New Rules for Principal Residence

By Randall Orser | Personal Income Tax

In late 2016, the Liberal government decided to make changes to Canada Revenue Agency’s (CRA) reporting requirements for the sale of your principal residence. Supposedly this will improve compliance and administration of the tax system. Is this the beginning of a new way to tax you, the taxpayer? Well, probably will be though not now. Never underestimate a government to tax its citizens.

When you sell your principal residence or when you are considered to have sold it, usually you do not have to report the sale on your income tax and benefit return and you do not have to pay tax on any gain from the sale. This is the case if you are eligible for the full income tax exemption (principal residence exemption) because the property was your principal residence for every year you owned it.

Starting with the 2016 tax year, due by April 30th, 2017, you will be required to report basic information (date of acquisition, proceeds of disposition and description of the property) on your income tax and benefit return when you sell your principal residence to claim the full principal residence exemption. If you sell your principal residence will have to report the sale on Schedule 3, Capital Gains of the T1 Income Tax and Benefit Return. Reporting will be required for sales that occur on or after January 1, 2016.

The principal residence exemption is an income tax benefit that generally provides you an exemption from tax on the capital gain realized when you sell the property that is your principal residence. Generally, the exemption applies for each year the property is designated as your principal residence.

For the sale of a principal residence in 2016 or later tax years, CRA will only allow the principal residence exemption if you report the sale and designation of principal residence in your income tax return. If you forget to make a designation of principal residence in the year of the sale, it is very important to ask the CRA to amend your income tax and benefit return for that year. Under proposed changes, the CRA will be able to accept a late designation in certain circumstances, but a penalty may apply.

The penalty is the lesser of the following amounts:

  1. $8,000; or
  2. $100 for each complete month from the original due date to the date your request was made in a form satisfactory to the CRA.

More information on late designations is available on the CRA website under Late, amended, or revoked elections.

The CRA will focus 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. For dispositions occurring during this communication period, including those that occur in the 2016 taxation year (generally for which the designation would be required to be made in tax filings due by late April 2017) the penalty for late-filing a principal residence designation will only be assessed in the most excessive cases.

Your Home is used for a Business or Rental

If only a part of your home is used as your principal residence and you used the other part to earn or produce income, whether your entire home qualifies as a principal residence will depend on the circumstances.

It remains the CRA’s practice to consider that the entire property retains its nature as a principal residence, where all the following conditions are met:

  • the income-producing use is secondary to the main use of the property as a residence;
  • there is no structural change to the property; and
  • no capital cost allowance (CCA) is claimed on the property.

If your situation does not meet all three of the conditions above, you may have to split the selling price and the adjusted cost base between the part you used for your principal residence and the part you used for other purposes (for example, rental or business). You can do this by using square metres or the number of rooms, if the split is reasonable. Instructions are provided in the guide T4037, Capital Gains 2016, on how to report the sale of your principal residence in this situation.

If you’ve sold your home, and it’s your principal residence, in 2016, then remember to have the information necessary to report said sale on your income tax return. Now, no gain will be attributed to said sale, however, that may change in the future.

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