On October 3rd, 2016, the Department of Finance announced “preventative measures for a healthy, competitive and stable housing market” (fin.gc.ca). The message conveyed is that the government is taking action over “concerns of middle class families facing high debt and concerns over the housing affordability, and is actively engaged in monitoring and addressing the overall health and stability of the housing market and financial system in Canada” (fin.gc.ca).
With the lingering fear of the American housing crisis in our rear-view mirror, it is imperative that the Canadian government take preventative action. But, what exactly are the steps that we, as a country, will be taking to ensure stability? Overly simplified, the Department of Finance proposes to:
- Bring consistency to mortgage insurance rules by standardizing eligibility criteria for high- and low-ratio insured mortgages, including a mortgage rate stress test;
- Consult on how to better protect taxpayers by ensuring that the distribution of risk in the housing finance system is balanced; and
- Improve tax fairness by closing loopholes in the capital gains tax exemption on the sale of a principal residence (fin.gc.ca).
The focus of this article will be to highlight the changes to the tax rules, which include:
- Changes to the +1 rule included in the principal residence exemption formula;
- More stringent restrictions for when a trust is eligible to claim the principal residence exemption;
- Changes to reporting of a disposition of a principal residence on an individual’s income tax return; and
- Changes to CRA’s reassessment period for an individual claiming the principal residence exemption.
Changes to the +1 Rule
Previously, any individual claiming the principal residence exemption was allowed to add an additional year to the formula which calculates the amount of the gain that is exempt from tax. The purpose of this additional year is to accommodate individuals in a year that they dispose of, and purchase, a principal residence. The proposed income tax amendment will restrict an individual who was a non-resident of Canada in the year of acquisition from having the ability to add an additional year to the formula. These changes will apply to dispositions made after October 3, 2016.
Revised Rules for Trusts
While current rules already restrict the circumstances when a trust is eligible to claim the principal residence exemption, the proposed legislation will provide additional restrictions which will further limit the situations in which a trust can claim the principal residence exemption. Explanation of the changes is beyond the scope of this article. Instead, we recommend that you consult with your tax professional if you have a trust that holds a property you wish to designate as a principal residence.
Changes to Reporting the Sale of a Principal Residence
CRA’s current administrative policy is that when a capital gain is completely exempt from tax as a result of the principal residence exemption, the disposition is not required to be reported on an individual’s income tax return. Proposed changes state that, starting with the 2016 tax year, individuals will have to report the sale of their principal residence on Schedule 3 of their income tax return. The Schedule 3 form will be amended to include a line for the disposition of a principal residence. Form T2091 will still only be required when the principal residence exemption covers less than 100% of the gain. As a result of the changes, be sure to inform your tax professional if you have disposed of a principal residence in 2016.
Changes to CRA’s Reassessment Period
The current rules generally restrict CRA from reassessing an individual’s income tax return beyond three years from the date on their Notice of Assessment, with exceptions. The proposed changes will allow CRA to reassess an individual who has not reported a disposition of real property for an unlimited period. However, the unlimited reassessment period will be restricted to only the unreported disposition of real property, and not to other unreported income.
Although, these changes are significant and many “rules” seem to be changing within a short period of time, this is not the first time amendments have been made. We would like to encourage others to take the time to understand the new changes and feel free to contact your RLB advisor if you have any questions or concerns.
