# Principal residence year plus one rule



## Gadjo (Aug 10, 2016)

Hi all,

How does the principal residence rule apply to someone who is no longer resident?

Eg say I bought a house in 2013, left Canada in June 2015, then I came back and sold my house in July 2016 (during this period the house remained unoccupied but with my personal items).

Can I use the year plus one rule to reduce my capital gain in this case ? The rule being 
(Years lived-in plus 1) / (years owned)

Meaning the gain reduction factor is:

(2 years + 1) / 3 = 100%

Having said that, there is no indication from Canada Revenue that I am deemed a non-resident since June 2015, but I'm assuming CRA will catch on eventually.

If they do catch on, can I use this "plus one year" exemption or I will have to pay tax on the gain from June 2015 to July 2016 ?

Although I spent more than 6 months outside Canada, my intention at the time was to return (this changed and I decided to sell my house to severe ties), but I'm worried about the consequences if CRA arbitrarily decides that I'm not a resident anymore...

Thanks


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## AltaRed (Jun 8, 2009)

First of all, it depends on your residency for tax purposes. What happened when you left in June 2015? Did you report on your 2015 Canadian T1 tax return that you had left Canada on a certain date? Did you establish a residence outside of Canada? Were you working with the intent to locate permanently in your new location? Did you break your ties with Canada? What does the tax treaty say for the country you lived in?

All that makes a difference in determining if you are a non-resident of Canada for tax purposes or not.

Selling a house while a non-resident will result in as I understand it, at least temporarily, withholding taxes. I believe there is a form to be completed to recover these taxes. Google "selling real estate for non-residents". Whether they are capital gains or not to be paid remains to be seen.


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## kcowan (Jul 1, 2010)

Gadjo said:


> Having said that, there is no indication from Canada Revenue that I am deemed a non-resident since June 2015, but I'm assuming CRA will catch on eventually.


By now, you should have filed your 2015 income tax. What did you put as your residence on December 31st? There is a process of declaring yourself as a non-resident. I would argue that they still consider you a resident because you own your home here based on the limited information you have provided.


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## mikep00 (Aug 17, 2016)

It is a question of fact whether you severed your ties with Canada. Based on your limited info provided it is highly unlikely you severed your ties.

Therefore, the principal residence rules cover your entire gain as you demonstrated.

Keep in mind that as a Canadian resident you are taxed on your worldwide income, so if you earned any income from June 2015 to July 2016, it must be reported in the correct year on a Canadian tax return.


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## Eclectic12 (Oct 20, 2010)

AltaRed said:


> First of all, it depends on your residency for tax purposes.


+1 ... especially since owning the home is considered a significant residential tie.
http://www.cra-arc.gc.ca/tx/nnrsdnts/cmmn/rsdncy-eng.html

Where one is a Canadian tax resident ... the good side is the personal residence exemption will shield one from having to pay capital gains taxes on the sale. The bad news is that Canada taxes worldwide income so any income made while outside the country has to be reported on one's Canadian tax return.

A tax treaty with the other country might or might not be helpful, not to mention a second tax return might need to be filed. For example, working in the US for something like five months meant filing a Canadian and US tax return, in my case.


What happened when you left in June 2015? Did you report on your 2015 Canadian T1 tax return that you had left Canada on a certain date? Did you establish a residence outside of Canada? Were you working with the intent to locate permanently in your new location? Did you break your ties with Canada? What does the tax treaty say for the country you lived in?

All that makes a difference in determining if you are a non-resident of Canada for tax purposes or not.




AltaRed said:


> ... Selling a house while a non-resident will result in as I understand it, at least temporarily, withholding taxes. I believe there is a form to be completed to recover these taxes ...


I'm not sure why capital gains taxes for selling the house would be waived as a NR as it sounds like Part 1 tax to me.
http://www.cra-arc.gc.ca/tx/nnrsdnts/ndvdls/nnrs-eng.html

This blog seems to agree ...


> Any gain on the disposition of personal property in Canada is subject to taxation, which is levied in two parts: a withholding tax at the time of disposition and then a final calculation of tax as reported on the personal tax return.


http://www.inman.com/2011/06/10/tax-issues-when-buying-canadian-real-estate/

It seems a Canadian NR of the US has to do similar for their property purchases.
http://www.milliondollarjourney.com/canadians-buying-property-in-florida-the-tax-issues.htm


Cheers


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## AltaRed (Jun 8, 2009)

I was referring to the withholding tax that can be recovered. Whether or not there is cap gains is a separate (but related) issue. The point of the withholding is to help ensure non-residents don't skip out on taxes due. If the PR+1 applies to this individual, and I don't know that it does, there would be no cap gains taxes. Sadly, the OP has gone AWOL and/or non-responsive.


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## Eclectic12 (Oct 20, 2010)

Fair enough ... since the OP was concerned about the principal residence exemption, I thought the possibility of CG was missing from the NR scenario.


Cheers


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