But while the capitals gains on your home can still be exempted from tax, there are new reporting requirements that, if not followed properly, could cause you some major tax-related headaches.
Last October, the Canadian government announced new measures requiring everyone to report the sale of their home on their tax return. If the sale is not reported, you could be re-assessed and the new rules permit the Canada Revenue Agency (CRA) to review property sales beyond the standard reassessment period. You may even be subject to a penalty in the future. CRA has stated that it is unlikely a penalty will be issued when the sale occurred in 2016, given that the reporting requirement is brand new, but it may not be so lenient going forward.
The new rule is part of the government’s attempt to rein in potential abuses of the principal residence exemption (PRE), such as non-Canadian residents claiming the exemption and others claiming it on a second property in the same year. Usually, 50% of a capital gain on an asset must be reported as taxable income. But the PRE allows Canadian residents to be exempt from paying tax on capital gains on their principal residence. Only one property can be designated per year as a principal residence, therefore gains may be taxable on the sale of a second property, like a cottage.
With the new rule, you will have to fill out the Schedule 3 of the T1 tax return to report the sale of the property where you designate the property as your principal residence for all the years it was owned. Information required on Schedule 3 includes the date the property was acquired, the address of the property, and the proceeds received. If you are designating a property as a principal residence for only some of the years it was owned, e.g. when a cottage will be designated for one or more of those years, form T2091 is still to be used with additional details to be provided on Schedule 3.
Though the change has been public since October, it hasn’t been widely publicized. The bottom line is this: if you sell your home in the 2016 tax year or later, complete Schedule 3 at tax time to claim the PRE and to avoid any potential penalties for late filing. Most individuals previously eligible to claim the PRE will continue to remain eligible, but the CRA will now have a record of that claim.
As with every other aspect of your financial life, it pays to get help from your professional advisor before you file your next tax retur
This column, written and published by Investors Group Financial Services Inc. and Investors Group Securities Inc. presents general information only and is not a solicitation to buy or sell any investments. Contact your own adviser for specific advice about your circumstances.
