Most taxpayers know that when you sell an asset which has increased in value, the federal Income Tax Act provides that you will generally be liable for capital gains tax on the net increase in value, unless there is an applicable exemption. One exemption from capital gains tax is for a principal residence. In October of 2016, the federal government introduced draft legislation to amend the rules to restrict the application of the principal residence exemption. The amendments are aimed at stopping non-residents of Canada and real estate developers from unreasonably claiming the exemption. However, the amendments can also affect anyone who currently has or may wish to have a trust which holds a residence for a beneficiary, whether or not they are tax resident in Canada.
The principal residence exemption allows one family unit to designate one property as their principal residence for the purposes of accessing the principal residence exemption, as long as certain conditions are met. The exemption from capital gains tax applies to all years the property is owned plus one additional year to allow for the sale of one principal residence and the purchase of another in the same year. Under existing rules, a home held in a trust can qualify for the exemption.