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Very recently, the Canadian government came out with changes to the Income Tax Act, along with some significant changes to our mortgage rules. These rules are being introduced in an effort by the government to stabilize the Canadian housing market, though some are concerned the new housing rules will lead to higher mortgage rates, hurt real estate markets and potentially drive borrowers toward unregulated lenders. Let’s explore some of the new rules:
Principal Residence Designation
“One-plus” Rule: When a person sells a home, some of the gain is exempt. The exemption is calculated as a formula:
(1 + number of years designated) / (number of years owned)
Only one home can be designated a principal residence for a particular year by a family. This is to prevent one spouse from designating the main home and the other from designating the cottage or other vacation property.
The purpose of the “one-plus” portion of the formula is to account for the fact that people will often sell their old home and buy a new one in the same year. Without the “one-plus” rule, on the second house sale, there would be a year that could not be designated. That would cause some gain to be taxable.
The new rule requires that in order to use the one-plus rule on a particular property, the taxpayer must be resident in Canada during the year of acquisition.
Trusts are generally eligible to claim the exemption.
Starting 2017, only certain trusts will be eligible to claim it. But the narrowing of these rules is very limited.
When filing a tax return,
form T2091 is used to report the designation of a principal residence and it is how one claims the exemption. This is not a new form. The penalty for failure to file is $25/day up to $2,500. There is no change to the law in this regard.
the CRA has allowed individuals claiming complete exemptions to forgo this form. At this point the government has said it will require filing of the form, so presumably this administrative concession will be withdrawn (it’s still up on their website as of today).
Normally, the CRA can reassess a taxpayer up to three years after the date the notice of assessment is issued. With the new rule, if a taxpayer fails to report a disposition of real estate (using the T2091 form), the CRA will be allowed to assess at any time. You read that right. ‘At any time,’ means forever. This is a major change – it’s the same thing that applies when there is fraud. I’m opposed to putting people who forget a form, especially in a situation where they thing the gain is non-taxable, in the same position as fraudsters.
Given the fact that there are approximately 525,000 home sales per year in Canada, an increase this significant in reporting is going to require substantial resources on the part of the CRA.
For more information, contact Kevyn Nightingale, CPA, CA, CPA (IL), TEP at 416.596.1711 or
[email protected]p.ca or contact Ryan Hoag, CPA, CGA, at 604-685-8408 or [email protected].
Related Topics:Canada Revenue Agency; Personal Tax
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