Is Principal Residence Capital Gains Exemption Under Threat in Canada?

Are you a Canadian who gets nervous about budget announcements?

Canadians are just starting to think through the ramifications of the latest federal budget announcements. One major issue which was highlighted was the overheated Canadian housing market. For the first time, there was a proposal that put limits on the use of the principal residence capital gains exemption (“PRCGE”).

In the lead-up to the budget, I read a recent article that speculated that in future budgets there would be further limits on the PRCGE. Indeed, it is even suggested there may be a complete elimination. This would be an even more significant change than a Wealth Tax.

At present your primary residence may secure you a comfortable retirement

For Canadian taxpayers, their primary residence is their single largest asset. With recent price explosions it is now an asset with a large amount of unrealised capital appreciation.

As of 2022, the average Canadian household net worth is nearing $1 million of the capital gains from any potential sale. For the Canadian government, the inability to tax principal residence gains, therefore, means millions of lost potential tax revenue.

In upcoming budget proposals, the Canadian government will be looking for ways to make up for the financial deficits that they have experienced over the past few years, largely coming from COVID-19. One way they could potentially propose to help ease this debt is to fully or partially void the PRCGE.

The only reason that the PRCGE has not already been attacked is a fear of voter reaction. However, demographics are changing this calculation. Many younger voters are currently not able to get into the housing market due to the recent extreme rise in housing prices.  They have little sympathy for those that would have to pay taxes on the astronomic price increase of their home. Limiting or eliminating the PRCGE also affects fewer voters on a day-to-day basis. In contrast, raising the HST rate would hit all voters immediately.

What would it mean if the PRCGE was eliminated?

Canadian homeowners could be paying up to 50% (combined federal and provincial rates) on their capital gains from the sale of their primary residences.

For example, let’s say a home was purchased for $100,000 twenty years ago. Today, that home sells for $1.1 million dollars. This results in $1 million in capital gains. With the PRCGE, the homeowner will net $1.1 million for their retirement. If the PRCGE was eliminated this would cut their net proceeds to $600,000. Canadians can find out here what their personal capital gain tax bill may look like.

principal residence capital gains exemption impact
If the principal residence capital gains exemption were eliminated your retirement fund may be hit by a huge tax bill



With principal residence capital gains exemption under threat – is it time to take action?

Skeptics may think that imminent elimination of the principal residence capital gains exemption is unlikely given the inevitable uproar from older voters. I would agree. Nevertheless, even if one puts the odds of this outcome at 25%, prudence would dictate that it is an outcome worth preparing to avoid… especially if a strategy avoids the impact of the elimination of the PRCGE.

In previous blog posts, I describe reacting to potential financial and other threats to your family wealth and well-being in the same way that you would act if living in a wildfire zone. Namely that you would engage in Fire Prevention; acquire Fire Insurance; and map out a Fire Escape Plan in case you perceive the threat to be imminent. Leaving yourself unprepared in a situation like this may lead to detrimental financial repercussions. Acting preemptively, before the fire reaches you, will save your fiscal house from suffering significant damage.

is principal residence capital gains exemption elimination your wildfire?
Prudence dictates that even if a wildfire threat to you and your property was statistically low you would still invest in fire insurance

Now let’s apply this strategy to a potential limitation or loss of the PRCGE.

Step One: Fire Prevention.

In this situation, fire prevention will simply mean selling your primary residence sooner rather than later. Because of the current state of the Canadian housing market, you’ll net a significant sum for retirement. These proceeds can then be applied to renting in Canada. Alternatively, you might institute a Fire Escape Plan and retire abroad to avoid other inevitable Canadian tax increases.

Step Two: Fire Insurance.

Fire Insurance is having a second citizenship or residence which gives an individual the ability to live in countries outside of Canada. Naturalised Canadians most likely already have their original citizenship. Others may have claim to a lineage citizenship. Canada has largely been an immigration destination over the last two centuries. Currently over 70% of Canadians identify with European origins. If the country of your ancestors is within the EU, then possession of that citizenship gives the owner (and their spouse and dependent children) the ability to live in any one of 27 European countries. In many other countries, a residence permit can be acquired through either investment or even proving that you have sufficient financial means to maintain yourself and your family.

Step Three: Fire Escape Plan.

Many Canadians are attracted by the concept of retirement or even living and working in warmer climes. Others are primarily motivated by fears of significant tax increases beyond the elimination of the principal residence capital gains exemption. Some take issue with the current direction of politicians. Just as prudent Canadians recognise that statistically their home will not catch fire, those who consider any of the above possibilities within the remote realm of possibility should consider preparing a Fire Escape Plan.

To escape the Canadian tax system, there are two steps. The first is to properly sever Canadian tax residence. The second is to locate in a jurisdiction that meets the needs and desires of you and your family members. With professional advice, the new jurisdiction can be made tax efficient. Success means not jumping out the Canadian tax pot and into some other country’s fire.

If you are a Canadian who gets nervous around every budget announcement then you may want to explore your Fire Insurance options and potential Fire Escape destinations. Please feel free to contact us.

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