The Principal Residence Exemption is Canada’s most lucrative tax break. When a taxpayer sells his or her personal residence, providing the conditions are met, the gain from the sale is non-taxable. This provides a very large incentive for taxpayers to claim the exemption, even if they do not qualify.
For the past eight to ten years, taxpayers have been purchasing pre-construction condominiums for the express purpose of selling the condos once the building has been completed. Taxpayers will typically move into the condo in order to claim the principal residence exemption on the sale so that they are not subject to tax on the profits.
The Canada Revenue Agency (“CRA”) has noticed this trend and since 2010, has been auditing taxpayers looking for those cheating the system. At times the CRA acknowledges that the taxpayer actually moved into the condo, but will claim that the taxpayer is in the business of buying and selling condos. When CRA makes this claim, taxpayers are no longer eligible for the principal residence exemption, and all of the profits are taxable as business income. It then becomes a fight for taxpayers who would rather have the profits taxed as capital gains, rather than business income.
British Columbia (Vancouver)
The real estate market in British Columbia, mainly Vancouver, was on fire between 2010 and 2016. Homes increased in value roughly 5-10% per month. Because of this, taxpayers were incentivized to go out and buy and sell multiple homes, while claiming the principal residence exemption on each sale. This slowed down in 2016 with the introduction of the 15% foreign ownership tax. However, many homes were bought and sold with no taxes being paid on the profits.
The CRA noticed this trend, and will, beginning in 2017, audit tens of thousands of these sales looking for those who either do not qualify for the exemption because they did not actually live in the property, or for those the CRA will claim are running a business.
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.