Dispositions of a Principal Residence – New Tax Rules as of October 3, 2016
It has been a long standing practice that the sale of one’s principal residence was not a reportable transaction on one’s personal income tax return. On October 3, 2016, Finance Minister Morneau introduced new tax rules concerning the sale of a principal residence and the related principal residence exemption (“PRE”) which impact all Canadian individuals. Here is what you need to know:
New Tax Reporting Requirements
For any dispositions of homes during 2016 and thereafter, the sale must be reported on your personal income tax return. Such reporting occurs on Schedule 3 (if only one property qualifies) or a combination of Schedule 3 and the T2091/T1255 form (if more than 1 property qualified for the PRE during any year of ownership). Remember, all dispositions of real property must be reported on your personal tax return in order to be eligible for the PRE.
Note that if you fail to report the sale of the principal residence on a timely filed tax return, you will need to ask the CRA to amend the return to make the late filed designation. A late filed designation could be subject to a maximum $8,000 penalty. In addition, failure to report the sale of the home may result in the Canada Revenue Agency having the ability to audit and reassess that particular tax return indefinitely (as opposed to 3 years from the date of mailing of the notice of assessment). Finally, and perhaps most importantly, absent the preceding tax reporting (either timely or late-filed), you may lose your PRE!
Non-Residents and Domestic Trusts and PRE
Prior to October 3, 2016, non- residents (and non-resident trusts) of Canada could still utilize their PRE to shelter Canadian taxation with respect to the potential gain.
For dispositions that occur after October 2, 2016, a property only qualifies for the principal residence exemption for that particular year of ownership if the taxpayer is a resident of Canada at any time in the year.
With respect to the ownership of the residence by a trust, only four types of domestic trusts will continue to be entitled to make a principal residence designation:
- Spousal or Common-Law Partner Trust
- Alter Ego Trust
- Qualifying Disability Trust
- Trust for Minor Child of Deceased Parents
All other trusts will not be able to make a principal residence designation after December 31, 2016. To achieve this result, all trusts will be required, at the time of an actual or deemed disposition, to determine the amount of gain between acquisition and January 1, 2017 which may be exempt under the existing rules and determine the amount of gain after December 31, 2016 and the actual date of the disposition. The second part of the gain will be taxable if the taxpayer is non-resident and the trust is not one of the above four types of trusts.
A number of other rules and elections for various trusts have also been updated as a result of the new rules. Please review any of your PRE related matters with your Bateman MacKay LLP tax advisor.