Did you know? In 2020, 70% of homes sold in Canada were eligible for the Principal Residence Exemption, saving homeowners an estimated $3.1 billion in taxes. On the other hand, 2.5 million Canadian taxpayers were in awe, indicating the widespread utilization of PRE.
Now, as Chartered Professional Accountants in Calgary, we understand the importance of maximizing tax savings for our clients. One powerful tool in our arsenal is the Principal Residence Exemption (PRE), a significant tax benefit available to homeowners in Canada.
In this blog post, we’ll provide you with a comprehensive guide on how to make the most of the PRE and ensure you’re well-equipped to navigate the complexities of claiming this exemption.
Understanding the Principal Residence Exemption (PRE)
The PRE is a tax benefit the Canadian government provides to individuals who sell their primary residence. This exemption allows homeowners to exclude the capital gain realized from the sale of their primary living from their taxable income, effectively reducing their overall tax liability.As CPAs, we aim to help you leverage this exemption. In fact, in the past years, the average tax savings achieved through the PRE in Calgary was approximately $15,000 per qualifying homeowner. Isn’t that amazing?
To qualify for the PRE, there are several critical criteria you need to meet:
- Ownership: You or your spouse must own the property.
- Usage: The property must have been used as your primary residence during the years you’re claiming the exemption. Property primarily used to generate income is considered inventory, and does not meet the requirements for PRE.
- Location: The property doesn’t have to be in Canada, it could be outside of Canada, such as a US vacation home.
- Designation: Only one property per year can be designated as a principal residence, per family (includes spouse or common law and children under 18 years).
Benefits of the PRE
As one of the leading Chartered Accountant Professionals in Calgary, we often find that our clients underestimate the potential benefits of the PRE. By properly utilizing this exemption, you can:
- Significantly Reduce Taxes:
The capital gain from selling your principal residence is tax-free, leading to substantial tax savings.
- Preserve Wealth:
Retaining your hard-earned money allows you to invest it back into your financial goals, whether retirement, education, or other investments.
- Estate Planning:
Utilizing the PRE effectively can also benefit your heirs by preserving the property’s value without burdening them with unnecessary taxes.
Recent studies have shown that proper utilization of the PRE can accelerate retirement savings by up to 15% due to reduced tax liabilities. Additionally, homeowners aged 65 and older benefited significantly from the Principal Residence Exemption, with approximately 80% of them using the exemption to reduce their taxable capital gains.
While the PRE is a valuable tax-saving opportunity, it does come with complexities that require careful attention. Here’s where our expertise as Chartered Professional Accountants in Calgary comes into play:
- Change in Use:
There are tax implications if you transform your primary residence into a rental property or change its use. We can help you navigate the rules and minimize potential tax exposure.
- Reporting the Sale:
Even if your entire gain is exempt, you must report the sale on schedule 3 of your tax return. Our role as CPAs is to ensure accurate reporting, avoiding future issues with the Canada Revenue Agency (CRA).
- Plus One Rule:
Understanding the “plus one” rule can provide you with an extra year of exemption if you’re not utilizing the property as your primary residence just before the sale.
- Restriction on land size:
Property in excess of ½ hectare will generally not qualify under PRE, unless, excess land is required for the use and the enjoyment of the property.
Working with Your CPA
To make the most of the PRE, it’s crucial to work closely with your CPA. As well-known Chartered Professional Accountants in Calgary, here’s how we can assist you:
- Accurate Documentation:
We’ll guide you in maintaining meticulous records related to the property, ensuring you have the necessary evidence in case of a CRA audit.
- Form T2091(IND):
Our expertise will help you complete Form T2091 (IND), which designates your property as a principal residence for tax purposes.
- Foreign Property Reporting:
If you own foreign property, we’ll ensure you correctly report it on Form T1135, keeping you compliant with CRA regulations.
As your trusted Chartered Professional Accountant in Calgary, we’re here to help you maximize the Principal Residence Exemption. By understanding the eligibility criteria, leveraging the benefits, and navigating the complexities with our expert guidance, you can secure substantial tax savings and enhance your overall financial well-being. Don’t miss out on this valuable opportunity – let’s work together to maximize your tax efficiency and achieve your financial goals. Contact us today to get started on your journey toward a successful claim of the Principal Residence Exemption.