New Principal Residence rules require forms from most home sellers for the first time

Those who know tax know that a surprise is always just around the corner. This time, it was the release on Monday of new legislation to combat high prices in certain housing markets.*

The income tax measures relate to the “principal residence exemption” which protects homeowners from capital gains tax on the sale of a residence. One residence per family may be designated for any one calendar year. The gain is exempted from tax pro rata for every year the home has been designated.

The new rules, which have been requested by many concerned about the attractiveness of the Vancouver and Toronto housing markets to non-residents of Canada, will deny the exemption to persons who were not resident in Canada during the year they acquired the property, for the purposes of that year (actually, for the purposes of one year, but it makes sense to just say that year.) The new rules apply to all dispositions from October 3 on, so it is retroactive in the limited sense that persons who purchased in this year or before, who were relying on receiving that one year’s exemption but have not yet sold, will not receive it. Broadly speaking, this is an appropriate result. The exemption was never intended to provide any benefits to non-resident persons.

There were also changes to eligibility for trusts; previously there were ways to structure the holding of a principal residence through a trust that were more generous than those where it was held directly. That appears to no longer be the case, and the types of trusts that can claim a principal residence exemption have also been limited. If you hold a residence inside a trust, you will want to consult a tax advisor to ensure your continued entitlement to the exemption.

Remember always that the exemption only applies to capital gains! Even if you live in it, gains from a property held on income account are fully taxable.

Furthermore, more importantly for most Canadians, CRA will now require the submission of a T2091 election form on the disposition of your principal residence. They have previously asked taxpayers not to submit the form if the exemption wiped out the full gain. (Although the election form has always been required by the Income Tax Act.) Not only is the form required now, but if a taxpayer fails to submit it, the taxpayer can be reassessed past the normal reassessment period.

This is an enforcement tool which has a stated purpose of catching “bad actors” frequently blamed for the desirability of Canadian real estate, such as non-residents, but which in fact seems to form part of CRA’s concerted plan to hunt house-hoppers, flippers, and the many who innocently purchase a family home but must leave it after a short time. Currently CRA relies heavily on information collected and forwarded by provincial governments through their land registry systems. I expect the inundation of T2091 forms to be heavily used by CRA in their ever-increasing enforcement campaign against ordinary homebuyers.

So remember, especially accountants and tax preparers, to begin preparing T2091s for every taxpayer disposing of a principal residence and to modify your protocols for return preparation appropriately.

As always, call (905) 870-0196 and ask to speak to Craig (it’ll be me answering, don’t worry) if you have questions about the principal residence exemption.

*Note: and, of course, apply the brakes to one of the very few high-performing sectors in Canada’s economy.

Written by Craig Burley

Craig is a tax lawyer in private practice in Hamilton, Ontario. Call Craig at (905) 296-3378 to discuss issues that you think may need independent tax advice. In addition to tax, Craig writes and works publicly on a number of other issues related to law, justice, and public affairs.