Principal Residence Reporting:
On October 3, the Government announced an administrative change to reporting requirements for the sale of a principal residence.
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.
Starting with the 2016 tax year, individuals who sell their principal residence will have to report the sale on Schedule 3 of your tax return. Reporting will be required for sales that occur on or after January 1, 2016.
In prior years Canada Revenue Agency did not require any reporting related to the sale of a principal residence if the property was your principal residence for every year you owned it.
If the property was not your principal residence for every year you owned it (e.g., a different property, such as a cottage, was designated as your principal residence for one of the years during the same period of ownership), Form T2091 (IND), Designation of a property as a principal residence by an individual, would have to be filed with the individual’s T1. The representative of a deceased person would have to use Form T1255, Designation of a property as a principal residence by the legal representative of a deceased individual instead.
The Canada Revenue Agency’s previous administrative practice did not apply to trusts. Trusts that designate a property as a principal residence for one or more tax years must complete Form T1079, Designation of a Property as a Principal Residence by a Personal Trust and attach it to their T3 for the year in which the sale (or deemed disposition) occurred.
You will complete Schedule 3 and file it with your T1 Income Tax and Benefit Return for the year you sell the property. If the property was your principal residence for every year that you owned it, you will make the principal residence designation in your Schedule 3. In this case, the year of acquisition, proceeds of disposition and the description of the property are the information that will have to be reported. Form T2091 (or Form T1255) will still be required for the designation in the case the property was not your principal residence for all of the years that you owned it.
For the sale of a principal residence in 2016 or later tax years, Canada Revenue Agency 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 Canada Revenue Agency to amend your income tax and benefit return for that year. Under proposed changes, the Canada Revenue Agency 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:
- $8,000; or
- $100 for each complete month from the original due date to the date your request was made in a form satisfactory to the Canada Revenue Agency.
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.
If only a part of your home qualifies as your principal residence and you used the other part to earn or produce income, 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, as long as the split is reasonable.
The new rules apply for deemed dispositions. A deemed disposition occurs when you are considered to have disposed of property, even though you did not actually sell it. For example, a deemed disposition will occur if there is a change in use of the property:
- You change all or part of your principal residence to a rental or business operation.
- You change your rental or business operation to a principal residence.
When you change the use of a property, you are generally considered to have sold the property at its fair market value and to have immediately reacquired the property for the same amount. You have to report the disposition (and designation) of your principal residence and/or the resulting capital gain or loss (in certain situations) in the year the change of use occurs.
Please refer to these documentations below from the Canada Revenue Agency for more information.
Income Tax Folio S1-F3-C2, Principal Residence
When someone has died / Deemed disposition of property
If you have any questions please contact Robert McGaghran 416-665-7735 Ext 298