Reporting Requirements on the Sale of a Principal Residence

The Government announced an administrative change to Canada Revenue Agency‘s reporting requirements for the sale of a principal residence on October 3, 2016. This was to address perceived abuses of the exemption.

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. You also do not have to pay tax on any capital gains from the sale. This is the case if you are eligible for the full income tax exemption (principal residence exemption or PRE). The eligibility for the exemption occures if the property was your primary residence for every year you owned it.

Did You Sell Your Principal Residence?

Starting with the 2016 tax year, generally due by April 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 it to claim the full PRE.

• In October 2016, the federal government introduced legislation intended to curtail certain perceived abuses of the principal residence exemption (PRE).
• These amendments included several changes that impact the reporting of and computation of the PRE. This is for dispositions of principal residence properties occurring on or after January 1, 2016. In particular, the PRE will be denied unless information is reported on your tax return.
• Additionally, an important change that could impact certain trusts holding a principal residence property was also announced.
• In respect of the new changes impacting trusts, these amendments added new criteria to the eligibility requirements. It affects what types of trusts may be entitled to designate a property as a principal residence.

Disposition by a Trust

• These new eligibility requirements apply to a trust’s disposition of a principal residence occurring in a trust’s taxation year commencing on or after January 1, 2017.
• Specifically, for years after 2016, only certain trusts are allowed to designate a property as a principal residence for the purpose of the PRE. These trust types include:
  • Spousal or common-law partner trusts
  • Alter ego trusts (or a similar trust established for the exclusive benefit of the settlor during their lifetime)
  • Qualifying disability trusts
  • Trusts for the benefit of a minor child of deceased parents
• Consequently, any gains accruing after 2016 on real property held by non-qualifying trusts will be taxable and will not be sheltered by the PRE.

If the property disposition is not reported accurately or timely, the exemption could be denied. CRA could impose a penalty of $100 per month upto a maximum of $8,000 depending on the circumstances. Managing your purchase and sale of property effectively will reduce the tax you owe drastically. Contact us if you have a property to find out how we can help you save the most on your taxes.