PROTECT YOUR PRINCIPAL RESIDENCE EXEMPTION! – CHANGES TO REPORTING REQUIREMENTS FOR THE SALE OF YOUR HOME
By Dave Thomas
Generally speaking, Canadians do not pay any Capital Gains Tax on the growth in value of their homes. The Income Tax Act provides an exemption called the “Principal Residence Exemption”. In most cases, if you own your home and sell it, you get the full benefit of the exemption and pay no tax, even if the value of your home has increased significantly. The Income Tax Act requires you to keep track of your original costs and the sale price. However, until recently, you did not have to report the sale on your income tax return. You just got the benefit of the exemption.
Under new rules, which will affect sales of homes occurring in 2016 and afterwards, people who sell their homes will need to report the sale on their tax returns for that year. It will be necessary to fill out Schedule 3. You will have to report the address of the home, the proceeds of sale, and the date that the home was acquired. If you qualify, there will still be no tax. However, if you do not report the sale and the gain, you may be reassessed later and then you won’t be able to claim the exemption and you’ll have to pay an unnecessary tax. There can also be penalties for failure to report the gain. Late filed declarations may be accepted, but will involve penalties.
This new rule also applies to estates. If a person dies owning a home, there is a “deemed disposition” of the home as of the date of death, as if the home had been sold for its fair market value as of that date. The Estate must report the capital gain in the deceased’s final tax return, and claim the exemption.
It is therefore important to keep in your records the details of the purchase of your home, and also its sale. Most of this will be found in your lawyer’s reporting letter. Make sure that your tax preparer is advised of the sale.
In most cases, where you have used the home as your principal residence for the whole time that you owned the property, there will be no difficulty getting a full exemption. In some cases, where you or your spouse have owned other properties which you occupy, at the same time, or where your property has been rented out for part of the time that you owned it, you may not get the full exemption. In these cases, it is important to have your documentation available so that the gain can be calculated and you can calculate how much of the exemption you get. In some cases, where you own more than one home, you may need to get the advice of your accountant or real estate agent to help you determine which home should be designated as your principal residence for a given year. Whatever you do, make sure you report the capital gain and claim the exemption. The alternative can be very expensive.
Dave Thomas is a senior partner at Lancaster Brooks & Welch LLP and he can be reached for legal advice on residential and commercial real estate matters at 905-641-1551. Lancaster Brooks & Welch LLP are Niagara Lawyers for 135 years.