CRA Denying Principal Residence Exemption For Pre-Construction Condos

The Canada Revenue Agency (CRA) audit divisions have been targeting home sales in the GTA of what they deem to be a quick resale of a newly purchased pre-construction condos. If you resell within 6 to 8 months of getting title, you could face a reassessment for taxation on the full gain, 50% penalties on the amount reassessed, plus interest. This is the result of the CRA concluding that you bought the condo with a “profit motive” and not for personal usage.

The primary rule for getting the tax-free Principle Residence Exemption (PRE) status is that you MUST take occupancy of the residence. The CRA Interpretation Bulletin on this issue says that PRE status will be conferred if there is personal occupancy for “…a short period of time”. The amount of time is not defined but this use of language in the CRA’s own Interpretation Bulletin will be interpreted by the courts liberally in favour of taxpayers.

While the CRA does not specify a timeframe for the PRE a number of precedent cases that have gone through tax court lead us to believe that the CRA will settle on 4 months of occupancy to the get tax-free status. The CRA will still review resales within 6, 7 or even 8 months of getting title since many taxpayers pay the reassessed amount, penalties and interest out of fear.

If you do not take occupancy and the CRA insists that you repay the New Housing Rebate on HST paid on purchase, usually an amount of $24,000; we recommend that you appeal their decision. The courts have ruled that eligibility for this rebate is based on your personal circumstances at the date of signing the Agreement of Purchase and Sale and that failure to move in does not disqualify you from getting the rebate. Customized upgrades at the time of signing the purchase offer is strong proof that the property is being bought for personal usage and not to make a profit.

The following are some of the reasons that the CRA has been pursuing the PRE status:

  • The CRA has state-of-the-art computer systems designed to review virtually EVERY sale of a residential property in the GTA area.
  • Values of condominiums often rise significantly between the time an Offer of Purchase and Sale is signed and when title passes 4-5 years later.
  • The CRA is tracking sales data on the TREB Multiple Listing Service and using Teranet to check titles, the name(s) on a deed.
  • The CRA requires all developers to provide a list of all those who have signed offers and catches anyone selling an offer – – also known as ‘flipping an offer’ – – by comparing the list of signers of offers to the names on a deed. Anyone flipping an offer will pay FULL taxes on the entire gain and face 50% penalties plus interest if they do not declare the gain.
  • The PRE exempts from taxes any gain on sale if the home is used as your personal home during the entire period of ownership. The PRE requires that you take occupancy of the home. If you do not move in you will not get the tax-free status.
  • You will pay capital gains tax on the sale of a second home not designated as a Principal Residence and on the sale of rental properties owned and rented for AT LEAST 18 MONTHS. 50% of the gain on such “capital dispositions” is exempt from taxation.
  • You will face FULL taxation as ‘regular income’ where you sell/assign an offer before getting title or relist for sale on MLS on the ‘quick sale’ basis as contrived by the CRA – – known as ‘flipping’ a property. If you sell a rental property before 18 months of ownership the CRA will not allow you to treat the sale as a “capital disposition and will tax the full gain as “regular income’.
  • If you do not declare the gain on the sale of a second home, rental property or the profit on ‘flipping’ an offer, the CRA can reassess you for taxes, 50% penalties under s.163(2) of the Income Tax Act (ITA) – – this requires that the taxpayer ”knowingly file a false return”. Failure to declare a sale of a personal residence is an omission and NOT an act of filing a false return. If the tax evasion is sufficiently grave you can be summoned to appear in the Ontario Court of Justice and be prosecuted under s. 239 (1) of the ITA and face up to 200% penalties and 2 years in jail.

What Is The Definition Of Principal Residence For Tax Purposes In Canada?

Under the Income Tax Act, in order for a property to qualify as your principal residence for a particular tax year, four criteria must be satisfied:

  1. The property must be a housing unit;
  2. You must own the property (either alone or jointly with someone else);
  3. You or your spouse or kids must “ordinarily inhabit” the property; and
  4. You must “designate” the property as a principal residence.

Note that a seasonal residence, such as a cottage, cabin, lake house or even ski chalet can be considered to be “ordinarily inhabited in the year” even if you only use it during vacation periods “provided that the main reason for owning the property is not to gain or produce income.”

The statutory definition of “principal residence” limits the amount of land that qualifies for the exemption to half a hectare (one hectare contains 2.47 acres) unless the taxpayer can show that the excess land was necessary for the use and enjoyment of the housing unit.

The statutory definition of “principal residence” limits the amount of land that qualifies for the exemption to half a hectare (one hectare contains 2.47 acres) unless the taxpayer can show that the excess land was necessary for the use and enjoyment of the housing unit.

What Is Principal Residence Exemption In Canada?

One of the most valuable tax breaks Canadians have is the ability to claim the principal residence exemption (PRE) on the sale of a home. The PRE provides homeowners with an exemption from tax on the capital gain realized when you sell the property that you have designated as your principal residence.

Recent changes to Canada Revenue Agency (CRA) requirements now require you to report the sale of your principal residence on your tax return. The designation of your principal residence is reported on Schedule 3 of your return and you must also complete the appropriate sections of Form T2091(IND), Designation of a Property as a Principal Residence by an Individual.

Our Tax Experts Will Provide You With Unparalleled Advice

For real estate investors of all types, our tax experts can be a valuable asset. We can help you figure out your eligibility for a specific tax rebate, and help you make the application in a timely manner. Our experts understand all of the government guidelines, rules and regulations. We streamline the application process for a stress free experience.

Every rebate claim requires supporting paperwork and documents. In fact, any mistakes or oversights might delay a claim or result in a denial of the claim altogether. When you work with our rebate experts, your rebate application is completed by one of our in-house experts. Prior to submission the document undergoes a final review by a second expert. After the documents are submitted we will work, on your behalf, with the appropriate government agency to handle any issues that might arise.

Our in-house tax experts provide a streamlined application process, with minimal stress to the applicant. You can find out more by calling 1-647-281-5399 or by visiting www.my-rebate.ca. One of our experts will be in touch to discuss your tax rebate questions, and to help out with your particular application

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