Currently, the capital gains or difference between the purchase price and the sale price of a home in Canada provided the home is the principal resident of the taxpayer is not subject to tax. Over the past several years, it has been proposed multiple times that this exemption be discontinued to prevent house flipping and potentially slow down this white-hot market.

But, what would that mean to homeowners? Currently, most Canadians rely on the increased home equity value that they have accumulated to either put toward a down payment on a larger home where they can raise a family, or fund their retirement.

Despite the fact that some of the political parties deny that they would impose this change, it feels that this potential tax is lurking beneath the surface. Right now, the policy stipulates that a homeowner needs to live in their principal residence for more than a year to be exempt from paying capital gains, but that timeline is not definitive and open to interpretation.

Many Canadians are skeptical, and there is mistrust. It is required that Canadians disclose their home sale price to the Canadian Revenue Agency (CRA) the tax year following the sale, although principal residences are exempt from home equity taxes. So why does CRA need to know?

The Canadian Association of Professional Accountants says that it’s important for Canadians to understand the rules so that they can maximize this exemption. “Properties, including a cottage or summer home, can be designated a primary residence and qualify for the principal residence exemption when sold.” Revenue Canada does not specifically outline how long a homeowner must reside in their place of residence in order for it to qualify as their principal residence and instead use the term “ordinarily inhabited.” So, a Canadian’s principal residence is the home in which they spend the majority of their time within any given year. Years ago, if a married couple owned a house and a recreational property, each could claim one of their homes as their principal residence and hence claim the tax exemption of any capital gains when they sold. Those were the days! It wasn’t until 2016 that the tax-man required that people start to report the sale of their principal residence on their income tax return.

Revenue Canada has become very stringent about analyzing Canadians buying patterns, length of time that they own a domicile and sources of income to determine the intent of the homeowner. The objective is to discourage “real estate flipping,” foreign ownership and “serial builders” (those who build a house, declare it as their primary residence, sell it and then repeat), making tax-free money in the process.

What happens if a homeowner fails to report the sale of their Primary residence? The tax-man could potentially fine that person $8,000 for failing to disclose that the house was sold, as well as deny any capital gains being tax exempt.

For most of our sake, let’s hope that doing away with the tax exemption for any capital gains on a principal residence never comes into play. It’s your home, your sanctuary and should be free of tax obligations should you decide to sell.

SUBMITTED BY:
LINDA MCCLEAN
SALES REPRESENTATIVE, CHESTNUT PARK REAL ESTATE LIMITED BROKERAGE
Serving Southern Georgian Bay

NICOLE ZARRY
SALES REPRESENTATIVE, CHESTNUT PARK REAL ESTATE LIMITED BROKERAGE
Serving Toronto