When you sell your home, the income earned from the sale and any potential capital gains are received tax free thanks to the principal residence exemption. This can mean a substantial amount of income in your pocket.
For example, if you bought your house for $300,000 and then sold it 10 years later for $900,000, you will have earned $600,000 on your investment. Under ordinary tax rules, $300,000 would be a taxable capital gain. The tax payable on this amount could be close to $150,000.
Because of the principal residence exemption, you do not have to claim any portion of the capital gain as income and therefore owe no taxes on it.
Currently, to claim the principal residence exemption, you must meet certain criteria.
According to tax legislation, a principal residence is a house, cottage, condo, apartment in a building or duplex, trailer, mobile home, or houseboat that you own and meets the following requirements.
- It is a:
- housing unit;
- leasehold interest in the housing unit; or
- share of capital in a housing co-operative acquired only to get the right to inhabit the unit.
- The property is owned by you or jointly with someone else.
- You, a spouse, a common-law partner or a child lived in it at some point during the year.
- You designate it as your principal residence.
In addition, the amount of land considered to be part of your principal residence in limited to .5 hectare (5,000 sq. m or 1.24 acres) unless you can demonstrate that you need more land to reasonably enjoy the property (i.e. the minimum lot size imposed by the municipality at the time of purchase is greater than the allotted amount).
However, over the last few years there have been growing concerns about people flipping residential real estate and claiming the principal residence exemption when they are not entitled to it.
As a result, the Federal Government announced changes in the 2022 Budget that affect residential property sales that happen on or after January 1, 2023.
What is the change to the principal residence exemption?
The change will deem any home sold within 365 days of purchasing it a flipped property. This means that any realized gains will be treated as income and be fully taxable. There will be exceptions for sales that take place due to specified life events or circumstances. These circumstances and events include:
- Death of the taxpayer or a related person.
- Household addition where one or more related people join the household through birth or adoption or to receive care, etc.
- The taxpayer is joining the household of a related person for reasons such as caring for an elderly parent.
- There has been a breakdown in marriage or common law relationships and the taxpayer has been living apart and separate from their spouse for 90 days or more since separation.
- A threat to personal safety such as domestic violence.
- Suffering from a serious illness or disability.
- Moving due to a change of employment.
- Insolvency.
- Involuntary disposition due to the expropriation or the destruction of the property.
If the taxpayer sells their home within 365 of buying it due to the above reasons, or in anticipation of these circumstances, then they will most likely be eligible to claim the principle. However, the onus is on the taxpayer to prove that one or more of these circumstances apply.
Because of the broadness of these circumstances, it could be concerning how these changes will be effectively administered to target those intending to make a quick profit without inadvertently affecting families and individuals who rightfully qualify for the exemption.
The good news is the government will be carrying out a consultation to help address any potential issues before the new year. This means, however, that there could be further changes.
For more information on these proposed changes and how they could affect you, please contact us today.
