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March 7, 2019 | Saving PR

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

Paul lost it all in a divorce. But then he saw Brianna. Engaged again, and about to create a blended family. With a love nest outside Kelowna.

You bought it with her, I asked?

“No, Paul said. Bought the house myself. But I put her on title because we have a trusting relationship.”

Let’s recap, I hissed diplomatically. Your marriage failed. She cleaned you out. You live with a woman you haven’t yet married. It might not take. And you just gave her half of the only thing you possess, with the mortgage in your name only. Are you a slow learner?

Fortunately it was a phone call. So he couldn’t hit me. But the little episode reminded me that in a country where homeownership is a cult and most beavers stuff their net worth into real estate, you need to know how to protect it. Yes, being careful about title is part of that. Ensuring you avoid a tax trap is equally yuge.

It’s been three years since Big Brother got involved in tracking your residential real estate. Back in 2016 the reason given was to monitor foreign ownership. But the real goal was to establish over time a registry of Canadian residential real estate, thus giving the CRA a powerful tool to tax non-residential use.

So, did you sell your house in 2018? Then you must report the details on your tax return next month in order to claim the Principal Residence Exemption. Or did you rent your basement to some pasty Millennial last year? Put in a kitchen, or create a separate entrance? If so, there could be tax consequences. And Ottawa will be ready to Hoover up its share.

Yes, you’re still allowed to buy a house, live in it and sell for a profit which is free from any tax. But in order to do so, Schedule 3 on the tax return now needs completing, plus Form T2091 (“Designation of a Property as a Principal Residence by an Individual”). If you neglect this, a friendly auditor and maybe a penalty could be in your future.

By the way, a PR can be a house, condo, cottage, yurt, trailer or houseboat, or a share in a co-op. If the place is rural, you get only a little over 2 acres as part of the exemption. The rest of the spread is taxable. And you don’t need to live in this real estate full-time for it to be a PR. A month or two is fine. So in any one year you can claim your cottage (for example) as a principal residence and sell with no tax on the gain.

An important wrinkle is CRA will not be generous when it comes to properties that have been bought, lived in and sold for a gain within a short period of time. A year. Maybe two. It’s completely arbitrary and subjective. So if you acquired a condo from a developer, for example, stayed there a while and dumped it for a profit you can expect to be taxed on their windfall – at your marginal rate. Painful. Also verboten these days is living through a reno, selling at higher market value, then trying to claim PR status. Won’t work.

Now, an important consideration is the thing in the basement. Renting out a portion of your home can (as explained here previously – but it bears repeating) affect the PR status of your property. If you live in only a part of the house, renting the rest, you’ll be entitled to a partial (not full) exemption from capital gains tax. When you sell, the value of the rented part goes on your tax return.

The rules allow somone to move out for a period (generally four years), rent the home, then move back and still claim PR exemption. But the real problem can occur when there’s a ‘change-in-use’ – going from family residential to income-producing – that could trigger big tax since the CRA considers the property sold then repurchased at market value.

That change might include remodelling the home to create a rental suite. But this can be avoided if three conditions are met: (a) the suite is clearly secondary to the main use of the property (so you can’t move into the basement and lease the top two floors), (b) you do no structural work, and (c) no depreciate is claimed. Incidentally, that structural work might be as minor as throwing up a new wall, or opening a doorway.

Of course, this is separate from tax on rental income, whether that’s from a basement suite with an annual lease or a bedroom that you Airbnb nightly. Not declaring that income is tax evasion, which is illegal and you can fry for it. Also, by reporting this money a hunk of expenses can be written off, from a portion of the mortgage interest to Netflix and those kinky bathroom dog candles. Naturally when this rental income is recorded by the CRA, it’s attached to a taxpayer and now a principal residence address. So, yes, nothing goes undetected over time, and you can see why the change was made.

As for Paul… If they eventually split, she can walk with half the equity while he may get 100% of the debt. Isn’t love grand?

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March 7th, 2019

Posted In: The Greater Fool

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