The Principal Residence Exemption and Changes of Use
Canada’s real estate industry is constantly fluctuating and transforming in a variety of ways. Among these transformations, are the duties of the Canada Revenue Agency (CRA) when dealing with taxpayers and tax implications that often arise when buying and selling homes. For example, the role of the CRA in the purchase and sale of residential properties became more involved in 2016 when the Department of Finance made it obligatory to report all sales of real estate to the CRA, whether taxable or not. Before 2016, it was not necessary for Canadians to report the sale of their homes, so long as they elected for a principal residence exemption on the property for the duration of their ownership.
What is the Principal Residence Exemption?
The Principal Residence Exemption can be described as a taxpayer selling their personal home, and no taxes are owing on the sale of that home.
When selling your personal or family home, the Income Tax Act (ITA) allows you to designate the home as your principal residence with the CRA. Once the home is officially designated as your principal residence, you can then elect to have a portion of the monetary gains from the sale of the property, be exempt from tax. This is done by completing a specific form along with your tax return in the year that the home was sold.
What is a Change of Use?
A change of use is defined under subsection 45(1) of the ITA when the use of a property changes from personal to income-producing purposes or vice versa. For example, if the property was initially being used for personal enjoyment but is later rented out for reasons related to business and profit, subsection 45(1) would come into effect. Under this provision, the individual is deemed to have disposed of their property for tax purposes, and it no longer qualifies for the principal residence exemption.
Can I Stop a Change of Use?
Short answer: yes.
You may file an election under subsection 45(2) of the ITA. Under this provision, the individual will no longer be deemed to have disposed of their property and engaged in a change-in-use of the property. A valuable function of the 45(2) election is that the individual can claim a principal residence exemption on the property in question for an additional 4 years, while continuing to use it to earn income. This aspect of the provision can be particularly financially beneficial to homeowners, especially with the soaring property and housing costs in major cities in Canada.
You may also file an election under subsection 45(3) of the ITA. This provision will also stop the change of use from occurring, and has similar benefits to the 45(2) election.
Are there Deadlines for Stopping a Change of Use?
Short answer: yes.
If these deadlines are missed, you are not out of luck. There are ways of having late elections accepted, however there are typically penalties for ensuring the CRAs agreement.
If you have questions about the Principal Residence Exemption, changes of use, or electing out of those changes of use please give us a call today. We are here to help!
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.