How do you treat your principal residence for tax purposes – BDO’s Scott Conner explains

Did you report your 2016 principal residence disposition?

Our Income Tax Act allows Canadian taxpayers to receive a complete exemption for the gain on a disposition of a “principal residence”. As with many tax rules, some new in 2016, we benefit from understanding the tips, traps, and exceptions around these rules as we plan our real estate transactions.

What is a principal residence?

Perhaps the best place start is the definition of “principal residence”. Essentially we are talking about a property:

• with a housing unit,
• which was ordinarily inhabited in the year, and
• where the lot size is a ½ hectare or less.

Where the total area of the property exceeds a 1/2 hectare, the excess shall be deemed not to have contributed to the use and enjoyment of the housing unit as a residence unless the taxpayer establishes otherwise. What happens if the taxpayer can’t convince the Canada Revenue Agency that the excess portion was necessary to the use and enjoyment of the residence? That portion of the capital gain will not qualify for the principal residence exemption.

Recent Principal Residence Exemption Reporting Changes

For dispositions that occur after January 1, 2016, the Canada Revenue Agency will now require that a sale of a principal residence be reported on the taxpayer’s T1 return. Information now requiring full disclosure includes:

• the year of acquisition,
• the proceeds of disposition, and
• a description of the property being designated as a principal residence.

This filing change was said to target misuse of the rules that allow a gain on the principal residence to be exempt from tax. If you forgot, you are encouraged to amend and minimize your penalty for a late designation.

Can I sell my cottage or vacation property and claim a principal residence exemption?

Absolutely! Ordinarily inhabited in the definition does not mean that the taxpayer must spend most of their time in the residence…the housing unit must only be ordinarily inhabited “in” the year.

One family unit, one principal residence

For taxation years before 1982, it was possible to have each spouse own one of the properties and claim it as his or her principal residence. Since then a married couple and their unmarried minor children are only entitled to a single principal residence. Capital gains realized on the disposition of other family residences will be taxable.

Caution before flipping a house

The Canada Revenue Agency and Tax Courts will always look at the intention of the taxpayer…and simply ask did the taxpayer build the property with the intent to sell at a profit? If this is the case, be ready for the tax authorities to deny the principal residence exemption and conclude your sale was “an adventure in the nature of trade”, thus giving rise to business income.

These tax tips are general in nature and should not be relied upon to replace the requirement for specific professional advice. If you have questions about the principal residence exemption, contact the Huntsville office of BDO at 705-789-4469. Scott Conner is a Tax Partner at BDO Canada LLP. With over 15 years of experience as CPA, CA specializing in Canadian income tax, Scott helps a variety of individuals and private companies pay the least amount of tax possible with great tax planning strategies. He also specializes in planning for estates, trusts, and non-resident dispositions of real estate.

Scott Conner is a Tax Partner at BDO Canada LLP. With over 15 years of experience as CPA, CA specializing in Canadian income tax, Scott helps a variety of individuals and private companies pay the least amount of tax possible with great tax planning strategies. He also specializes in planning for estates, trusts, and non-resident dispositions of real estate.

Scott Conner, CPA, CA
Tax Partner
BDO Canada LLP
Direct: 705 789 4469 ext 1824
[email protected]