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Important changes to principal residence exemption rules


December 12th. 2016

On October 3, 2016 the department of Finance introduced changes to the principal residence exemption rules. The goal was to close tax loopholes relating to the capital gains exemption on the sale of principal residence. The principal residence rules are complex and most taxpayers will be affected by the changes. These new rules will apply to dispositions of property at any time during 2016 (not just after October 3rd).

 

Old rules

 

Generally, when a Canadian resident sells his/her home, the capital gain on the sale may be eliminated or reduced by claiming a principal residence exemption. CRA did not require any reporting related to the sale if the property was a principal residence for every year of ownership. However, if the property was not a principal residence for every year of ownership, then Form T2091 Designation of a property as a principal residence by an individual would have to be filed. This is relevant in cases when an individual owned more than one property that could qualify as a principal residence (i.e. cottage).

 

New rules

 

Under the new rules, CRA requires that all property sold by an individual be reported on the tax return. Where the property is designated as a principal residence for each year of ownership, the sale must be reported and the designation is made directly on the tax return. Similar to old rules, if the property was not a principal residence for every year of ownership, then Form T2091 is required. These rules also apply to deemed disposition of property, which could arise from change of use from personal to rental and vice a versa.

There could be several adverse implications if you forget to report the sale of your home (or other property). First of all, an amended return will have to filed. This return will be subject to late filing penalties to a maximum of $8,000. Second, reassessment period will be extended – the year of disposition is never closed, unless an amended return is filed. In that case the reassessment period is extended to 3 years after the date of amendment. Finally, if CRA audits the return and discovers an unreported disposition of a principal residence, then you will be liable for tax on the gain. You can then file an amendment to recoup the tax, however it may be subject to the aforementioned late filing penalties.
 

Summary

 

The new rules are complex and many taxpayers may not be aware of their reporting requirements, when filing the 2016 tax returns. Penalties for non-compliance can be significant. If you have any questions regarding the new principal residence rules, please contact our office.


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