As a mortgage agent, I usually deal with questions pertaining to second mortgages and mortgage refinancing questions relating to a principal residence. As most of you know, the red-hot real estate market in Ontario has been ongoing with the surging prices in property values ever increasing with no end in sight. This has led to many people asking, how is the flipping of real estate or the sale of property been so lucrative, for such a long period of time? Are there any tax implications that affect how much you make from the sale of one’s home? Things have been status-quo for some time now, however, last year, Ottawa made some significant changes to the reporting of the sale of your principal residence. I will briefly summarize some of the key points from the CRA bulletin as referenced from their webpage with respect to tax filing disclosure as related to the sale of one’s principal residence in Canada.
Reporting the sale of your principal residence for individuals (excluding trusts)
On October 3, 2016, the Canadian Government announced an administrative change to Canada Revenue Agency’s reporting requirements for the sale of your principal residence.
Generally, when you sell your principal residence, usually you do not have to report the sale on your income tax return and you do not have to pay tax on any gain from the proceeds of the sale. This is applicable in the event you qualify for the full income tax exemption (principal residence exemption) because the property was your principal residence for every year you owned it.
Definition of the principal residence exemption:
An income tax benefit that provides the individual with an exemption from tax on the capital gain realized on the sale of the property that is deemed as the individual’s principal residence. This exemption applies for each year the home owner designates the property as their principal residence.
In the past, the CRA did not ask for any information relating to the sale of a principal residence if the property was the homeowner’s principal residence for every year they owned it. However, from CRA’s referenced bulletin:
“If the property was not your principal residence for every year you owned it (e.g., a different property, such as a cottage, was designated as your principal residence for one of the years during the same period of ownership), Form T2091 (IND), Designation of a property as a principal residence by an individual (other than a personal trust), would have to be filed with the individual’s T1 Income Tax and Benefit Return. The representative of a deceased person would have to use Form T1255, Designation of a property as a principal residence by the legal representative of a deceased individual instead.”
Beginning in the 2016 tax year, and due by late April 2017, you will be required to report certain basic information, such as:
- date of acquisition of the property,
- proceeds of disposition of your property
- and a description of the property being sold
All reportable on your income tax and benefit return when you sell your principal residence in-order to claim the full principal residence exemption.
The new rules as introduced, also apply for deemed dispositions. For practical purposes, a deemed disposition occurs when the home owner is considered to have disposed of property, even though the home owner did not actually sell it. To illustrate this point, a deemed disposition will occur if there is a change in use of the property:
- Such as, in the event the home owner changes all or part of their principal residence to a rental or business operation.
- The home owner changes their rental or business operation to a principal residence.
When the homeowner 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 as disposed of. The home owner is required to report the disposition (including designation of the property) of their principal residence and any associated capital gain or loss in the respective year the change of use occurs.
If only a part of the home qualifies as the home owner’s principal residence and they used the other part of the home for business purposes to generate revenue, then the individual may have to split the selling price and the adjusted cost base between the part used as designated as a principal residence and the part used for other purposes for generating revenue. This can generally be done by using square metres of the dwelling or the number of rooms in the home, as long as the split is considered to be reasonable.
It is important to keep in mind that, for the sale of a principal residence in 2016 or subsequent tax years, CRA will only allow the principal residence exemption if the home owner reports the sale of the home and the designation of principal residence in the home owner’s income tax return. If one forgets to make a designation of principal residence in the year of the sale, it is crucial to ask the CRA to amend your income tax and benefit return for that respective year. Under the proposed changes, the CRA may accept a late designation in certain applicable circumstances, but does indicate that a penalty may apply.
The penalty is the lesser of the following amounts:
- $8,000; or
- $100 for each complete month from the original due date to the date your request was made in a form satisfactory to the CRA.
The penalties as described above are not by any means insignificant, and can very easily add up in the event of an inadvertent error on the part of a home owner who has disposed of their property without the proper declarations mentioned.
The CRA has communicated that it will focus its efforts on communicating to taxpayers and the tax community the requirement to report the sale and designation of a principal residence in the income tax return and that the penalty for late-filing a principal residence designation will only be assessed in the most excessive cases.
Nonetheless, it makes sense to definitely confer with your accountant and/or the CRA on these new changes to the tax filing requirements announced by Ottawa in 2016 that relate to the sale of your principal residence.
For further information please visit the the CRA website (http://www.cra-arc.gc.ca/gncy/bdgt/2016/qa11-eng.html) for full disclosure of all the changes as described in this article.
And as always, for your mortgage refinancing, mortgage renewals and new purchases, please contact me via email and the telephone number listed below.