The PRE – Principal Residence Exemption is one of the most valuable tax benefits we have, entitling homeowners to tax-free returns on increases in their homes’ value.
That’s why it attracts interest from non-residents. And according to government communications this past October, some of those non-residents are not only using the PRE, but abusing it to the detriment of Canadian tax revenues.
A new reporting regime now requires formal reporting of all principal residence transactions as a condition to claiming the PRE.
Limitation on non-residents
The PRE has always been intended to be available to Canadian-resident individuals. The government had observed that some non-residents had claimed the PRE when buying and selling a property in the same year.
As a result, the rules were changed, making the PRE no longer available for property dispositions by non-residents after October 2, 2016.
Where a trust with foreign connections is used, more stringent eligibility criteria apply, since the beneficiary must be a Canadian resident for all years for which the PRE is claimed and must be a family member of the settlor. Even if a family member of the beneficiary is the occupant, the beneficiary must meet the residency requirement.
Past reporting for PRE claim
In the past if the PRE was claimed on a property that was the taxpayer’s principal residence for every year it was owned, there was absolutely nothing to be reported. Reporting has applied if the property was not the principal residence for every year it was owned.
The partial year and trust ownership situations continue as before, unaffected by the added general reporting obligations discussed below.
Future reporting of PRE
On October 3, 2016, the government announced that any disposition of a principal residence is now reportable by an individual, regardless how many years are intended to be claimed under the PRE. The reporting is retroactive to transactions completed from the beginning of the year, January 1, 2016.
The new rules apply both to actual and deemed dispositions. In addition to death and emigration, deemed disposition includes changes in use, where part or all of a principal residence begins to be rented or is used in a business operation. A change back from rental or business use to principal residence would also be the case. All of these situations are now reportable under the new rules.
The reportable information is the year of acquisition, proceeds of disposition and description of the property. For properties that have been used in part for rental or business purposes, separate adjusted cost bases and selling prices will have to be tracked for the PRE and non-PRE uses.
The Canada Revenue Agency (CRA) will only allow the PRE if the sale and designation of principal residence is included in the taxpayer’s income tax return. It is expected that late-filed designations will be accepted, but that will require an amendment to the income tax return for that year and a penalty may apply.