Mahdi Al-Toum is a Summer Student at Rosen Kirshen Tax Law. Mahdi is a JD/MBA student at Queen’s Faculty of Law and is nearly finished law school.
James Pendergast is an Associate Lawyer at Rosen Kirshen Tax Law. James is entering his third and final year at the University of Toronto Faculty of Law. Outside of academics, James is a chair of the Faculty of Law’s Health and Wellness Committee, volunteers with the Law in Action Within Schools (LAWS) program and was an Associate Editor with the University of Toronto Law Review. This year, James competed for the University of Toronto at the 2019 Donald G. H. Bowman National Tax Moot.
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New Rules for Principal Residences Sold Within One Year
On April 7th, 2022, the Federal government proposed “anti-flipping” rules to house sales within 12 months. Prior to this, many individuals bought and sold (“flipped”) houses to make a profit and would try to claim the Principal Residence Exemption to eliminate taxes on the sale. These new rules are meant to address the inflating housing market in Canada and reduce speculative house sales for profit over short periods of time.
While our previous blog introduces the new rules, it is possible for them to not apply if the reason for selling the home is due to certain reasons or exceptions. This post will elaborate more on those exceptions and how they allow individuals to claim the Principal Residence Exemption despite having a house sold within 12 months.
The Exceptions to the New Principal Residence Exemption Rules
The underlying theme behind these exceptions is that these events are unexpected and significantly changing to a Taxpayer’s life.
A sale due to (or in expectation of) the death of an individual or someone related to them can be a reason to allow the exemption to apply.
2. Household Addition
A sale because of a new addition to the household can be a reason to allow the exemption. A “new addition” would be a related person joining the taxpayer’s household, or the taxpayer joining a related person’s household. “Related person” has its own definition in the Income Tax Act (section 251). The CRA also references these definitions here.
A sale resulting from the breakdown of a marriage or common-law relationship can be a factor to denying the new rules applying. However, the taxpayer has to have lived separately from their spouse or common-law partner for at least 90 days after the breakdown. Shorter periods of separate living conditions (or none at all) will be under further CRA scrutiny.
4. Personal Safety
A sale because of a threat to the personal safety of a taxpayer or related person can weigh in favour of allowing the exemption. Examples can include the threat of domestic violence, or an unexpected dangerous neighbourhood or neighbour.
5. Disability or Illness
A disposition because of a serious disability or illness to the taxpayer (or a related person) could favour allowing the exemption. This is more convincing if the old home was not equipped with accessibility features, or if installing them would not be feasible. An example could include requiring fewer floors to reduce moving up and down staircases. Further, the CRA will likely request supporting documentation or proof that the old home was no longer suitable because of the illness or disability.
6. Employment Change
A sale because of the taxpayer (or spouse/common-law partner) having to work at a new location – or involuntary employment termination – can be a reason to allow the exemption. If a taxpayer is fired and no longer has income to support their current household, selling the house and moving to a more affordable residence supports this.
For relocation due to a new work location, the new home must be at least 40 kilometres closer to the new work location. In addition, the CRA outlines how moving expenses can also be claimed for these relocations.
If you sell your home because of bankruptcy or insolvency proceedings (ie. because of too much debt that cannot be paid), the new rules may not apply.
8. Involuntary Disposition
A forced disposition, such as through expropriation or destruction of the property due to natural or man-made disasters, could be a reason to allow the exemption.
Although the events listed above can be an exemption to the new rule, the Principal Residence Exemption applying is still decided on a case-by-case basis. If the CRA has contacted or is auditing you about a recent house sale, contact us 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.