Foreign speculators may have been the target of a new rule from Ottawa cracking down on the tax-free capital gains exemption on the sale of a homeowner’s principal residence, but house flippers and cottage owners may also end up feeling its bite.
The new rule, which is already in effect, says you must now report the sale of a principal residence on your tax return.
Previously, while homeowners were obligated to report sales of secondary residences subject to capital gains tax, reporting the sale of a principal residence was not mandatory. That made it more difficult for the Canada Revenue Agency to track the frequency with which people were turning over their primary residences — there are limits to what is allowed — and created some confusion for owners of secondary properties, such as cottages.
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For Canadians dabbling in the real estate market, the CRA’s newfound ability to track transactions could mean trouble, according to Toronto developer Brad Lamb, who thinks a crackdown on tax-free flipping was long overdue.
“Why do we keep track of every cent you make in this country on your tax filing, but not selling your house,” the developer said. “That will prevent locals (from abusing the system). That’s a good idea. Those people who buy a house, renovate it for nine months and sell it, that’s not your residence. That’s called a business and those people should be taxed accordingly. The mom and pop small-time builders have made a living at this.”
While Lamb thinks the changes will lead to more scrutiny on house flippers, he is skeptical that it will have any implications for foreign buyers. “It’s a nothing tax. It’s stupid. Why they even bothered to do it, is mind boggling,” he said.
Another group of Canadians who might increasingly find themselves navigating a more complicated question when it comes to principal residence exemption are cottage owners, or people with secondary properties for personal use. You can only claim the principal residence on one property, but vacation properties have often been ignored in reporting.
“I don’t know that it is always fully disclosed,” says Heather Scott, a sale representative with Re/Max Hallmark Realty Ltd. who is active in the Muskoka region north of Toronto. “You talk to two different accountants and get two different answers (about whether it has to be disclosed).”
Jamie Golombek, managing director of estate and tax planning with Canadian Imperial Bank of Commerce, says that legally you always had to disclose any disposition of property, but there was an administrative policy by that Canada Revenue Agency that you didn’t have to report a gain if it was your principal residence.
“There was a form for this (for recording principal residence sales) and they said, ‘Just keep it,'” said Golombek, about the CRA policy.
Gains on a cottage or secondary property are considered taxable at the 50 per cent capital gains rate unless you deem it your principal residence, something that would leave you with a tax liability on your main home. The rub is that, if you sold a secondary property and reported nothing on your return, the CRA deemed you to have sold your principal residence and used up the exemption — meaning you could have faced a major tax bill on your primary home, which had probably increased far more in value.
“I think people have been double claiming or claiming (the exemption) inappropriately because no one is tracking it,” Golombek said. “There is no real designation (of principal residence) until you sell. The minute you sell, you make a choice: Am I going to report it or not? If you don’t, the CRA deemed you to have made a principal residence exemption, which means when you sell the other property that you hold concurrently, you cannot use the exemption on the second one.”
While that hasn’t changed, the new wrinkle is that if you sold your cottage first and did not report the sale or capital gain, the CRA can now go back and reassess you indefinitely. If you do nothing, which previously meant you were automatically claiming the exemption, the CRA can now say you’ve squandered that exemption and can potentially fine you. (There is an opportunity to refile your returns, saying you made a mistake.)
Golombek says that, in general, the CRA is going to have a rich data base at its fingertips for all of our real estate transactions. “Once they have it, it’s pretty straightforward. If you are constantly selling every year and you are reporting gains, it will be pretty easy,” he says. “Right now, no one is reporting these gains.”
Tony Spagnuolo, a Vancouver-based real estate lawyer, says the CRA is going to need to hire a lot of auditors to catch everybody not reporting. “There are lots of people that will build a house, live in it for a couple of months, claim it’s their principal residence and then sell it. They never get caught.”