On October 3, 2016, the Government announced an administrative change to Canada Revenue Agency’s reporting requirements for the sale of a principal residence.
“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 and you do not have to pay tax on any gain from the sale. This is the case if you are eligible for the full income tax exemption (principal residence exemption) because the property was your principal residence for every year you owned it.
Starting with the 2016 tax year, generally due by late 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 your principal residence to claim the full principal residence exemption.”
On October 3, 2016 the Government introduced a new requirement to disclose the sale (or other disposition) of a principal residence on your personal tax return in the year that the property was disposed of. The disposition must be reported on page 2 of Schedule 3 of the return –
$8,000 (Max) Penalty For Failure To Report
According to the CRA website, if a taxpayer doesn’t report the sale and designation of the property as his or her principal residence, a penalty of up to $8,000 for failing to report the disposition may be applied :
“7. What should I do if I sold a property and want to claim the principal residence exemption but I forget to report the designation of principal residence on my income tax return for the year of sale?
For the sale of a principal residence in 2016 or later tax years, CRA 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 CRA to amend your income tax and benefit return for that year. Under proposed changes, the CRA 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:
1. $8,000; or
2. $100 for each complete month from the original due date to the date your request was made in a form satisfactory to the CRA.
More information on late designations is available on the CRA website under Late, amended, or revoked elections.
The CRA will focus efforts on communicating to taxpayers and the tax community the requirement to report the sale and designation of a principal residence in the income tax return. 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 latefiling a principal residence designation will only be assessed in the most excessive cases”
What About Deemed Dispositions on Change in Use?
By virtue of Paragraph 45(1)(a) of the Income Tax Act, if a person converts a residential property into a rental property (or the other way round), he or she is deemed to have disposed of the property at “fair market value” and re-acquired it at that same value. So if you move out of your principal residence and begin renting it out, you will need to report that disposition on Schedule 3 of your T1 return for the year.
The change in use rules have always been challenging for individuals filing their own returns. Since no actual purchase or sale has occurred, such transactions could easily be overlooked.