2022 Tax Law Changes that Affect Homeowners in 2022 and 2023
With tax season officially upon us, now is a good time to look at federal changes to tax law that may affect homeowners, prospective buyers, developers and other stakeholders in the real estate and construction space. The focus of much of the rule changes relate to making home ownership more affordable.
First, the Underused Housing Tax (UHT) may apply to real property owned by you at December 31, 2022. Different ownership arrangements through trusts, partnerships or corporations may create a filing requirement even where no non-resident persons are involved. The penalty for failing to file on time are quite significant so if you are uncertain you should discuss with us. The returns are generally due by April 30 of the following year (for 2022 returns interest and penalties will be waived as long as they are filed by October 31, 2023). In case you missed it, you can read our initial write-up about The Underused Housing Tax (UHT) – What You Need to Know.
The next change concerns the first-time Home Buyers’ Tax Credit (HBTC). The budget proposals that received royal assent in December 2022 included an increase of the HBTC for “first-time homebuyers” from $5,000 to $10,000 increasing the tax credit from $750 to $1,500 (based on 15% of the amount).
The HBTC applies to homes purchased after January 1, 2022, that are intended to be the principal residence of the homebuyer or a related person with a disability where the homebuyer (or the homebuyer’s spouse or common law partner) did not own another home in the year of acquisition or any of the previous four years.
The Home Accessibility Tax Credit (HATC) was increased to allow for a maximum tax credit of $3,000 by increasing the annual expense limit to $20,000 (previously a maximum tax credit of $1,500 based on an annual expense limit of $10,000).
The HATC applies to specific renovations or alterations that expand access, minimize risk or boost the individual’s ability to be mobile and function in their primary residence.
As of January 1, 2023, there is a new Multigenerational Home Renovation Tax Credit in effect. This is applicable to the cost of constructing a secondary unit to a family’s primary residence, if that new unit will be occupied by an immediate or extended family member who is either disabled or at least 65 years of age before the renovation year.
The credit is 15% of eligible expenditures to a maximum cost of $50,000 (credit of $7,500). Expenses could include labour costs, raw materials, equipment rentals and the cost of obtaining permits. Items such as furniture, household appliances and landscaping are not eligible for the credit.
The last federal change to be aware of are new “anti-flipping” rules. The changes legislate the government’s position that purchasing real estate with the intention of reselling the property in a short period of time to realize a profit is considered fully taxable business income.
The new rule clarifies what would be considered “flipped property” and affirms the income tax treatment as business income rather than capital gains. Under the new definition, if a taxpayer sells a property after possessing it for less than 365 days the property will be considered “flipped property” and will not be eligible for the 50% capital gains inclusion rate or the principal residence exemption. This new rule also comes into effect as of January 1, 2023.
The property may not be considered “flipped property” where a sales is made within the 365 day period and the disposition could reasonably be considered to have occurred due to circumstances such as death, additions to the family (such as adoption, birth of a child, or having a family member join the household), separation, personal safety, disability or illness, employment change, insolvency or the destruction or expropriation of the property.
The rules do not change the CRA’s historical fact-based approach on whether property would be considered held on account of capital or income and therefore consideration of the treatment may still need to be made for those properties held over 365 days.
On the provincial level, the BC government has enacted a law implementing a “homebuyer protection period” or “homebuyer recission period” that became effective January 3, 2023, which creates a mandatory three-business-day period that will give buyers “more time to secure financing or arrange home inspections” before an agreement to purchase a property is finalized.
The law was designed based on the findings in the B.C. Financial Services Authority’s (BCFSA) report on poor consumer protection in the real estate market. According to the BC government, “[t]he extra time will help buyers fully consider whether a purchase is right for them under any market conditions, including in the face of rising interest rates and any high-pressure sales.”
A cancellation fee applies “to help ensure that all parties are taking the transaction seriously.” To cancel the contract the purchaser must pay 0.25% of the purchase price, which works out to a $250 penalty for every $100,000 of the value. Thus, if a buyer decides during the protection period to cancel the purchase of a $1 million purchase, they will have to pay the seller a cancellation fee of $2,500.
While similar provisions exist around the world, BC is the first province in Canada to enact this protection period. The new law is applicable on most residential real estate sales (including private sales). Exceptions to the rules include leasehold properties or real estate on leased land; real property sold at an auction; and real property sold under a court order or the supervision of a court. The rules do not apply to certain other properties that may not be affixed to land or are attached to certain leasing arrangement including manufactured homes on leased pads, other dwellings based on leased land and float homes.
The Real Estate Development and Marketing Act of 2004 already mandates “cooling-off periods” for pre-sales of multi-unit development properties, such as condominiums; any transaction under this category are exempt from this new recission regulation.
Please reach out to a Smythe expert to ensure that you are able to capitalize on all the property-related tax credits and deductions made available to you by both the federal and provincial governments or if you have questions about the UHT, the anti-flipping tax or other matters discussed above.