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Jamie Golombek: CRA’s recent crackdown on alleged abuse of the PRE has sparked a barrage of reader interest

The CRA has recently sent educational letters to individuals The CRA recently sent educational letters to individuals “who may have incorrectly applied the PRE,” giving them the opportunity to correct or amend their previous years’ returns if they were found to have incorrectly claimed the PRE. Photo by Gavin Young/Postmedia files

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The Canada Revenue Agency’s recent crackdown on alleged abuses of the Primary Residence Exemption (PRE) has sparked a barrage of interest from readers, with many asking additional questions about various aspects of the exemption.

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To summarize, the CRA recently sent educational letters to individuals “who may have incorrectly applied the PRE”, giving them the opportunity to correct or amend their previous years’ returns if they were found to have the PRE claimed incorrectly. Here’s a sample of your questions (edited for brevity and clarity) and my answers.

Q: We recently sold our house and are planning to buy our daughter/son-in-law’s apartment so they can buy a townhome. At that time, we will inhabit their apartment and live in it as our primary residence. Our plan is to live there for about six months after which our new townhome (currently under construction) will be ready to move in. Do we have to live in the apartment for a whole year before we can resell it without tax consequences? Our accountant told us that if we bought their apartment and it is our main residence, we can sell it whenever we want without any tax problems.

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JG: Your accountant is right that there is currently no minimum amount of time that you must live in a property before designating it as your primary residence. Keep in mind, though, that one of the federal Liberal Party’s platform proposals before the last election was the introduction of an “anti-flipping tax.” Under this proposal, the PRE would not be available for a property sold within 12 months of purchase. To date, no draft legislation has been submitted on this proposal, although information provided ahead of the election indicated it would be in effect for the year 2022. Perhaps next month’s federal budget will have more information on when this will be. implemented.

The Canada Revenue Agency headquarters in Ottawa. The Canada Revenue Agency headquarters in Ottawa. Photo by Errol McGihon/Postmedia

Q: My husband and I own a property in the Laurentians. We bought it as a single sale seven years ago, but it included two lots. The two lots together measure approximately 72,000 square meters. One lot (about 35,000 square feet) has a house, our primary residence where we live full-time, and the other lot (about 37,000 square feet) is empty. Both are lakefront properties and visually one lot, but the vacant lot has its own tax bill and address. We are considering selling the vacant land. Since there is no house on it, are we subject to capital gains tax if we sell the land?

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JG: Since the vacant lot has its own tax bill and legal address and can be sold separately from the lot your house is on, it is unlikely that the sale will qualify for the PRE. Even if both lots were eventually sold together, you’d run into the “half acre rule.” Under the Income Tax Act, the definition of “principal residence” limits the amount of land eligible for the exemption to half an acre (about 54,000 square feet), unless the taxpayer can demonstrate that the excess land was necessary for the use and enjoyment. of the residential unit.

This half-acre rule was the subject of a 2018 tax lawsuit in which a taxpayer purchased four adjacent tracts of land in rural Quebec, in four separate real estate transactions, totaling approximately 4.17 acres. Her housing unit was on the land obtained in the first transaction. The other three pieces of land were eventually merged into a second plot, on which a swimming pool, barn, garage, septic field and sugar shack were built.

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The taxpayer eventually sold 1.47 acres of the property, a forest plot representing 33 percent of the second lot, to the local council for the extension of the municipal aqueduct and claimed the PRE on the sale. The CRA denied the PRE and the case went to court. The judge agreed with the CRA and concluded that the taxpayer could not determine “on a probable basis” that the land sold was necessary for the use and enjoyment of her housing unit as a home.

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Q: What if you own your town home and designate it as your primary residence. You also had a house then. You then realize that you should not have designated your town house, because the house would have generated a much greater increase in value and would provide an enormous added value when sold. You do not intend to sell the house in the near future. Can you amend your tax return to eliminate the townhome designation and pay the taxes, interest, and penalties generated by the townhome disposition?

Owning both a townhome and cottage can also present unique difficulties in claiming the PRE in the event of a divorce or separation. Owning both a townhome and cottage can also present unique difficulties in claiming the PRE in the event of a divorce or separation. Photo by Getty Images/iStockphoto

JG: Tax law gives the CRA the power to allow taxpayers to late or revoke a PRE (after payment of a penalty), but the CRA reserves the right to deny withdrawal if “it is reasonable to conclude that you have filed the retroactive tax request for planning purposes.” That said, you can certainly try it, it is ultimately the discretion of the CRA to allow the withdrawal.

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Owning both a townhome and cottage can also present unique difficulties in claiming the PRE in the event of a divorce or separation. For example, suppose a couple separates and the wife keeps the cottage and the husband keeps the house, but the parties do not specify in their divorce agreement who is entitled to the PRE when the properties are sold in the future. If the wife sells the house five years later and claims the PRE for all the years they owned it, the husband will not be able to use the PRE to protect the profits from the years before the divorce when he finally sells the house, since the wife have already used it.

“Many divorce agreements fail to resolve this potential problem, which results in surprises when properties are sold years later,” said Lorne Wolfson, a family law attorney at Torkin Manes LLP. “The parties should agree on what property should be entitled to the PRE for the pre-divorce years and factor that advantage into settling their family law issues.”

Jamie Golombek, CPA, CA, CFP, CLU, TEP is the General Manager, Tax & Estate Planning at CIBC Private Wealth in Toronto. Jamie.Golombek@cibc.com

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This post Exemption from primary residence: you have questions, we have answers

was original published at “https://financialpost.com/personal-finance/taxes/youve-got-questions-about-the-cras-principal-residence-exemption-weve-got-answers”

Categories: Finance

Author: Frederick Sullivan

Hannah Sullivan: As a seasoned journalist, Hannah's blog provides hard-hitting analysis and in-depth reporting on major crime stories. Her thorough coverage and fearless reporting make her a trusted voice in the field.