Qualification for Principal Residence Status – You Could Be Surprised!

Your principal residence exemption is an income tax benefit that generally provides you an exemption from tax on the capital gain realized when you sell the property that is your principal residence. Generally, the exemption applies for each year the property is designated as your principal residence. It came into effect after 1971, just when the capital gains tax was introduced and is a year-by-year calculation.  One must be a Canadian resident who owns and has lived in the property in that year. Currently you may have one or more properties that might qualify (see details below) so you must designate one property in the year of disposition on your tax return. Failing to do so may result in penalties of up to a total $8,000.00. If you have more than one property and have lived in both, you have a choice of which property you want to designate as a principal residence, however you are only allowed to designate one property during that period. The land area to be included as part of the principal residence cannot exceed 0.5 hectare (50m X 100m) unless the excess land was necessary for the use and enjoyment of the housing unit. The property must be a housing unit, a leasehold interest or capital stock of co-operative housing. The housing unit must be inhabited in the year by you, your spouse or common-law partner, former spouse or common-law partner or your child.

There are several factors that might allow for your claim to be over 0.5 hectare of land. We recommend you get some advice from a professional before you file your return in the year of disposition of your principal residence.

Taxes at the Date of Death

While Canada does not have an “estate tax” there are a few potential taxes that may be incurred at the date of death.

In the year of death, a final T1 return must be prepared and filed by the executor/administrator of the estate that should include all the income that was earned by the deceased up to and including the date of death. Another thing that is included as income is the net capital gain on the deemed disposition of all assets held at the time of death by the deceased (Unless 1. the deceased has a surviving spouse in which case the assets are rolled over at cost, or 2. the principal residence designation applies). In any event the principal residence of the deceased is not taxable at the date of death.

The rule per the Income Tax Act is that all capital property held by the deceased will be treated as disposed of immediately prior to death, thus all capital gains and losses that are not exempt at that time will be realized and included in the final T1 return. For example, if the deceased owned 100 shares of a listed company in a non-registered account that have a cost base of $1,000.00 and a value at the date of death of $3,000.00 then $2,000.00 of capital gain is realized and 50% of that i.e., $1,000.00 will be included in income in the final T1 return (In Canada only 50% of the capital gain is included in income).

For registered accounts, like an RRSP or a RRIF the total value of the account at the date of death will be deemed to be deregistered i.e., it will be deemed to have been cashed out and should be included as income in the final T1 return unless the RRSP or RRIF is left to a surviving spouse, common law partner or a surviving child/grandchild (In some cases).

Navigating estate taxes can be tricky for executors, if you have any questions or require assistance with a deceased taxpayer’s returns, please do not hesitate to give our estate and trust department a call on 604 669 9631 during office hours and on 604 788 1011 after office hours.  

2020 T1 Tax Deadline Day

As we enter April there is something other than April Fools Day and the Easter long weekend that we need to look forward to. Tax deadline day!!! April 30, 2021 needs to be marked in the calendar of every individual taxpayer, whether you were a full-time employee, part time employee, received government benefits or just sat on the couch all year doing nothing. A tax return is absolutely essential. A late filing penalty of 5% plus 1% for every full month you are late in submitting the return (up to a maximum of 12 months) will be applicable and if this is not the first time you have missed the deadline, the penalties are double. Furthermore, arrears interest of 5% compounded daily will also be charged for any unpaid amounts starting May 1, 2021 (this rate can change every 3 months, see prescribed interest rates). Some relief on this interest is provided by CRA if all of the following apply:

1)    Your total 2020 taxable income was less than $75,000.00

2)    You received at least one COVID-19 benefit in 2020

3)    You filed your 2020 income tax return on or before April 30, 2020.

If this applies to you, CRA will not charge any interest on taxes owing until April 30, 2022. This relief only applies to taxes owing for the 2020 tax year.

Home Office Expenses to Claim for 2020 - COVID-19

The 2020 year has brought about a wide range of challenges due to the COVID-19 pandemic and many Canadians were forced to set up shop at home, whether it be in their kitchens, living rooms or bedrooms.

In response to these challenges CRA has provided some relief in the ability to claim expenses related to this situation. Employees who worked from home more than 50% of the time over a period of four consecutive weeks due to COVID-19 in 2020 are now eligible to claim home office expense deduction for 2020. This shorter qualifying period ensures that more employees can claim the deduction.

There is a new temporary flat rate method introduced by CRA that will allow eligible employees to claim a $2 deduction for each day that they worked from home in that period plus any other days they worked from home due to COVID-19 in 2020 up to a maximum of $400. Using this simplified method would not require the employee to have the form T2200 or T2200S completed and signed by their employer.

For employees looking to claim expenses more $400, the detailed method would have to be used. CRA has also simplified the process for this method by introducing form T2200S and form T777S. A special calculator has been designed to specifically assist employees who are eligible for home office expenses.

For those using the detailed method to calculate their home office expenses, CRA has expanded the list of eligible expenses that can be claimed to include home internet access fees. A comprehensive list of all eligible expenses is available online.

For more information on working from home expenses go to Canada.ca/cra-home-workspace-expenses.