When you sell a property you have to report the sale on your personal income tax return. It can be confusing and expensive depending upon the appreciation of the value of your property and the capital gains tax owed. However under the Canadian Income Tax Act the sale of a residence can be exempted from this tax under the Principal Residence Exemption (PRE).
Since 2016 the CRA required the sale of a principal residence to be reported on the seller's income tax in order to qualify for the PRE and to tighten up eligibility requirements. There are several things that Canadian property owners need to consider when filing for the PRE particularly if they own multiple properties.
Here are four questions that clients commonly ask their income tax preparers:?
1. How long do I need to live in a residence to claim it as a principal residence and qualify for PRE
The CRA does not specify an exact amount of time that you must reside in a property for it to qualify as your principal residence. The tax rules say that it must be ordinarily inhabited within the calendar year. The more important issue is that if a property is only held for a short period will it produce an income or capital gain when sold. The CRA will analyze evidence such as length of time living in the property and your sources of income and real estate buying patterns to establish whether or not this is your principal residence or part of a business venture such as real estate flipping. If the CRA challenges your claim for PRE they will question your intentions when moving into the residence and your reasons for selling.
2. Can other properties such as a cottage be designated as a principal residence and eligible for PRE?
Most properties can be designated a principal residence even those outside of Canada as long as the owner or their family ordinarily live there during each calendar year claimed. However only one property can be designated a principal residence. Once sold any property not deemed to be a principal residence will be subject to capital gains tax for the years that it was not designated a principal property.
There is a restriction on land size that qualifies for the PRE. If it exceeds one half hectare it will generally not qualify. If the property is a farm only one-half of a hectare of land plus the home would qualify for the exemption. The remaining acreage would be subject to capital gains tax based on value appreciation. If the excess land is required for the use and enjoyment of the property then the amount of land that qualifies can be larger, however the CRA has many restrictions before this rule can be applied.
If you own multiple properties then you can designate any of them as your principal residence for all or part of the years of ownership to take best advantage of the exemption and minimize the amount of tax paid. In general it is thought that it makes the most sense to designate the property that has the highest average gain per year of ownership, but it is recommended to get advice from a tax professional on how best to calculate this.
3. Does a property that generates income be deemed a principal residence making it eligible for PRE?
The mandatory income tax reporting of a principal residence sale was brought in by the CRA to limit when the exemption could be applied. It increased monitoring over:
4. Are there penalties incurred when the sale of a principal residence is not reported to the CRA?
According to the CRA If the sale of a principal residence is not reported the owner may be subject to a late filing penalty of $100 per month up to a maximum of $8000. In addition the exemption may be denied and the owner would be taxed on the capital gains. Even though these rules have been in place for a number of years many people believe that if they only own one property they do not have to report when they sell it which can result in significant costs to them.
From an article by Sophie Nicholls Jones
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