The Senators in the playoffs, temperatures in the twenties, and tulips beginning to bloom…we think it is safe to say that spring has finally and truly arrived in Ottawa (although our friends to the west who have yet to put away their snow shovels may not agree). Another sure sign of spring is the bustling spring real estate market. This brings to mind changes to the principal residence exemption which were announced by the federal government last fall.
Generally speaking, when a capital property such as a home or cottage is sold, an individual is taxed on the increase (or ‘gain’) in the value of the property. The gain is calculated from the date it was acquired by the individual to the date it was sold. However, if the property disposed of qualifies as the individual’s principal residence, he or she can take advantage of the principal residence exemption to reduce or eliminate any taxes owing on the capital gain.
The changes announced last fall exclude the use of the principal residence exemption where the taxpayer was a non-resident of Canada in the year the property was acquired. This may have the effect of deterring some foreign real estate investors but if the property is ordinarily inhabited by the non-resident following the year of purchase, the changes would only affect the first year of ownership.
For taxation years ending after October 2, 2016, a taxpayer will have additional reporting requirements to Canada Revenue Agency (‘CRA’) when they intend to claim the principal residence exemption. Some have predicted that audits will likely increase as a result of this change as it will be easier for CRA to verify when an exemption has been claimed by a taxpayer and for which properties.
The new rules also introduced limits as to when a trust can claim the principal residence exemption. Specifically,
- the trust must be considered an ‘eligible’ trust, one of whose beneficiaries are resident in Canada in the year;
- the specific terms of the trust must give the right to the specified beneficiary to use and enjoy the property as their residence during the taxation year in question; and,
- there are only three types of eligible trusts:
- an alter ego or spousal/common law partner trust (the specified beneficiary must be the settlor or the settlor’s spouse),
- a qualified disability trust, and
- a trust for a minor child which was established by the child’s deceased parent.
Will these changes affect my estate planning?
Yes, the above changes with respect to trusts may affect your future estate planning or an estate plan you already have in place. For example, you may have directed in your Will that your home be set aside upon trust for a ‘spendthrift’ adult child or to protect the home in the event of the child’s marital breakdown. Due to the changes, unless the trust meets the requirements above, the principal residence exemption will not be available. As such, the trust will be required to pay any capital gains owing as a result of the ultimate disposition of the property. If this is the case for you, a review of your estate plan with a qualified professional should be undertaken to ensure these new realities are taken into account.
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