Principal Residence Exemption: CRA Project
In early 2022, CRA began to send out education letters in respect of individuals claiming the principal residence exemption (PRE) in the British Columbia region. Often, regional projects such as this are used as pilots for subsequent national projects. As CRA has indicated that they have a larger overall focus on real estate transactions, similar or extended versions of the project may be coming.
The letters advised that the taxpayer or their representative review the return and adjust it if necessary. The letters also stated that an agent would follow up with a phone call to answer any questions.
There appears to be multiple versions of the letters, with multiple triggers. For example, one version noted that it was sent because the taxpayer claimed the PRE for two different properties over two years (2018 and 2019, potentially reviewing whether business income was being generated from flipping activities). Another version was sent because the taxpayer claimed the PRE and also reported a reduction in gross rental revenue (presumably looking at whether the residence was actually a rental property).
ACTION: If such communications are received, a tax advisor should be promptly advised. Letters that appear strictly educational can turn into costly audits. Inappropriate and untimely responses may lead to adverse assessments in addition to penalty and interest charges.