by Ron Clarke
How can the selling of your personal residence be a taxation issue?
There is no tax on the sale of a principal residence in Canada?
The gain is tax free, right?
Certainly this basic tax rule permitting an exemption from taxation on the sale of your home has been appreciated by homeowners, but over the past decade or two (or more) it has been abused by some to avoid taxation on their planned profit taking.
As a result, rules are a-changin’ … again.
Again?
Unless you have sold a home since 2016, you likely aren’t aware that in 2016, in pursuit of house flippers Canada Revenue Agency (CRA) began to enforce the filing of little known Schedule T2091 used to report the sale of a person’s principal residence (Update 1.0).
It doesn’t affect tax calculations, but it does introduce a tracking system for CRA’s supercomputer to identify a person’s frequency of selling their home.
Then just a couple of years back, there was the “CRA review period” extension for any real estate sale (Update 2.0). Well, not really an extension, more like elimination of the seven-year maximum review period.
In other words, from now on keep your buy/sale real estate records for your lifetime. CRA can ask for a review at anytime.
So now Update 3.0 may be underway.
But first, some explanation is needed to set the stage on the tax advantage afforded by the principal residence tax exemption on the sale of one’s home versus the sale of other real estate.
CRA considers a dozen factors relevant to a person’s “intention of the purchase and ownership” of any particular real estate, including a person’s home.
If CRA determines the intention of the taxpayer is to resell property, the property is not a capital asset eligible for capital gains taxation which only includes 50 per cent of the gain as taxable income.
Rather, the property is considered inventory and the entire gain is considered income and fully taxed as business income.
For example, buying vacant land with the intention to sell it to a developer could define that land as inventory, resulting in the gain being classified as income and not capital gain.
The owning of rental properties is not only a rental income business, but if rental properties are bought with the intention of being re-sold, CRA may determine that there is also the “business” of buying and selling properties. This means the properties are inventory and the gain on any sale would be included as income and not treated as capital gains.
This also applies if a person buys a house or condo, briefly lives in it and then sells it, specifically if this is a reoccurring pattern. Thus, as mentioned above, the enforcement of Schedule T2091 by CRA for tracking purposes.
If CRA determines that a person is in the business of flipping houses, the principal residence exemption will be denied and the entire gain will be considered income and taxed as such.
With this background, here’s the description of Update 3.0. If pending legislation passes, the CRA “trigger” for “house flipping” expands from the identification of a “reoccurring pattern” identified with the aid of Schedule T2091, to also include a “one-time flip” identified with any principal residence sale within the defined time period of … one year after purchase.
In other words, it will be immediately determined by CRA to be house flipping when any residential property is purchased and then sold within 365 consecutive days after the date of purchase.
This doesn’t mean a reoccurring pattern of buying and selling every couple of years will not be recognized as house flipping by CRA.
Instead, this new one-year rule is designed to identify the occasional abuser of the principal residence tax exemption.
There will be exceptions to the one-year rule. This includes a birth or death, marriage or separation, new job location or job loss, insolvency, or safety, with proof having to be provided to CRA.
Will there be principal residence Update 4.0?
Funny you ask.
The scuttlebutt is that the government is considering some sort of taxation on the gain on the sale of any principal residence.
Stay tuned.
Ron Clarke, owner of JBS Business Services in Trail, provides accounting and tax services.
