What does Trudeau’s sneaky “principal residence” tax change mean?

Update March 8, 2017:

This post was published on January 13th, 2017 and went viral shortly after. In fact, my last check of the numbers of readers was 100,000+. As a result, it is obvious that some readers pressured the CRA (Canada Revenue Agency) to clarify Item 8 for Reporting the Sale of a Principal Residence. As I just learned today, apparently, that whole section was updated by the CRA on February 28th, 2017.

As a result, it appears that the potential problems discussed in this post no longer applies. However, I have re-read Item 8 and, while I note minor editing, I am still unsure what the change means for self-employed Canadians who use part of their principal residence to earn income. Nevertheless, I will defer to the many tax professionals who commented here that the change is minor. (H/T to Frances and Sarah).

What I also learned since I initially posted this article is not to claim CCA (Capital Cost Allowance) because if you do, when you sell your principal residence, you might owe taxes to CRA. (Sandy Crux)

I wonder how many Canadians know that, as of the taxation year 2016, if they conduct self-employment activities from their principal residence, they may have to report the sale of their principal residence to Revenue Canada.

Justin Trudeau at Winnipeg Convention 1030Yup. PM Justin Trudeau, the PM that continually tells us he is trying to help the middle class, has quietly and sneakily changed that provision as of early October 2016.

Why? Because it appears that anyone who runs a small business out of their home and uses part of their principal residence expenses to write down that self-employment income, is going to get hit big time.

For example, I know people who run day cares out of their home. I also know of firefighters, police officers, teachers and government workers who run landscaping or other similar businesses in the summer. In fact, I know one firefighter in my community who works for 4 twelve-hour days and then is off for 3 or 4 days (or some combination of work/off schedule like that), and sells real estate on his off days. (This sentence added on January 17th at 11am because of a Tweeted question.)

Read this page on the Revenue Canada Agency website. Go to Item # 8. It reads that:

If only a part of your home qualifies as your principal residence and you used the other part to earn or produce income, you may have to split the selling price and the adjusted cost base between the part you used for your principal residence and the part you used for other purposes (for example, rental or business). You can do this by using square metres or the number of rooms, as long as the split is reasonable. Instructions will be provided in the guide T4037, Capital Gains 2016, on how to report the sale of your principal residence in this situation.” (My highlighting.)

In other words, if you have been conducting and claiming self-employment activities at any time you owned your property, are you going to have to pay some tax when you sell it?

Clarifiction Sat. January 17th, 2017:

I would recommend visitors read all the comments, but particularly this one from a qualified accountant with the sign-in name Frances.  He says the new change means that effective 2016, all Canadians, not only the self-employed, will need to let the CRA know that they sold their principal residence (PR) during that year and how much profit they realized. If that does not qualify as sneaky by the CRA and the Trudeau government, I don’t know what does? What it says to me is the same thing it said to Frances — that at some point in the years ahead, profits made in 2016 might conceivably be hit with a tax adjustment.