The Principal Residence Exemption is probably the most important tax break for a large percentage of Canadians. Essentially the exemption means that you are not required to pay any capital gains tax on the sale of the property that is designated as your principal residence. If you have more than one residence, you can actually choose which one you designate as your principal residence – it does not need to be the one that you spend most of your time in. For example, if you own a cottage and it has increased in value more than your city home, you may want to designate the cottage as your principal residence.
So what has changed?
Last month, the Canada Revenue Agency (CRA) changed its administrative position regarding reporting requirements for the principal residence exemption. Previously, you were not required to report the sale of your principal residence, as long as it was your principal residence for every year that you owned it. This would be the case for the vast majority of principal residence sales. Starting with the 2016 tax return, Canadians will be required to report any sale of a principal residence on Schedule 3 – Capital Gains or Losses. The rule applies not only to outright sales, but also to deemed dispositions. This can occur for example if you start renting out a portion of your home, which triggers a deemed sale for tax purposes that must be reported.
What happens if I miss reporting the sale of my principal residence?
If you forget to report the sale of your principal residence on your tax return in the year the sale was made, any late reporting will be subject to penalties, which would be calculated as the lesser of the following two amounts:
- $8,000, or
- $100 for each month from the original due date of your tax return
As with all areas of tax legislation, not being aware of the rules will not be accepted as a valid reason for non-compliance. That being said, the CRA has indicated that they would be lenient for 2016 at least.
Should you be concerned?
As long as you are diligent about reporting all of your dispositions in the year they occur, you should be able to stay clear of any penalties. If you have been properly reporting all of your taxable dispositions, there has not been any changes to the actual rules of what is and what is not exempt.
There is one area however that I suspect the CRA will be looking at closely – taxpayers who flip houses on a regular basis. Many taxpayers have taken the position that as long as they move into a house for any period of time before selling it, any subsequent disposition should qualify under the principal residence rules. The CRA has been trying to attack these transactions in recent years, however they have had little data available to them to be able to track this behaviour. With the new reporting requirements, they will be able to see exactly how many principal residence dispositions that you are claiming. If you are claiming multiple exemptions is a relatively short period of time, I expect you can look forward to a call from the CRA.