Starting with the 2016 tax year the Canada Revenue Agency has introduced new reporting requirements on personal tax returns for the sale of real estate in Canada, even if the property is a principal residence. It’s no secret real estate markets across Canada have appreciated significantly and it appears the government wants to make sure they are getting their cut.
But first a bit of history…
In very general terms, anytime a taxpayer sells a property for more than they paid for it, the Canada Revenue Agency (CRA) will consider the increase in value a capital gain. These gains are reported on the tax return in April and any taxes that are due are paid with the regular return. A property, for tax purposes could be stock, bond, real estate, a business or personal property; gains would all be taxed similarly.
However there is one exemption that many families in Canada have enjoyed for many years, perhaps without knowing it. That exemption relates to their principal residence. If there was a sale of a home, and it was a family’s principal residence for the entire time it was owned, the gain would be exempt from tax. This makes the principal residence exemption one of the most valuable elections in the tax act for most taxpayers as their home could be the largest investment of their lives.
A few of the finer details:
One of the key points to understand is that any real property can be designated as a principal residence. However this designation happens on a year-to-year basis, and the family can only elect one property per year to be its principal residence.
As an example, assume a family purchased a home in Burlington in 1990 and have lived there continuously ever since. Also, the family purchased a cottage in Parry Sound in 2005 which they are looking to sell in 2016. The family is able to designate either of the properties as their principal residence when they are sold so the family may decide to designate their cottage as their principal residence from 2005 to 2016. If they do so that would mean that 100% of the gain from that property’s sale would be tax free.
Their home in Burlington however can no longer be their principal residence for all the years they have owned it. The period from 2005 – 2016 has already been used to shelter the cottage gains. So even though the family has owned the property for 26 years, it can only be their principal residence for 15. This means that roughly 39% of any gains on their home sale would be taxable income in the year of sale.
Depending on the number of properties a family owns, and how each has appreciated there are planning opportunities available to try and minimize any taxable gains using the principal residence election; however careful planning must be done.
New requirements for 2016:
There has technically always been a requirement to report the sale of a home to the CRA on a tax return and apply for relief from tax with the principal residence exemption. Administratively though, CRA has never asked that the forms be submitted with the return, but simply kept on file in case they would like to see them. This has created the impression in a number of people that the sale of any home is simply exempt from income tax.
Because of the rising real estate prices across Canada, notably in Toronto and Vancouver, the CRA has taken a much more careful look at peoples’ tax returns in the last few years relating to home sales. Their concern is that properties may be sold where the principal residence does not apply but people may be omitting the details from their returns. Formally in 2016, parliament changed their policy to require people to report the sale of their principal residence on their tax returns. Failing to do so could jeopardize the principal residence exemption, potentially making the sale taxable.
Starting in 2016 (i.e. tax returns due April 30, 2017), taxpayers will be required to report to CRA anytime they sell a property even if it is their principal residence for the entire period it was owned. General details including date of purchase, sale proceeds, and description of the property will be required in order to apply for the principal residence exemption. Accordingly, anyone selling property should now be keeping very detailed records of the sale in case CRA asks to see them as a part of their new effort to review principal residence exemptions.
Late reporting and potential penalties
As noted above failure to report the sale of a principal residence can jeopardize the principal residence exemption however the CRA does allow late filings. The CRA will accept amended tax returns to correct a previous mistake but penalties may apply. The penalty could be $100 per month the designation is late or $8,000 whichever is less. If the information is at least one year overdue, it may be worth considering the Voluntary Disclosure Program which will hopefully eliminate any penalties that would otherwise apply.
Please feel free contact our firm to discuss how we can assist you with your tax reporting requirements and filings in Canada and the United States of America. We appreciate you taking the time to read this post and look forward to hearing from you.
This blog post was written by Derek Edelkoort, CPA, CGA