On Monday, October 3, 2016, the Canadian government announced new rules affecting principal residence exemption and other rules to in part, to curb the runaway housing market prices in Vancouver and GTHA (Greater Toronto/Hamilton area).
Without being too technical, here is a quick summary:
- Sellers will now have to attest that they are Canadian citizens or a minimum 25% witholding tax of the sales price will apply. This will prevent non-residents to buy homes and then sell homes for a profit to avoid paying capital gains tax by claiming it as principal residence.
- Seller will have to complete Form T2091 effective 2016 tax return, i.e for any sale starting January 1, 2016. Big brother now wants to know how many homes you have purchased and sold and may even potentially deems the gains as normal income vs capital gains. In addition, they can even cross-reference against seller's reported income for further analysis and for potential audit.
- Prospective buyers in most cases will now have to qualify for mortgages based on the 5-year posted interest rate or currently 4.64% instead of the mid 2% currently offered. This means a 20% reduction in the price of home they can afford to purchase.
Together, with the recent measure by the British Columbia government to impose a 15% tax on foreigners purchases of property, this will hopefully bring some law and order to the housing markets in Vancouver and the GTHA. Note that housing prices in these areas have almost tripled in the past ten years.