New Reporting Requirements to CRA to Pay No Tax on the Sale of Your Principal Residence
In Canada, we are very fortunate. Why? Because when we sell our principal residence, any profitable gain we realize is tax exempt, totally free of taxation. Further, as no tax applies, we have not been required to report the sale.
But no more. On October 3rd, 2016 the Government announced a change to the reporting requirements. From the 2016 taxation year and beyond, the sale of one’s principle residence must be reported to CRA in order to qualify for the tax exemption.
Why the Change?
The intent of this mandatory reporting, according to Finance Minister Bill Morneau, is to:
- “Improve tax fairness for Canadian homeowners,”
- Improve compliance with the tax system, and
- Close this loophole thus preventing foreign investors from flipping homes and fraudulently taking advantage of the capital gains exemption.
Reporting the sale of investment property and payment of capital gains tax has always been required. But because some non-residents have evaded their tax obligations, Canadian residents are now required to report all sales, including their tax-free principal home.
How and What to Report
On the sale of your principal residence, you will be required to complete a revised version of “Schedule 3 to be filed with your” Income Tax Return for the taxation year in which the residence has sold. This form will ask for the year the home was acquired, the proceeds of the sale, and a description of the property. Of course you must own the home, you and your family must ordinarily inhabit it and you must designate it as your principal residence. Understand that you can have only one principal residence in a particular year.
It is likely that requiring the home’s description helps determine its use as a residence and any portion that may have an investment or commercial application.
Penalties for Failing to Report
CRA will only allow the tax exemption if you report the sale and the designation, as your principal residence in your tax return.
So what if you forget to Report the Sale? You must ask CRA to amend your return but a penalty may apply comprised of $100 “for each complete month from the original due date to the date your request was made” or $8,000 whichever is less. So report and designate to receive the tax exemption. During the initial period of communicating this change and including the 2016 taxation year, “the penalty for late-filing a principal residence designation will only be assessed in the most excessive cases.” Regardless, report the sale and avoid stress. .