On October 3, 2016, the federal government announced an important administrative change for reporting the sales of principal residences.
Previously, the government’s administrative position was that you did not have to report the sale of your home (on your income tax return) as long as you lived in it as your principal place of residence for the entire time you owned the home.
Beginning with the 2016 income tax year, all Canadians will be required to report the sale of their homes on their personal income tax returns. This will apply to all sales of homes (real estate), regardless of whether it was your principal residence or not.
It’s important to know that if the property was, in fact, your principal residence during the entire time you owned it, any capital gain will still be exempt from tax. The CRA is now just going to require you to actually report it on your personal tax return for tracking purposes.
If you sold a property in 2016 or later, you will need to give your accountant the following information:
- Date of purchase
- Original cost of the property
- Proceeds of disposition
- Description of the property
Your accountant will then put this information on Schedule 3 of your personal income tax return and designate it as a principal residence.
Please note that if you own the property with your spouse, then you will both be required to report your proportionate share of the property on both your income tax returns.
The rules will also apply to deemed dispositions of the property. Deemed dispositions occur when you are considered to have disposed of the property, even though you did not actually sell it. Common examples of deemed dispositions are as follows:
- Change in use from principal residence to rental or business use
- Change in use from rental or business use to personal use
- On death of the taxpayer
If the disposed property was not your principal residence during the entire time of your ownership, then your accountant will have to file another form on your behalf called a T2091. This form will calculate the portion of any capital gain that is taxable based on the number of years you did not live in it.
Implications for Non-Compliance to these new rules
If you fail to report the sale of a residence in 2016 or later, you could lose your entitlement to the principal residence exemption (which could be extremely tax punitive). If you live in an area where there has been huge increases in real estate values such as Toronto or Vancouver, this failure to report could cost you tens or even hundreds of thousands of dollars in capital gains taxes. The gains could also be very large if you’ve owned the property for a long period of time.
If you forget to designate a property as your principal residence, you should ask the CRA to amend your tax return for that year. CRA will often accept a late designation but they may apply penalties. The penalty is the lesser of the following amounts:
- $8,000
- $100 for each complete month the designation is late
CRA is now putting the onus on all Canadians to report the sales of any real estate they own, regardless of whether it was your principal residence or not.
Did you know?
If you own a property in which you did not live in during your entire time of ownership, you should keep all receipts for any capital improvements you made on the property. This will serve to increase your adjusted cost base of the property and save you capital gains taxes later.