Selling A Home
Most of us know that the sale of your principle residence is exempt from capital gains tax. While this income tax benefit has not changed, what has changed is the reporting requirement. Failure to report the sale of your principle residence can result in potentially large penalties, even if you don’t owe capital gains tax!
On October 3, 2016 the federal government announced changes to tighten the rules on the Principle Residence Exemption (PRE). Prior to the new rules, the Canada Revenue Agency did not have a system to track principle residence exemption claims. The new reporting requirements have been implemented to improve compliance with existing rules.
The PRE is available on a one-property-per family limit and applies to each year that the property is designated as the principle residence. Generally, to designate a property for a given year the taxpayer, spouse, common-law partner or child of the taxpayer must have ordinarily inhabited the home at some point during the year. The Income Tax Act does not specify that “ordinarily inhabited” has to be the residence you spent the majority of your time in; only that it was lived in at some point during the year by a qualifying family member. In cases where two properties are owned, this allows for some tax planning opportunity through the ability to determine which residence to designate for a particular year.
The new reporting requirements apply to the sale of a principle residence after January 1, 2016. If the home is designated as the principle residence for every year the home was owned the sale must be reported on Schedule 3 of your personal income tax return. If the home was designated for some, but not all years then Schedule 3 must be completed as well as Schedule T2091, which calculates the taxable portion of the capital gain. The information disclosed on Schedule 3 is the address of the property, proceeds of disposition and year of acquisition.
The reporting requirements also apply to a deemed disposition of property. A deemed disposition occurs when there is a change in use of the home, for example from a principle residence to a rental property or vice versa.
If your home was used both as a primary residence and as a rental property, you may still qualify for the full PRE in the year of sale if certain criteria are met.
So, what are the consequences of not reporting the sale of your principle residence? First, failure to report the sale and make the principle residence claim could result in the sale being subject to capital gains. Second, while the CRA is able to accept late filing designations, penalties can be levied. The penalty for late filing is $100 per month x the months from the original due date to a maximum of $8,000! For properties sold in 2016, generally the due date for filing is the personal income tax filing deadline of April 30, 2017. If you sold your home in 2016 and have not made the designation, we strongly recommend amending your return immediately.
For more information and professional advice on the principle residence exemption rules and other tax matters, contact your personal accountant.