The principal residence exemption allows a Canadian taxpayer to shelter the capital gains realized on the sale (or other disposition) of a property that meets the definition of a “principal residence” in the Income Tax Act (Canada).  Over the years the rules related to claiming the exemption have been tightened up.  For example, up until 1982 where two spouses owned different principal residences, each could claim the exemption over their respective property.  This was changed in 1982, such that each family unit can only have one principal residence for a given time period.

Due to an administrative policy of Canada Revenue Agency, when a taxpayer disposed of a principal residence it was not necessary to report the sale (or other disposition) on his/her T1 Income Tax and Benefit Return given s/he did not have to pay tax on the sale. The ability to rely on this policy depended on whether the taxpayer was eligible for the full exemption.  This would be the case if the property was the taxpayer’s principal residence for every year that s/he owned the property.

On October 3, 2016 the Government announced a change to this administration policy. For sales of a principal residence on or after January 1, 2016, a taxpayer will have to report certain information.  In particular, the taxpayer will have to describe the property, as well as disclose the date of acquisition and the proceeds of disposition.  If this information is not provided, the taxpayer will not be able to claim the exemption.   The disposition will be reported on Schedule 3, Capital Gains of the T1 Income Tax and Benefit Return.

The purpose given for this change is “to improve compliance and administration of the tax system”. This language suggests, to the author of today’s blog, that the Government is concerned that the policy has allowed taxpayers to take steps to take advantage of the exemption, in a manner that was not intended by the rules.  Like the Provincial Government in British Columbia which recently took steps to attempt to curtail the foreign ownership of real estate in Vancouver, perhaps the federal Government has become concerned with the relative ease with which a taxpayer has been able to claim the exemption, even where the taxpayer may not, for example, be ordinarily inhabiting the property and therefore not otherwise meet the requirements for the exemption.

Hopefully this tightening up of the administrative policy related to the principal residence exemption is not a harbinger of things to come. For more information on this announcement and the principal residence exemption see https://intelliconnect.ca/public/CCH-News-2016-10-046786_fittracker.pdf