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TAXATION – Principal Residence Exemptions

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PRINCIPAL RESIDENCE EXEMPTION

One of the changes announced by the Government in October 2016 was the new reporting obligations related to the sale of a principal residence.

Background

When an individual sells their principal residence and the gain is eligible for the full principal residence exemption, no reporting obligations were necessary to report the sale and the exempt gain on the income tax return. This was an administrative position held by the Canada Revenue Agency (CRA) until now. Revenue Quebec always required the reporting of such gains.

New Reporting rules

Starting in 2016, you will now be required to report the gain and some basic information on your income tax return for the actual or deemed sale of your home completed on January 1 2016 and after, and to effectively claim the principal residence exemption.

How is it reported

The sale of your home and the claim for the exemption will have to be disclosed on Schedule 3 of your income tax return. If only a portion of the gain is exempt under the principal residence exemption rules, form T2091 will need to be filed at the same time of your income tax return.

What happens if you do not report the gain or the designation

Like any other undisclosed revenue transaction, this act can result in significant penalties if the omission was due to gross negligence. If the gain is never reported and discovered by the CRA, the gain will be entirely subject to income taxes and you would potentially lose the opportunity to claim the exemption. Furthermore, a late election or designation of the principal residence exemption may be eligible, however, penalties can be imposed for late filing the designation. Penalties for late filed designations will range from $100 to $8,000, depending on the number of months the designation is filed after its original deadline.

What should you do if you sold your principal residence in 2016

If you sold your home in 2016, aside from the new reporting obligations discussed above, there are potential additional issues to be considered such as the following:

  • If you own a cottage or another vacation property (situated in Canada or outside of Canada), any of these properties can be used for the exemption. Detailed analysis is required to choose the least tax possible.
  • Application of the change-in-use rules. For example, your home is converted to a rental property, or vice-versa.
  • A portion of your home was used for business or rental purposes.
  • You and your spouse have owned homes before your marriage, and continue to own homes.

Don’t hesitate to contact us for consultation on this or other issue.