Canada: Tax Reporting Has Changed For Principal Residence Sales

If you sell property, you are required to report the sale in your tax return. However, if the property you sell is your principal residence, the gain you realize on the sale is not taxable, as there is an exemption on the gain realized on a principal residence. In the past, Canada Revenue Agency's administrative policy was that you did not have to include the sale in your tax return if the property was your principal residence for all years it was owned. This policy changed in 2016, and CRA now requires everyone to report the sale in their tax return. While the sale of a principal residence is still tax free, there is a penalty if you fail to report the sale.

Requiring people to report the sale of all property allows CRA to monitor the activity and confirm the principal residence exemption is being properly applied. If you are selling your principal residence, understanding the intricacies of CRA's rules is crucial.

Designating years

To be eligible to claim the principal residence exemption, you must have inhabited the home during the year in question. When reporting your home as your principal residence, you will need to choose which years to designate it as your principal residence. You could have a cottage and a home in the city, both of which technically qualify as your principal residence because you inhabit each of them at some point in the year. When you sell a property, you have the choice of treating it as your residence and sheltering or exempting the gain by designating it as your principal residence. Previously, if you designated all the years that it was owned, the sale was not taxable and you were not required to report the gain. You were required to complete form T2091 and provide it to CRA if requested, but this was rare. The new rules require that designation be recorded, and you can only designate a single year once. For instance, if you designate 2014 to your cottage, you can't use 2014 again when you eventually sell the house.

The formula for claiming the principal residence exemption automatically adds one year to the number of years designated. For example, if you own a home for 15 years, you would designate it as your principal residence for 14 of those years. (Fourteen plus one equals 15 years; divided by the 15 years owned means that 100 per cent of the gain is sheltered by the principal residence exemption.)

The "one plus" in the formula is there to ensure that when a home is sold in a year and a new one is purchased, they will both be covered by the principal residence exemption on their eventual sale.

Selling two properties

If you are selling two properties in the same year, you can assign a portion of the principal residence exemption to each property. For example, say you're selling two properties in 2016 and you bought them both in 2000. If you choose to designate your house for 15 of those 16 years, you'll have one year left to be used on the other property. If you're doing this right, you can exempt all of one property and a piece of the other, but you'll never be able to entirely exempt both. Logically, you designate as many years as needed to the property with the largest gain and use whatever is left on the other property.

If the sales occur in different years, the extra year would be preserved to be used when the sale of the second property occurs.

Checking the box

When the principal residence rules changed to require the updated reporting of these sales, CRA provided a simplified method for reporting the sale of the principal residence. On the form for reporting capital gains and losses for the year (Schedule 3), there is a section for the sale of a principal residence. If you choose to designate the property for all of the years owned, the only information you need to provide is the address of the property, the year it was acquired and the proceeds received on the sale. This is a simple way to report the sale of a principal residence for anyone who does not own another eligible property at the same time.

However, for anyone who owns a second property at the same time, using this method would cause increased tax on the second property. This method states that you are designating the property to be your principal residence for all years it was owned, which would reduce the number of years available to designate for the second property when it is eventually sold.

Form T2091

Instead of using this simplified method, individuals who own a second eligible property should complete form T2091. Doing so gives you the opportunity to leave one year out from your designation and make it available for the second property. The simplified method is easier and the default for most people. However, anyone who also owns a second qualifying property should definitely be filing the T2091.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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