Kim Moody: Exemption is among the most misunderstood tax provisions within the Earnings Tax Act
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As soon as upon a time, capital gains 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 achieve was included in revenue.
The inclusion fee for capital features has modified through the years: growing within the late Nineteen Eighties to two-thirds, additional growing 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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With a view to encourage residence possession, and never tax Canadians on their most necessary 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 among 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Let me inform you an outdated story for example.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 buddies of my mother and father had been shopping for and promoting houses in Alberta (given the gradual restoration of residence costs from the disastrous implementation of the Nationwide Vitality Program earlier within the decade). They might transfer into their new houses for very quick durations of time (typically solely days), checklist the house they had been at present residing in after which promote.
Over a three-year interval, they moved into and bought 11 completely different houses. Seems, they believed the revenue on every residence was tax free due to the principal residence exemption. Again then, the Canada Revenue Agency (or Income Canada because it was then recognized) 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 chums by no means reported any of the 11 tendencies.
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Have been their features 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 necessary parts are:
* It should be owned by you and “ordinarily inhabited” by you, your partner/common-law accomplice or different family in sure circumstances. There is no such thing as a scarcity of myths as to what ordinarily inhabited means, nevertheless it doesn’t imply in the future. Given the chums’ quick durations of time residing 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, nevertheless, the property disposed of should be a “capital property” and never “stock,” which suggests it should be acquired for a long-term maintain and never bought to flip. For this reason flippers usually are not eligible to assert the principal residence exemption — the property they get rid of isn’t capital property. Have been the chums’ properties capital properties or stock? In my view, such properties had 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 12 months went forward and carried out a really foolish flipping tax, which can deal with any features on the disposition of a property held for lower than a 12 months (topic to some sure “life occasion” exceptions) as totally taxable and never a capital achieve. 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 buddies’ case.
* The land contiguous to the housing unit should not exceed half a hectare except it’s needed for the use and delight of the property. And, no, life-style circumstances reminiscent of lengthy driveways, tennis courts, and so forth., don’t make such extra land needed for the use and delight of the property. Sometimes, 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 “needed.” Once more, this was not a difficulty within the buddies’ case since they had 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 chums’ tendencies and ensuing income on the 11 tendencies had been probably 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 tendencies the place the principal residence exemption was claimed to be reported, it was not straightforward for them to turn into conscious of the tax place taken by my household’s buddies. This lastly modified in 2016 when the CRA’s administrative place was altered to make it necessary for tendencies of principal residences and the exemption to be reported. About time. On condition that, the chums would probably not have the ability to get away with claiming the principal residence exemption 11 occasions with out scrutiny as we speak.
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There is no such thing as a ceiling on the quantity of principal residence declare. Should you’re eligible, then the quantum of the exemption could possibly be $1 or it could possibly be $10 million, clearly relying on the precise quantity of the achieve on the disposition of the property.
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Is that truthful? 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 straightforward inquiries to reply.
However don’t turn into my mother and father’ buddies and depend on tax myths. As a substitute, be sure that any features on the disposition of your house are certainly on a “residence candy tax-free residence.”
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 may be reached at kgcm@kimgcmoody.com and his LinkedIn profile is www.linkedin.com/in/kimmoody.
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