If you’re buying, selling or renovating a home this year, there are two real estate tax changes you should know about: a new anti-flipping tax and the multigenerational home renovation tax credit. Julie Seberras, Senior Manager of Wealth Planning Support with TD Wealth, joins Kim Parlee to dig into the details and why they may matter to you.
If you are a homeowner, or a prospective homeowner, or a real estate investor, listen up. There are a couple of new real estate rules now in effect that you should be aware of, the new anti-flipping rules and the new multi-generational home renovation tax credit. With more on that and how it could affect you is Julie Seberras, senior manager of wealth planning support with TD Wealth. It just rolls off the tongue, doesn't it?
JULIE SEBERRAS: It's a mouthful.
Multigenerational home renovation tax credit. OK, we'll get to that one in a second, but let's talk about the new anti-flipping rule. And this was put in place because, again, with real estate prices rising in Canada, the government is trying to find ways to tamp things down a little bit. What is it?
JULIE SEBERRAS: So this particular rule was really designed to address three key things, one of those being improper use of the principal residence exemption. So the principal residence exemption is where individuals sell their principal residence and get to eliminate the capital gains associated with it.
KIM PARLEE: Good thing.
Exactly, and we want to keep that in place. The second piece being the classification of capital gains when it really should be business income, and those have different tax treatments.
And so, where it is capital gains, the taxpayer is paying less in the way of taxes. And, third, as we mentioned, just cooling that housing market. And so, by putting this rule in place and the associated definition, CRA now has a little bit more to work with in defining what is the property flipping, and then without the need to prove intent, which is what they were doing previously when going after people who they felt were misusing the capital gains or the principal residence exemption.
And so now the definition would be a property that is held, a residential property, for less than 365 consecutive days prior to its disposition, and where this applies, it's going to be considered to be business income, starting January 1, 2023. So what that means to the taxpayer is that business income is 100% taxable, capital gains are 50% taxable, and where the principal residence exemption applies, the capital gains will be eliminated, and so, really, the end result for the taxpayer is going to be less in the way of after-tax profits in their pocket, where it is business income.
I'm going to say this back to you. So if I buy a house, and I completely gut it, renovate it, but I live there full time, if I buy it and sell it within, say, 365 days, I will be taxed fully as business income?
It's considered to be flipping at that point.
Yeah, so that's the difference, I think, for a lot of people, and it's an interesting rule. Any exemptions?
Yeah, I mean, obviously, there are situations where somebody would be selling their property in under 12 months that's not considered flipping, and, really, they're not intending to earn a profit. And so CRA has defined some of these things, and you're going to find things such as death or disability of the taxpayer or related person, breakdown of marriage, an addition to somebody to the household, such as a birth, adoption, or a relative moving in. You're going to have things that impact your employment, such as job relocation or job loss, insolvency, and as well as even the destruction of a home where we could see as it relates to a natural disaster, or even a man-made situation. And so there are exceptions to that rule, because it is reasonable to expect that somebody would be selling their residential property in under 12 months in these situations.
It's nice to see a little sympathy there. I can't imagine, if were going through a divorce, they say, oh, by the way, you also have a tax because of that, so that'd be hard. OK, so that's an important one for, I think, Canadians to understand. There's another one that's come out, which is the new multigenerational home renovation tax credit. What is it meant for, and what is the value of it, I guess, to people?
And also part of the 2022 federal budget targeting home affordability, and also in recognition of the aging population. And so this is a tax credit where you'd be eligible for a 15% credit on eligible expenses, up to a maximum of $50,000. So if you do indeed have $50,000 or more of eligible expenses, 15% of that is going to be $7,500. If you have less than $50,000 of eligible expenses, it's going to be 15% of your eligible expenses.
Now, these eligible expenses are really for the renovation or construction of a self-contained unit that a family member would be moving into, and so it does need to sort of fit that definition. There also are some rules around who the family member is and the age of them. So we are looking at family members that are at least age 65 or disabled, and the family members included in this do extend beyond just immediate family, so it does go to grandparents, grandchild, aunts, uncles, nieces, and nephews. And the other criteria that must be met is that dwelling must be inhabited within 12 months, or reasonably expected to be inhabited within 12 months.
OK, interesting. What constitutes, or what are they saying is a secondary suite? You said it has to be self-contained, right?
Self-contained, exactly. So this can take various forms. This can be an addition to the existing house. This can be the construction of a self-contained unit on the property. It can also just be alterations to the existing home, without changing the size or the configuration of it. But there are a few pieces that must hold true, and so it does need to have a separate entrance. It needs to have its own kitchen. It needs to have its own bathroom and its own sleeping area.
OK, I want to keep going through some of this. What if, you know, you're doing a renovation, and good luck to people who are trying to find contractors to help with this stuff too, right now, and it takes longer than a year to do? What happens then?
Yeah, so the key date here is going to be the date of completion. And so this rule has come into effect January 1, 2023, and so it really does need to be services that were carried out within the taxation year of 2023 or subsequent years, or goods or services that were purchased in 2023 and after, and once your renovation is complete, the project is subject to an inspection. Once that inspection is complete, that is your date of completion, and when that date of completion is established, that is now the taxation year in which you will be claiming the credit.
Anything to keep in mind in terms of the actual claiming of the credit?
Well, Kim, you know we always need to keep good records when it comes to taxation. So these eligible expenses, they need to be supported with receipts, so keep good records. CRA can always come and request more information, so you want that documentation retained, as well as understand what expenses are eligible. So expenses such as materials, labor, equipment rental, these are eligible expenses. However, expenses such as appliances or furniture for this dwelling are not eligible. So you want to ensure that you are clear on what you are claiming and what cannot be claimed, and, of course, we always want individuals working with the appropriate tax professional to guide them through these new tax credits and rules.
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