Wednesday, October 5, 2016
Canadian Finance Minister Bill Morneau has announced that he will close loopholes surrounding the capital gains tax (CGT) exemption on the sale of a principal residence.
According to the Finance Department, the Government "is committed to tax fairness, and to ensuring that the exemption from capital gains tax on the sale of a principal residence is available only in appropriate cases."
Last month, the Canada Revenue Agency (CRA) announced that it would investigate reports that real estate speculators are manipulating loopholes in the property residence rules to evade taxes. The move followed a report by the Globe and Mail that claimed that "a network of speculators flips homes for a profit and evades taxes by classifying them as principal residences even though they never lived there."
The CGT exemption is intended to be available only to Canadian resident individuals and trusts, and families are only permitted to designate one property as their principal residence for any given year.
Under the changes, an individual who was not resident in Canada in the year they acquired a residence will not be able to claim the exemption for that year. This measure applies to the disposal of properties after October 2, 2016. The aim is to ensure that permanent non-residents are not eligible for the exemption on any part of a gain from the disposal of a residence.
In addition, trusts will be eligible to designate a property as a principal residence for a tax year that begins after 2016 only if additional eligibly criteria are met.
A trust will be required to be – in each year that begins after 2016 for which the designation applies – a spousal or common-law trust, an alter egotrust, a qualifying disability trust, or a trust for the benefit of a minor child of deceased parents. The trust's beneficiary who, or whose family member, occupies the residence for the year will be required to be resident in Canada and to be a family member of the individual who creates the trust. Transitional relief will be provided for affected trusts for property owned at the end of 2016 and disposed of after 2016.
For tax years that end after October 2, 2016, the CRA will require taxpayers to report the disposal of a property for which the principal residence exemption is claimed. The Government has also proposed providing the CRA with new assessment powers in cases where the disposal is not properly reported in a taxpayer's return.