The Canada Revenue Agency (CRA) was asked to comment on the availability of the principal residence exemption (PRE) when a previously occupied property is destroyed by fire and a decision is made to sell the property in a later year.
The taxpayer purchased a house in 2010 which was ordinarily inhabited as a principal residence. In 2016, the house was completely destroyed by a fire and the taxpayer decided to move rather than rebuild. It is the taxpayer’s intention to sell the vacant land in 2017.
The term “principal residence” is a defined term in the Income Tax Act (Canada) and provides the conditions which must be met for a property to qualify. The definition is worded in such a way to include the land upon which the housing unit stands and any portion of the adjoining land that can reasonably be regarded as contributing to the use and enjoyment of the housing unit as a residence. However, where the total area of the adjoining land exceeds 1/2 hectare, the excess is considered not to have contributed to the use and enjoyment of the housing unit as a residence unless the taxpayer establishes that it was necessary to such use and enjoyment.
In their view, the CRA would not consider the vacant land (that is, after the fire and before a 2017 sale) to have met the conditions for claiming the PRE. However, with the one-plus rule in the formula used to calculate the PRE, it may be possible for the taxpayer to eliminate any capital gain arising on the sale of the vacant land in 2017.
When I was a child I would get together with kids in the neighborhood and we would play games like racing toy cars. Someone would call out the rules and the games would go for hours to the delight of our parents. On occasion one of the kids would do something that appeared to others as outside the rules which would be greeted with howls of protest “… not fair”. The game would break up and we would go our separate ways only to gather the next day to start a new game but not before going through the rules.
The Minister of Finance on July 18, 2017 introduced draft anti avoidance legislation that would significantly alter accepted practices to eliminate the double and sometime triple tax to occur on the death of an individual who owned shares of a private company on death. One of the practices, the pipeline method, relied on the the adjusted cost base in shares (created on a death) to extract assets from a private company without suffering the terminal tax liability all over again. The draft rules as written have both retroactive and prospective effect such that for deaths that occurred prior to July 18, 2017, the pipeline method is no longer available.
Imagine the uproar if you were an executor of an estate where the plan relied on the pipeline method and the rules were suddenly changed…. I say not fair. At a minimum there should be some sort of grandfathering with a sunset date to complete planning already in play.
If you are concerned with the fairness of Canada’s income tax system, you are encouraged to share your views and ideas about the proposals to address the tax planning strategies by either contacting your federal member of parliament or via email to firstname.lastname@example.org.
Stay tuned for more on this matter.
As we head toward another federal budget to be released on March 22, there is much speculation about a change in the capital gain inclusion rate from 50% to 66.67% or 75%.
We have prepared an outline examining the impact of a change in the inclusion rate and encourage you to consider certain tax planning strategies to lock in the current 50% inclusion rate.
Current Capital Gain Tax
As the rules are currently written, only 50% of a capital gain is subject to tax in Canada. For an Ontario resident, the combined Federal and Ontario tax rate applicable to a high rate taxpayer is 26.8% which compares favourably to salary at 53.5% and non-eligible dividends at 45.3%. History has shown us when the gap between the capital gain and dividend tax rate is this great that a change is in order to narrow the gap.
One way for the federal government to narrow the gap would be to increase the capital gain inclusion rate from 50% to 66.67% or possibly 75%. The rate increase is likely to translate into a tax increase on the capital gain of one-third or one half.
What You Can Do
You can lock in the current 50% inclusion rate by taking action before the 2017 Federal Budget is delivered. If you are not selling capital property in the very near term you could effect a sale to a related person and crystallize the capital gain at the current 50% inclusion rate.
There are a number of strategies available to fit your circumstances. The strategies are tax neutral and will not cause unnecessary tax if the speculation about a capital gain rate change is false.
Your next step is consult a CW Partners LLP advisor to review the impact on you and your business and determine what action should be taken to lock in the current 50% inclusion rate. Should you decide to proceed with one of our strategies, we will provide all implementation instructions to you and your legal counsel; in addition, we will prepare and file all tax elections for a fee to be discussed before any work begins.