FIRST TIME HOME BUYER’S SEGMENT
The approaching of tax time makes us feel uneasy with so much information we don’t’ know as a regular citizen including but not limited to how to optimize our savings through taxes in a given year. As a matter of fact, there are frequent changes in the laws, and we must be aware of those whether they are for better or for worse. In any case, transparency is the key word in tax matters.
In 2016 the government of Canada introduced tax changes that impacted every home owner and taxpayer in the country. Such changes aimed to close current tax loopholes applied to real estate earnings instead of focusing on specific home buyers. Overall the new rules tightened the requirements for claiming the capital gain exemption on principal residence. But what is considered principal residence and how capital gains work in practical terms?
Ø Canada Revenue Agency states that any residential property owned and occupied by a person or its family at any time each year could be designated as a principal residence. Whether it’s a detached home, a townhome, a condo, a cottage, a mobile home, a trailer or even a live-aboard boat, the property can be designated as a principal residence.
Ø The designation is significant as a financial planning tool since CRA allows to shelter profits earned on the sale of a principal residence from taxes owed.
Ø As a rule, all properties are subject to capital gains tax when they increase in value and the appreciation in value of an asset is subject to tax which is known as capital gains tax.
Ø From the investor’s perspective the capital gain tax requires that the person pays tax on half of the profit earned.
Ø If the property being sold isn’t an investment property, but instead the person’s principal residence, CRA provides full exemption from all capital gains tax incurred which is great!
Ø There are no changes to the principal residence exemption per se and any profit earned on the sale of a home with such status is still sheltered from tax.
Ø However, starting in the 2016 tax year everyone is required to report basic information such as date of acquisition, date of sale, proceeds of disposition as well as a description of the property on the income tax return in order to qualify for the principal residence exemption.
Ø Even though there is no immediate penalty for falling to report the sale of a home, if CRA audits and finds out the sale the person can be potentially subject to interest on taxes owed, as well as penalties.
Ø While most analysts understood the federal government would target foreign buyers with the new rules, the obvious targets were in fact those who sell properties that may not qualify as principal residence such as “quick flips”, a house that was not occupied in a given year by the seller or serial builders who build, then occupy a house before selling it.
Ø Lesson learned from this segment:
For most Canadian residents the new requirement to report the sale of a principal residence is a compliance exercise. In case the sale is not reported, Canada Revenue Agency has the power to reassess the tax return in regard to the sale at any time and there will be a penalty for those who file their principal residence designations late. Also, if you are in the business of flipping properties for a profit, make sure to do proper disclosures and reports to CRA diligently!