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 What is changing about the reporting of the sale of a principal residence?
What do I report when I actually sell my principal residence, if I used part of it as my principal residence and another part for my business or to earn rental income?
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.
Instructions will be provided in the guide T4037, Capital Gains 2016, on how to report the sale of your principal residence in this situation.
Does the new rule apply for deemed dispositions of property?
Yes. 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.
Refer to the T4037, Capital Gains 2016, once available, for more information.
CRA announced a major change to the rules regarding the Principal Residence Exemption. A few key points:
– Taxpayers will be required to report the disposition of a property for which the principal residence exemption is claimed.
– The CRA will gain the authority to assess taxpayers, beyond the normal assessment limitation period for a tax year, in respect of a disposition of real estate by the taxpayer (or a partnership of which the taxpayer is a member), in cases where the disposition is not reported in the taxpayer’s tax return for the year in which the disposition occurs.
– An individual who was not resident in Canada in the year the individual acquired a residence will not—on a disposition of the property after October 2, 2016—be able to claim the exemption for that year.
– Trusts will be eligible to designate a property as a principal residence for a tax year that begins after 2016 only if additional eligibility criteria are met. For example, the trust’s beneficiary who, or whose family member, occupies the residence for the year will be required to be resident in Canada in the year, and will be required to be a family member of the individual who creates the trust.