On October 3, 2016, the federal government announced an administrative change to the Canada Revenue Agency’s (CRA) reporting requirements for the sale of a principal residence.
People who sell a residential property they have lived in the entire time they owned that property will still be able to make a claim for the principal residence tax exemption on the proceeds of their home. However, starting with the 2016 tax year, people will be required to provide information about that property in their income tax return if they want to be eligible for the exemption.
The change is seen as an attempt to curb the practice of property flipping and tax evasion. According to an article by Erica Alini published by Global News on March 14, 2017, the CRA has added 70 more auditors to investigate tax evasion in the real estate market.
The information required by the CRA will include the date the owner acquired the property, the proceeds of the sale, and the description of the property. It is reported on Schedule 3, Capital Gains of the T1 Income Tax and Benefit Return 2016.
If this information is not supplied, people who have sold their principal property will not be able to claim the full exemption. Further to that, if a person does not report this information in their return, the CRA could fine them up to $8,000, or $100 for each complete month from the original due date to the date their request was made to the CRA for the principal residence exemption.
If the property was not a principal residence for all of the years that the person owned it, they will need to fill out Form T2091 to designate a property as a principal residence, and to calculate the capital gain for the year the property sold. This must be attached to the tax return.
Whether an entire home qualifies as a principal residence depends on the circumstances. If only a part of the home was used as a principal residence while the other part was used to earn or produce income, it could still be considered a principal residence if all three of the following conditions are met:
- the income-producing use was secondary to the main use of the property as a residence;
- there was no structural change to the property; and
- no capital cost allowance (CCA) claimed on the property.
The new rules apply for deemed dispositions as well. A deemed disposition is when a person has disposed of property, even though that person does not actually sell it. When a person changes the use of a property, they are generally considered to have sold the property at its fair market value and to have immediately reacquired the property for the same amount. It is required to report the disposition (and designation) of a principal residence and/or the resulting capital gain or loss (in certain situations) in the year the change of use occurs. For more information from the CRA, click here.