Tag: principal residence
On October 3, 2016, the Minister of Finance announced changes to the Income Tax Act. The purpose of these changes is to “improve tax fairness by closing loopholes surrounding capital gains on the sale of a principal residence.”
Although we have previously blogged on the proposed new reporting requirements, there are certain other proposals that merit further discussion.
Limitation Period and Tracing
One change concerns the current limitation period and tracing dispositions of principal residences. Currently, the rules are formulated so that the Canada Revenue Agency (“CRA”) may be barred from assessing or re-assessing an individual, including a trust, for taxation years that end on the third year after the date the CRA issued a Notice of Assessment.
Under the new rule, there will be no limitation period for a taxpayer’s disposition of a principal residence if it is not reported, which may allow the CRA to assess the disposition at any time.
Principal Residence Owned in a Trust
The changes also restrict when a trust may designate a property as a principal residence.
To qualify under the new rules, the beneficiary of the trust must personally reside in the proposed property. Furthermore, only three types of trust may designate a principal residence:
- Certain joint spousal and alter ego trusts for the exclusive benefit of the settlor and settlor’s spouse or common-law partner;
- Testamentary “qualified disability trusts” for the benefit of the child or a current or former spouse or common law partner of the settlor; and
- A trust for the benefit of the settlor’s minor child, where the child’s parents died in the preceding year or years.
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As you may have heard, new rules have recently come into effect that may not only have a stabilizing effect on the housing market in Canada but also usher in new Canada Revenue Agency (“CRA”) reporting requirements.
Until recently, when an individual sold their home, they did not have to report the sale on their income tax return to take advantage of the principal residence exemption. However, on October 3, 2016, the Canadian government announced that, starting with the 2016 taxation year, the sale of a primary residence must be reported to the CRA to receive the benefit of the principal residence exemption. This new reporting requirement will apply to any sale that took place on or after January 1, 2016.
The principal residence exemption is a benefit that provides a vendor with an exemption from capital gains earned on the sale of a property that has been used as their primary residence. The exemption will apply for each year the property was designated as their primary residence.
With the new reporting requirement in place, to benefit from the principal residence exemption, the CRA will only allow the principal residence exemption if the sale and designation is reported. Accordingly, estate trustees and tax professionals should pay careful attention during the preparation of income and terminal tax returns to ensure compliance with this reporting obligation.
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