With all of the recent speculation on the possible creation of a real estate bubble with prices in select areas of the country, namely Toronto and Vancouver to be exact, rising higher and higher the pressure on Finance Minister Bill Morneau to try and bring some stability to the market in order to prevent a bursting of that bubble.
Vancouver decided to try and curb speculation by bringing in a 15% surcharge for any foreign buyers in an attempt to cool the purchasing of homes in Vancouver for purely speculative reasons. The result of this was to force the buyers from outside the country to seek a different location for their purchasers and it would seem that Toronto was the beneficiary of that decision as the rate of house sales continued and in some instances grew even faster than predictions expected.
To try and counter some of this speculation and to do so without targeting individual buyers whether foreign or domestic Finance Minister Bill Morneau recently introduced measures to close loopholes that were currently on our books that allowed people to avoid paying capital gains on homes that were in reality not principal residences that the individuals actually lived in for a long period but were in fact purchased for speculative or short term investment reasons.
The first thing to understand is exactly what a principal residence is under the definition of the law. A principal residence is defined as a dwelling that you own and have LIVED in at some point in the current tax year. Whether a detached house, semi-detached, town-house or condo or even a motor home or houseboat, if you own it and have lived in it can be considered a principal residence for purposes of tax.
If you choose to buy and then sell a property as an investment you are subjected to what are known as capital gains tax. The rate you would pay would be contingent on the profit you made on the selling of the property. If you sold the property for an $80,000 profit under the current tax rules you would pay the marginal tax rate under your income bracket on only half the profits, in this case $40,000. That is the taxable capital gain.
If however you lived in the home and declared it your principal residence you would be exempt from that capital gains tax all together.
This is the area of concern from the standpoint of the Finance Minister. Who is using their properties as principal residences and who is merely buying and selling in order to turn a quick profit and by doing so raising the prices to heights never before seen in the history of real estate in Canada.
The new rules now demand that all Canadians who have sold a house in the tax year have to declare the sale and the amount of profit that they made on their tax return. The information would include when they purchased and when they sold as well as the profit made in order to fully understand if the unit was in fact an investment or a principal residence in order to prevent individuals from avoiding paying taxes on investments.
There is still a long way to go but at least we are seeing a start in trying to get a handle on the ever rising prices of real estate in Canada and to stop the bubble from getting bigger or popping.
