Starting for the 2016 tax year, which is generally due late this month, there are changes in place in regards to principal residences. Now, Canadian homeowners are required to report the sale of principal residences on their income tax returns, in order to claim the full principal residence exemption.
In the past, many Canadians assumed that every sale of a residence was tax-free because of the Principal-Residence Exemption (PRE), and up until now the CRA has not required Canadians to report their sales. The result has been that many have sold residences, have not reported the sale, have paid no tax, even in situations where tax should have been owing. So finally the CRA decided to crack down.
When you sell your principal residence or when you are considered to have sold it, usually you do not have to report the sale on your income tax and benefit return and you do not have to pay tax on any gain from the sale. This is the case if you are eligible for the full income tax exemption (principal residence exemption) because the property was your principal residence for every year you owned it. Starting with the 2016 tax year, generally due by late April 2017, you will be required to report basic information (date of acquisition, proceeds of disposition and description of the property) on your income tax and benefit return when you sell your principal residence to claim the full principal residence exemption. [CRA]
Now, individuals who sell their principal residence must report the sale on Schedule 3, Capital Gains of the T1 Income Tax and Benefit Return. This reporting is required for all sales that occurred on or after January 1, 2016.
If you fail to report the sale of a residence in 2016 or later years, you won’t be entitled to the PRE. If you forget to designate a property as your principal residence in the year of sale (for 2016 and later years), you should ask CRA to amend your tax return for that year. CRA will often accept a late designation but penalties could apply (the penalty could be $100 for each complete month the designation is late, or $8,000, whichever is less). [Globe and Mail]
The onus is on the homeowner to understand the principal residence rules and the changes, and they can be complex. The best thing to do, is to head to the CRA website for more information, where everything is laid out on all the possible scenarios and how to report each one.