Kim Moody: Exemption is likely one of the most misunderstood tax provisions within the Earnings Tax Act
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As soon as upon a time, capital features weren’t taxable in Canada. However the federal authorities instituted a tax on capital features when main tax reform was launched on Jan. 1, 1972, but solely 50 per cent of the ensuing capital acquire was included in earnings.
The inclusion price for capital features has modified through the years: rising within the late Nineteen Eighties to two-thirds, additional rising to three-quarters within the early Nineties after which going again all the way down to 50 per cent within the early 2000s, the place it has been ever since.
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So as to encourage house possession, and never tax Canadians on their most vital monetary asset, the principal residence exemption was additionally launched in 1972. It basically exempts from taxation any capital features realized on the disposition of a housing unit and its contiguous land to the extent that property qualifies because the taxpayer’s principal residence.
There was some minor tinkering with the exemption since then, however the structure has just about stayed the identical. Nonetheless, it is likely one of the most misunderstood tax provisions in Canada’s Earnings Tax Act and is the topic of a lot mythology.
Let me inform you an outdated story for example. Within the late Nineteen Eighties, some pals of my dad and mom have been shopping for and promoting houses in Alberta (given the sluggish restoration of house costs from the disastrous implementation of the Nationwide Power Program earlier within the decade). They might transfer into their new houses for very quick durations of time (generally solely days), listing the house they have been at present dwelling in after which promote.
Over a three-year interval, they moved into and bought 11 totally different houses. Seems, they believed the revenue on every house was tax free due to the principal residence exemption. Again then, the Canada Income Company (or Income Canada because it was then identified) had an administrative coverage that any features on the disposition of a principal residence weren’t required to be reported on a taxpayer’s tax return. Accordingly, the buddies by no means reported any of the 11 tendencies.
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Had been their features actually tax free? Let’s analyze this because the definition of a “principal residence” within the act is surprisingly complicated. A few of the extra vital components are:
* It have to be owned by you and “ordinarily inhabited” by you, your partner/common-law associate or different family members in sure circumstances. There isn’t any scarcity of myths as to what ordinarily inhabited means, nevertheless it doesn’t imply sooner or later. Given the buddies’ quick durations of time dwelling on the property and the explanations for acquisition, it’s uncertain they ordinarily inhabited any of the houses they lived in.
* Even when they did, nonetheless, the property disposed of have to be a “capital property” and never “stock,” which implies it have to be acquired for a long-term maintain and never bought to flip. For this reason flippers aren’t eligible to assert the principal residence exemption — the property they eliminate isn’t capital property. Had been the buddies’ properties capital properties or stock? In my view, such properties have been clearly stock and, due to this fact, not eligible for the principal residence exemption.
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As an apart, the federal government earlier this yr went forward and applied a really foolish flipping tax, which can deal with any features on the disposition of a property held for lower than a yr (topic to some sure “life occasion” exceptions) as absolutely taxable and never a capital acquire. This duplicative and nonsensical new provision must be repealed.
* Ever since 1981, a married/common-law couple should share eligibility to the principal residence exemption. Previous to such date, every taxpayer may declare a principal residence exemption. This was not a problem within the pals’ case.
* The land contiguous to the housing unit should not exceed half a hectare until it’s crucial for the use and pleasure of the property. And, no, life-style circumstances resembling lengthy driveways, tennis courts, and so on., don’t make such extra land crucial for the use and pleasure of the property. Sometimes, however not all the time, the courts have a look at what’s the minimal subdivision lot dimension within the municipality, with such minimal subdivision lot sizes being known as “crucial.” Once more, this was not a problem within the pals’ case since they have been shopping for and promoting metropolis houses that had lot sizes a lot lower than half a hectare.
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To summarize, the buddies’ tendencies and ensuing income on the 11 tendencies have been probably not eligible for the principal residence exemption due to the easy truth that every property they disposed of was stock and never capital property.
As a result of the CRA didn’t require tendencies the place the principal residence exemption was claimed to be reported, it was not simple for them to change into conscious of the tax place taken by my household’s pals. This lastly modified in 2016 when the CRA’s administrative place was altered to make it obligatory for tendencies of principal residences and the exemption to be reported. About time. Provided that, the buddies would probably not be capable of get away with claiming the principal residence exemption 11 occasions with out scrutiny right this moment.
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There isn’t any ceiling on the quantity of principal residence declare. For those who’re eligible, then the quantum of the exemption might be $1 or it might be $10 million, clearly relying on the precise quantity of the acquire on the disposition of the property.
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Is that honest? Did Canada’s parliamentarians ever envision multi-million-dollar features in Vancouver and Toronto being exempt from taxation? Ought to there be a ceiling? Not simple inquiries to reply.
However don’t change into my dad and mom’ pals and depend on tax myths. As a substitute, make sure that any features on the disposition of your private home are certainly on a “house candy tax-free house.”
Kim Moody, FCPA, FCA, TEP, is the founding father of Moodys Tax/Moodys Non-public Consumer, a former chair of the Canadian Tax Basis, former chair of the Society of Property Practitioners (Canada) and has held many different management positions within the Canadian tax neighborhood. He could be reached at kgcm@kimgcmoody.com and his LinkedIn profile is www.linkedin.com/in/kimmoody.
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