Article content material

As soon as upon a time, capital beneficial properties weren’t taxable in Canada. However the federal authorities instituted a tax on capital beneficial properties 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 charge for capital beneficial properties has modified over time: growing within the late Nineteen Eighties to two-thirds, additional growing to three-quarters within the early Nineteen Nineties after which going again all the way down to 50 per cent within the early 2000s, the place it has been ever since.

Article content material

Article content material

With the intention to encourage house possession, and never tax Canadians on their most vital monetary asset, the principal residence exemption was additionally launched in 1972. It primarily exempts from taxation any capital beneficial properties 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. However, it is without doubt one of the most misunderstood tax provisions in Canada’s Revenue Tax Act and is the topic of a lot mythology.

Let me inform you an outdated story as an example. Within the late Nineteen Eighties, some associates of my mother and father had been shopping for and promoting properties 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 properties for very brief durations of time (typically solely days), record the house they had been at the moment residing in after which promote.

Over a three-year interval, they moved into and bought 11 completely different properties. 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 recognized) had an administrative coverage that any beneficial properties on the disposition of a principal residence weren’t required to be reported on a taxpayer’s tax return. Accordingly, the chums by no means reported any of the 11 inclinations.

Article content material

Article content material

Have been their beneficial properties actually tax free? Let’s analyze this for the reason that definition of a “principal residence” within the act is surprisingly advanced. A few of the extra vital parts are:

* It have to be owned by you and “ordinarily inhabited” by you, your partner/common-law associate or different family in sure circumstances. There isn’t any scarcity of myths as to what ordinarily inhabited means, but it surely doesn’t imply someday. Given the chums’ brief durations of time residing on the property and the explanations for acquisition, it’s uncertain they ordinarily inhabited any of the properties 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. This is the reason flippers are usually not eligible to assert the principal residence exemption — the property they get rid of just isn’t capital property. Have been the chums’ properties capital properties or stock? For my part, such properties had been clearly stock and, subsequently, not eligible for the principal residence exemption.

Article content material

As an apart, the federal government earlier this 12 months went forward and applied a really foolish flipping tax, which is able to deal with any beneficial properties on the disposition of a property held for lower than a 12 months (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 might declare a principal residence exemption. This was not a difficulty within the associates’ 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, way of life instances reminiscent of lengthy driveways, tennis courts, and so forth., don’t make such extra land crucial for the use and pleasure of the property. Usually, however not at all times, the courts take a look at what’s the minimal subdivision lot measurement within the municipality, with such minimal subdivision lot sizes being known as “crucial.” Once more, this was not a difficulty within the associates’ case since they had been shopping for and promoting metropolis properties that had lot sizes a lot lower than half a hectare.

Article content material

To summarize, the chums’ inclinations and ensuing earnings on the 11 inclinations had been possible not eligible for the principal residence exemption due to the easy reality that every property they disposed of was stock and never capital property.

As a result of the CRA didn’t require inclinations the place the principal residence exemption was claimed to be reported, it was not simple for them to turn into conscious of the tax place taken by my household’s associates. This lastly modified in 2016 when the CRA’s administrative place was altered to make it obligatory for inclinations of principal residences and the exemption to be reported. About time. Provided that, the chums would possible not be capable of get away with claiming the principal residence exemption 11 instances with out scrutiny at the moment.

There isn’t any ceiling on the quantity of principal residence declare. In case you’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.

Article content material

Is that truthful? Did Canada’s parliamentarians ever envision multi-million-dollar beneficial properties in Vancouver and Toronto being exempt from taxation? Ought to there be a ceiling? Not simple inquiries to reply.

However don’t turn into my mother and father’ associates and depend on tax myths. As an alternative, be certain that any beneficial properties on the disposition of your own home are certainly on a “house candy tax-free house.”

Kim Moody, FCPA, FCA, TEP, is the founding father of Moodys Tax/Moodys Personal 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 will be reached at kgcm@kimgcmoody.com and his LinkedIn profile is www.linkedin.com/in/kimmoody.

In case you appreciated this story, join extra within the FP Investor publication.

Article content material