The Federal Government introduced new substantive and procedural rules for the Principal Residence exemption from capital gains taxation. These new rules were announced on October 3, 2016. The purpose of these rules is to restrict this major tax benefit to Canadian residents and not have non-residents benefit at the expense of other taxpayers. If you don’t fall into the non-resident category, your headache will be the new reporting requirements on the sale of property. Not doing this right will open you up to audits and bring the risk of significant penalties.
Starting with the 2016 tax year, individuals who sell a property that was their principal residence will have to report this sale on their income tax return. Specifically, they will have to report the sale on Schedule 3 which deals with capital gains taxation for an individual’s T1 return. Trusts that hold a principal residence will have other filing requirements not covered in this article (and you should talk to your tax advisor to make sure you don’t lose the eligibility of the property as a principal residence).
The reporting is fairly easy where you and/or your spouse or common-law partner own only one property. Where you own more than one property or where the property sold has not met the principal residence threshold for all the years you have owned it (or more than one property meets the threshold requirements) then things get complicated. You will need to designate properties for particular years and calculate the gains on the property for the years it was a principal residence and the years it was not.
If you fail to report the sale of your principal residence in the year you sell it, you can’t claim the exemption unless the CRA agrees to amend your return. The CRA generally does not accept late, amended, or revoked elections, but they may agree to your late filing. But, even if they do agree, you face a penalty of up to $8,000.
To put yourself in the best position:
- Report each sale of property, whether or not it is your principal residence
- Remember that changing how you use property (residence or rental) is also considered a “sale”;
- Keep good records of uses, revenues, expenses, valuation, and other documents that relate to each of your properties;
- Designate non-income producing properties as a principal residence each year based on the gain in that year; and
- Get professional advice so you’re not surprised.
Faris CPA can help you meet your filing requirements and ensure you can take full advantage of the principal residence exemption. Why pay more in tax that you need to, talk to Faris CPA today and get peace of mind.