Will the proposed tax measures help cooling the hot Canadian housing market?

Years of low interest rates and changes in the way real estate markets are operating in Canada are fueling the price increase in various pockets of the country. More and more people are raising concerns about sustainability and affordability of houses by Canadians. To address those concerns and Federal government has announced changes in rules relating to mortgage financing and mortgage insurance. It has also proposed income tax measures which will impact the real estate transactions going forward.

Proposed income tax measures are explained in following paragraphs.

Currently, homeowners disposing of their principal residence, are exempt from capital gains taxation (“the principal residence exemption”). The exemption is available only to Canadian resident individuals and trusts. This exemption is further limited by the rule that, families are able to designate only one property as the family’s principal residence for any given year. 

As per the Department of Finance, the proposed tax measures would improve tax fairness and the integrity of the tax system. Under these measures:

An individual who was not resident in Canada in the year the individual acquired a residence will not—on a disposition of the property after October 2, 2016—be able to claim the exemption for that year. This will mean that permanent non-residents will not be eligible for the exemption on any part of a gain from the disposition of a residence.

Trusts will be eligible to designate a property as a principal residence for a tax year that begins after 2016 only if additional eligibility criteria are met. To claim the exemption, a trust will be required to be one of the following trust, in each year that begins after 2016 for which the designation applies:

• a spousal or common-law partner trust,
• an alter ego trust (or a similar trust for the exclusive benefit of the settlor during the settlor’s lifetime),
• a qualifying disability trust, or
• a trust for the benefit of a minor child of deceased parents.

In addition, the trust’s beneficiary who, or whose family member, occupies the residence for the year will be required to be resident in Canada in the year, and will be required to be a family member of the individual who creates the trust. Transitional relief is provided for affected trusts for property owned at the end of 2016 and disposed of after 2016.

Reporting the sale of principal residence by individuals after October 02, 2016:

Under current administrative policies, sale of principal residence by individual is not reported on the income tax return and any gain on sale is not taxable if the house was principal residence for each year that was owned by the taxpayer. Under proposed rules, the Canada Revenue Agency (CRA) will require a taxpayer to report the disposition of a property for which the principal residence exemption is claimed. The change means that, when a taxpayer disposes of a principal residence, the taxpayer will be required to provide basic information in the taxpayer’s income tax return for that year in order to claim the exemption.  In addition, the CRA will be explicitly authorized to accept late-filed principal residence designations.

Another proposed measure would provide the CRA with authority to assess taxpayers, beyond the normal assessment limitation period for a tax year, in respect of a disposition of real estate by the taxpayer (or a partnership of which the taxpayer is a member), in cases where the disposition is not reported in the taxpayer’s tax return (or in the case of a partnership, the partnership return) for the year in which the disposition occurs. In the case of property disposed of by a corporation or partnership, the measure would apply only to property that is capital property.

Penalties for failure to report:

For the sale of a principal residence in 2016 or later tax years, CRA will only allow the principal residence exemption if you report the sale and designation of principal residence in your income tax return. If you forget to make a designation of principal residence in the year of the sale, it is very important to ask the CRA to amend your income tax and benefit return for that year. Under proposed changes, the CRA will be able to accept a late designation in certain circumstances, but a penalty may apply.The penalty is the lesser of the following amounts:

$8,000; or

$100 for each complete month from the original due date to the date your request was made in a form satisfactory to the CRA.

More information on late designations is available on the CRA website under Late, amended, or revoked elections. http://www.cra-arc.gc.ca/gncy/cmplntsdspts/ltmnd/menu-eng.html