principal residences.
- Deemed dispositions must be reported on personal tax returns now too. For example, if you change a property from personal use to rental (either all or a portion of it), this must now be reported. Note that there are deadlines, and filing penalties, if you aren’t doing this so ensure you indicate changes in use of properties to your real estate accountant so they can file the proper paperwork with the Canada Revenue Agency.
- Non-resident owners of Canadian real estate have lost the advantage of the “one-plus” rule to shelter capital gains. The one-plus rule means that in the year you sell a principal residence and buy a new one, you actually have two principal residences that year. Therefore the one-plus rule allows you to maintain the PRE for the property you sold, and the property you bought. Non-resident owners can no longer use this rule. They must be a resident in Canada to take advantage of it.
- Taxpayers were also restricted from using certain trusts to designate properties as a principal residence. Of particular note is the inability to use a discretionary family trust after 2016.
George E. Dube, CPA, CA
Tax Partner, BDO Canada
Real estate accountant, real estate investor, speaker, author