First off, a reassurance: The Principal Residence Exemption (PRE) is not going anywhere. If you are selling a principal residence that has been ordinarily inhabited, you will still get the same tax-free benefit that many Canadians have previously enjoyed. There have, however, been some recent changes in 2016 including three major changes regarding the treatment and filing of the PRE.
First, the formula for calculating the PRE has been changed for non-residents of Canada. The normal formula included a ‘plus-one rule’ that allowed individuals to gain an additional year of the PRE designation for a property. In general, this meant that they would pay less tax on the sale of their principal residence. After October 2, 2016, the government changed this ‘plus-one rule’, making it no longer applicable to non-residents of Canada. This was done as a measure to slow foreign investments in speculative housing markets like Greater Vancouver.
Second, for tax years that end after October 2, 2016, individuals who wish to claim the PRE on the sale of real property (i.e. principle residence) must report the sale and designation on their tax return. This signaled a change from the old system, where previously, this kind of sale was generally not reported. This means that if you sell real property after October 2, 2016, you will need to provide your accountant with information regarding the sale, so that they can include it in your tax filings, as required. This rule was implemented to aid the Canada Revenue Agency (CRA) in detecting taxpayer abuse, mainly those who were not reporting sales of real property, or reporting it when the PRE would not have applied, therefore avoiding tax that would have been due.
Third, the rules regarding trusts and the PRE have changed. Where previously many personal trusts could claim the PRE as long as the beneficiaries normally inhabited the home, now there are only a few trusts that will be eligible for the exemption. This includes alter ego trusts, spousal or common-law partner trusts, joint spousal/partner and qualified disability trusts, as well as trusts for minor children of a deceased parent. However, for the trust to be able to claim the PRE, the beneficiary who occupies the residence must be a resident of Canada.
Though the changes noted above were mainly aimed at restricting foreign investment in key real estate markets and the accompanying inflation in housing prices, they can still have significant impacts on Canadians who may wish to sell a principal residence or move their real property into trusts.
If you need professional advice regarding the proper use of the PRE when it comes to a property sale, or when moving, or if you would like additional information regarding these changes in taxation, please feel free to call us or email. We would be happy to help!