The Principle Residence Exemption and flipping homes
Principle Until recently, when you sold your principle residence you did not have to declare it on your tax return and you were not at risk of paying income tax on its increase in value from the original purchase price.
As of October 3, 2016, the federal government requires you to report the sale of your principle residence to determine a pattern of whether the principle residence exemption should be disallowed.
According to the Minister of Finance, Bill Morneau, the federal government wants to target “perceived abuses of the PRE” or, in other words, to target individuals that flip homes for profit as a source of taxable income.
And, despite the fact that the federal government established a number of legislative measures and CRA administrative changes (all of which I leave to your accountant to explain), the fact is there remains much uncertainty on who will not qualify for the PRE.
The biggest difficulty for CRA is that making a “profit” (being the growth or increase in equity) has always been a natural aspect of homeownership. We use the increased equity to “upsize” and even to “downsize” and bank the excess. The point is that we have always used our home as a source of advancement and retirement.
The financial environment for homeowners is now uncertain. Homeowners are now faced with the prospect of having to justify why they are entitled to the increased equity from the sale of their home and why they qualify for the principle residence exemption.
How will CRA determine when the growth or equity from the sale of a home constitutes taxable income?
Will someone’s intentions and personal reasons factor into the equation? If so, what personal reasons will qualify? I didn’t like the neighbourhood? The school? The neighbours? Change in employment? Or, I simply changed my mind about the home?
How much profit is too much before it becomes taxable income? $10,000? $100,000.00?
How long must a person or family live in the home before it’s sold? Six months? Six years? And how much renovation is too much? Interior non-structural improvements? A one-room addition? Demolition and complete re-construction?
I find it difficult to imagine regulations that will define all these questions into an objective application for all situations.
As an aside, those that claim the PRE means that they are not entitled to claim or deduct the substantial costs associated with buying or selling a principle residence, like:
- realtor and legal fees;
- land transfer tax;
- title insurance;
- mortgage interest and pre-payment penalties;
- relocation costs;
- repairs and improvements/renovation;
- municipal taxes;
- development costs;
- and more.
And, you are not eligible to claim the H.S.T. rebate when it’s your principle residence.
The fact is that there is an imbalance of power between CRA and taxpayers. I suspect that many taxpayers will be forced to settle and pay tax against some or all of the growth/increased equity generated from the sale of their home just to get CRA off their backs.
It is a murky area that may inhibit one’s right to mobility and investment in one’s own home. Trying to capture a few “perceived abusers” will risk eroding pride of homeownership and cause harm and harassment to a greater number of well-intentioned individuals.
So what if a person makes a living flipping homes? If it is their principle residence, why should they not qualify for the principle residence exemption? I say leave the principle residence exemption alone, subject only to the authenticity of one’s residence.