Principle Residence Exemptions (PRE) Changes For Personal Income Tax & Rental Portion

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Principle Residence Exemption, Personal Income taxes

In October of 2016, the Federal government introduced changes to the Principle Residence Exemption Tax Rules (PRE). These changes were targeted at individuals who flip houses and avoided paying personal tax by declaring it as a primary residence. These new rules only affect your personal income taxes if you sell your house in 2017 or later and if you own more than one property. If you sell your primary residence and you own no other properties, it still is tax exempt.

The information you need to provide on your personal tax return is:
  • Year you purchased the property
  • Address of the property
  • Sale price.

You no longer need to live in the property for a year or more. Even a few months now will qualify, and the property does not need to be in Canada to qualify. You are only allowed to assign one property as a primary residence and you can decide which property. “Property” does not just include a house. It can also be a condo, cottage, mobile home or even a houseboat.

The main personal tax implication is, if you sell a property that you haven’t designated as your principal residence, you must report half of any capital gains from the sale and pay tax on them.


Taxes On The Sale Of Your Home

A capital gain results from the selling of stock, real estate and shares (common types of capital property). The gain is calculated by taking the original cost of that you paid, minus the selling price, the difference is the gain. You are then exempted at 50% on the gain. For example, the gain is $50,000.00 the 50% exemption means you are taxed on $25,000.00. If by chance you have any capital losses from the current or prior years, you can then claim the loss against the gain and further reduce your taxes. Many individuals are under the impression that the personal gain exemption means you pay no tax. This is not true, you qualify to lower the tax implications.

The information you need to record on your personal taxes for a non-primary residence is the same:
  • Year purchased
  • Address of the property
  • Selling price.
  • Record the original cost or purchase price.

You can claim all the related selling expenses such as realtor commissions and legal fees. This will reduce your gain.

If you rented out part or all your home for a period, this changes the personal tax calculations on the capital gain. When you change the use of a property, according to Canada Revenue Agency, you are considered to have sold the property at its fair market value (FMV) and to have immediately reacquired the property for the same amount. You must report the resulting capital gain or loss (in certain situations) in the year the change of use occurs. For example, you bought your house in 2010 for $200,000.00. In 2015, you decide to rent the basement out. You have now changed the use the property. If the house fair market value in 2015 was $250,000.00 this is the new purchase price and is the amount now to be used in calculating the gain on the sale.

You may be exempt from the change of use if

  • your rental or business use of the property is small in relation to its use as your principal residence;
  • you do not make any structural changes to the property to make it more suitable for rental or business purposes; and
  • you do not deduct any CCA on the part you are using for rental or business purposes.

If you have done any of these, then you have changed the use of your home. The personal tax implications are that you can only claim the Principle Residence exemption on the portion specific to your own personal use. The year you sell the property you must split the selling price between the part you used for your principal residence and the part you used for rental or business purposes and report any capital gain on the part you used for rental or business purposes.

If the property was your principal residence for any year you owned it before you changed its use, you do not have to pay tax on any gain that relates to those years. You only must report the gain on your personal taxes that relate to the years your home was not your principal residence.

The penalty for not recording the sale of Principle Residence on your personal taxes is $100 per month for each month late to a maximum of $8000.00.

Don’t forget that CRA can access real estate sales to see who is buying and selling properties!!


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