Changes to the Principal Residence Exemption (Part 2 of 2)

Changes to the Principal Residence Exemption (Part 2 of 2)

In my previous blog, I introduced the Principal Residence Exemption, or PRE. There is a new reporting requirement on the sale of the principle residence. I’ll discuss it briefly here. As always, discuss complex tax issues with a tax accountant. Tax is often the biggest cash disbursement for most years, so proper planning may save you money.

For a long time there has been Principal Residence Exemption. A couple buys a home, designates it as their principle residence, and sell it years later. There are no taxes on capital gains if the PRE is used. Until recently, the use of the PRE did not have to be reported.

Now, the government wants to maintain information on the use of the PRE. When you sell, you have to report what you sold it for, when you bought it, and describe the property. That means there is more reporting to do, and there is a penalty for late filing.

Why is the government doing this now? Capital Gains are a huge tax opportunity. So, the government wants to know when someone uses an exemption from taxes on capital gains. Considering the huge increases in property values in the past few years, it is not surprising that the government wants information on PRE use.

This new requirement also helps the government to recognize those who avoid taxes on capital gains that are exempted by the PRE. If someone doesn’t understand the PRE regulations, they may mistakenly apply the PRE to two residences for many overlapping years.  The new reporting requirement helps the CRA catch this.

The rapid increase in housing value has led to people ‘flipping houses’. They move in, renovate, sell at a profit, and move out. This is a business, and business income is not protected by the PRE. If someone is flipping houses and files a new PRE use every year, this will help the CRA identify them and tax them accordingly.  Taxes on the business income of the ‘flipped’ house would be paid.

In conclusion, the government now wants you to report when you use the Principal Residence Exemption. This will help the government keep tabs on who is and who is not using the exemption properly.