Canada:
Is Primary Residence an Endangered Species?
July 13, 2021
TaxChambers LLP
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The government urgently needs money and is looking for new sources of income to finance its deficits. In anticipation of an election in the fall, the spring 2021 federal budget followed the general trend that governments are spending (or saying they will) ahead of an election by announcing $ 101.4 billion in discretionary spending and the federal deficit increased to $ 154.7 billion for the 2021-22 fiscal year.
Contrary to rumors, the 2021 budget did not contain any measures to abolish or reduce the primary residence exemption (PR). Tax increases do not precede elections, they follow them. We can expect them next spring after the Liberals have won a majority. The exception is rich and targeted by the government.
The tax system is generous for Canadian residents who own a home. They are usually not taxable on capital gains from the sale of their PR. Regardless of the value of the place of residence, the entire creditable profit is tax-free. The law treats everyone equally: a person who sells their PR for a profit of $ 35 million is treated the same as a person who makes $ 30,000. Canadians value this home ownership tax benefit as a source of their retirement income. What’s even better, the residence can be outside of Canada in a warmer climate.
The government dipped its toes in the PR exception. As of 2016, individuals are required to report all sales of their residences on their tax returns, even if they are exempt, for the CRA to review. In addition, there is no limitation period for undisclosed winnings. The CRA can always re-evaluate if you don’t report the sale on your tax return. These moves are targeted at real estate “pinball machines”, non-residents and money launderers who do not report their winnings and play the exam lottery.
Who can apply for the exemption?
A natural person resident in Canada can apply for the exemption if they, their spouse, civil partner, ex-spouse, ex-civil partner or child have their primary residence for the year and designate it as such for the year.
The exemption thus comprises four main aspects: the taxpayer’s place of residence, the taxpayer or his family living in a qualified property and the identification as PR in the prescribed form in the tax return.
What is a “primary residence”?
There are several technical requirements for qualifying a property as a primary residence. First and foremost, however, the place of residence must be a “capital asset”. This is where tax law becomes blunt. People who sell houses as a business or business person are not entitled to the PR exemption.
The critical test for determining an adventure or concern in trading is the taxpayer’s intent, which must be assessed objectively. If you run like a duck and croak like a duck, you will be branded a duck. This is especially critical for those who “flip” multiple properties.
The test of intent is objective and must result from the facts. Factors to consider are:
- the nature of the property sold.
- the duration of the tenure.
- the frequency or number of similar transactions.
- work carried out on or in connection with the property.
- the circumstances that were responsible for the sale of the property; and
- Motive for selling the property.
The taxpayer bears the burden of proof for his intentions in dealing with the property. Mere assertions are not enough. There must be credible evidence. Here the individual doesn’t want to croak like a duck.
The law is generous in terms of the type of property that qualifies as a PR. It can be a residential unit, a heritable building right participation in a residential unit or a participation in a cooperative housing association.
The term “dwelling unit” encompasses virtually any structure that an individual can inhabit. For example, a residential unit can be a mobile home, caravan, houseboat, or in some cases even a tent.
However, the law draws the line: Garden houses without water, heating, cooking facilities or electricity are out of the question.
The government is desperate for money. The federal deficit is soaring and economists are in an uproar. In the short term, however, until autumn, all political parties need your vote. However, after the election, the scene will change. The primary residence as we know it could become an endangered species in the spring of 2022.
The content of this article is intended to provide general guidance on the subject. You should seek expert advice regarding your specific circumstances.
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