Recently the Canada Revenue Agency (CRA) changed its administrative rules so that, unlike the past, if you sell your principal residence in 2016 or later years, you must report:
- The sale including the date and price of acquisition, the sale price and date and a description of the property; and
- The fact that the property was a principal residence
on your income tax return filed in 2017 if you want to claim the full principal residence exemption. The exemption means that no tax is paid on a property that is the principal residence of the seller. In the past CRA did not require taxpayers to report the capital gains on the sale of principal residences.
If you don’t claim the exemption then CRA will treat any gain in the value of the property as a taxable capital gain. One half of capital gains are deemed to be income in the year in which the capital gain is realized. The top marginal rate for income taxes in British Columbia is nearly 48% for income in excess of $200,000.
Only Canadian tax residents are eligible for the principal residence exemption. You cannot have your cake and eat it too, claiming not to be a tax resident for purposes of disclosing offshore assets and income but claiming to be a tax resident for purposes of exemption from taxes on the sale of a principal residence.
The purpose behind this change is to stabilize the housing market which was becoming overheated in certain regions, especially Vancouver and Toronto. The government is increasingly concerned that investors have been illegally taking advantage of this loophole.
So for individuals who are not tax residents of Canada, there will be added scrutiny applied to your sale of residential properties in Canada. Moreover, look for all levels of government (municipal, provincial and federal) to adopt more measure to curb speculation in the residential real estate market. Foreign investors, unlike locals, will not be affected by this administrative change. Foreign investors, not being eligible to have principal residences in Canada, are subject to a 25% tax on capital gains earned on the sale of Canadian real estate.
Notwithstanding these shifts in government policy, the consensus of management and realtors at Macdonald Realty is that the markets in Vancouver and most other high end communities in British Columbia will remain strong. Why? Well, global stock markets are overpriced. High quality bonds have a negative real yield. Cash is safe but subject to inflationary pressures. There is no yield with precious metals. Real estate, on the other hand, can provide cash flow while appreciating in value without ever going bankrupt. Canada, with its stable banking system, solid political structure, easy access to the USA, strong economy, safe environment, democratic traditions, liberal immigration policies, first-rate education system, multi-cultural society, resource wealth, and geographical isolation from the world’s trouble spots remains one of the best places in the world to invest.
Written by Peter Scarrow, former immigration lawyer, currently is the Director of Asian Business at Macdonald Real Estate Group.
