Until very recently, Canadian taxpayers and homeowners have not been required, under the Canada Revenue Agency’s administrative policy, to report the sale of their principal residences in their personal income tax returns. On October 3, 2016, however, the Finance Minister announced new rules that will require all Canadian homeowners to report the sale of principal residences in their tax returns in the year of the sale, else they be subject to an extended reassessment period.
Every taxpayer is now required to complete a principal residence designation using form T2091 (IND), and must include this form with their tax return for the year in which the home is sold. If taxpayers forget to report the sale, they should amend their income tax returns to report the disposition by filing a late designation but a penalty may apply. If the disposition is not reported and is subsequently selected for review or audit, the taxpayer will have to pay tax on any gain on the property, and the CRA will not need to prove any misrepresentation attributable to neglect, carelessness, wilful default, or fraud to extend the reassessment period.
As a result of these new reporting requirements and the extended reassessment period, it is very important that individuals—particularly those who own more than one residence in a given year—properly track the cost of each residence and determine how best to allocate the principal residence exemption among multiple properties. Properly tracking the cost of the property and maintaining appropriate records (such as purchase agreements, receipts, and invoices) to support the cost of the home will help minimize any capital gain that may arise.
In short, gathering the appropriate data will help you and/or your clients avoid any negative income tax consequences when selling a home.
Information provided by Barb Carle-Thiesson, FCPA, FCA, ICD.D, TEP, a partner and business advisor in MNP’s Nanaimo office.
Addendum February 20, 2017
CRA clarified the changes in administrative policy with FAQs on the Reporting the sale of your principal residence for individuals (other than trusts) page of its website. These FAQs explain the reporting requirement on Schedule 3 and when Form T2091 is required. In addition, Schedule 3 has been modified with a section for principal residence designation, which indicates if the taxpayer is not designating the property for all years owned, then they must also file a T2091.