"Ordinarily Inhabited"... Principal Residence Exemption Abuse?

Blog by Arnold Shuchat | August 30th, 2016

Families need homes. Investors on the other hand often like some kind of house that sits on larger land. 
Families anchor themselves in neighbourhoods to their liking to bring up children and the space in a home is of prime importance to them. Investors prefer to make money.

With these assumptions in mind, I examined the data in one Richmond neighbourhood from 2014 to date for every listing that is active right now.  That neighbourhood is South Arm.  It is not necessarily a "darling" of investors and other neighbourhoods sell for more.  It is a bedrock neighbourhood for what used to be middle class. To test my theory that there are a significant number of investors at play, I looked over all of the listing history since 2014 for single family homes having at least 6500 sq ft lots with at least 60 ft of frontage, where the home is at least 25 years old.  Families would not likely buy and sell.  But investors would. Here are my shocking revelations:

There are 11 properties meeting this criteria which are listed now.  Out of these 11, 8 have been sold at least once in the last 2 years starting January 1, 2014. 2 of them have been sold twice. So, in essence, 8 of them are being listed for the second time in 2 years.  Does this sound like community building to you?  The only value added here is to the debt that the last buyer ends up living with!

Address # times listed # times sold
9531 Steveston Hwy 2 1
10771 Southdale Rd. 2 1
 10980 Rosebank 1 0
10800 Southdale 2 1
9891 Swansea 2 1
10291 Rosedene 1 0
10340 Leonard 1 0
10940 Roselea 3 2
10560 Rosebrook 3 2
8580 Rosemary Ave. 2 1
9460 Williams 3 1

The Income Tax Act provides for a principal residence exemption for "capital" property (not inventory) which has been "ordinarily lived in" in.  This is a great mechanism for allowing families to accumulated a real estate legacy over many years.  Unfortunately, it is open to huge abuse as many "investors" are not "ordinarily" living in the unit, but nevertheless claim the principal residence exemption.  I am not saying that the owners of these particular listings did so.

I am however arguing that the law needs to be changed so that it cannot be done every year and sales need to be properly audited to insure that the properties were in fact "ordinarily lived in". Correcting such abuses would definitely go a long way to reducing the purchase and sale of old housing stock on a tax free basis for the purpose of earning income.  It is pretty assumable that most families do not sell their home more than once in a 2 year period! When 83% of a neighbourhood's listings are back on the market within a 2 year period, that ought to ring warning bells to Canada Revenue Agency auditors, who should be on the lookout for relisted properties prior to their disposition so that capital does not "flee".