Changes to the Principal Residence Exemption

When you sell your home, you typically do not have to pay tax on any gain from the sale if you claim the principal residence exemption. However, it’s crucial to be aware of the reporting requirements. Failure to meet these requirements can result in penalties of up to $8,000.

What is a Principal Residence?

A principal residence can be a house, cottage, condo, apartment, trailer, mobile home, or houseboat, and it doesn’t need to be located in Canada. To qualify as a principal residence, the property must meet the following conditions:

• It is a housing unit, leasehold interest in a housing unit, or a share of the capital stock of a co-operative housing corporation acquired only to get the right to inhabit a housing unit owned by that corporation.
• You own the property alone or jointly with another person.
• You, your current or former spouse or common-law partner, or any of your children lived in it at some time during the year.
• You designate the property as your principal residence.

Changes to the Principal Residence Exemption

Before 2016, if your property was your principal residence for every year you owned it, you did not have to report the sale to claim the principal residence exemption. This changed with the March 2017 federal budget. In June 2017, the CRA highlighted that from April 2015 to March 2017, it completed over 21,000 files related to real estate and assessed over $329 million in previously unreported income, applying over $17 million in penalties. This underscores the importance of compliance in real estate transactions.

The Reporting Requirements

For dispositions in 2016, you had to report the sale and designate the property on schedule 3 (Capital Gains or Losses). For dispositions in 2017 and later years, you must also complete form T2091(IND), Designation of a Property as a Principal Residence by an Individual, which includes details such as the address of the home, the year purchased, and the proceeds from the sale.

Change in Use

A deemed disposition from a change in use occurs when the principal residence no longer meets the criteria for a principal residence. This can happen if the property is fully rented, the owner passes away, or is no longer a resident of Canada. A change from personal use to income-producing use is considered a deemed disposition, requiring the fair market value at the date of change to be used as the new cost base for the property.

Partial Change in Use

If a portion of the principal residence begins to be used for business or rental purposes, that portion is deemed disposed of and reacquired for fair market value. However, the CRA generally considers the entire property to retain its nature as a principal residence if certain conditions are met, such as the income-producing use being ancillary to the property’s main use as a residence, no structural changes are made, and no CCA is claimed on the property.

What to Do if You Missed the Reporting Deadline

The principal residence exemption is only allowed if you report the disposition and designate the property as your principal residence on your tax return. If you forget to make this designation in the year of the disposition, it’s important to amend your return for that year. While the late designation is likely to be accepted, penalties will apply.

Penalties for Not Reporting

Failure to report can result in losing the principal residence exemption. A late filing or an amended return can be made, but there will be late filing penalties of $100 per month, up to a maximum of $8,000.

Conclusion

Not reporting the sale of your principal residence is a significant error to avoid during tax time. Remember to report this sale on schedule 3 and form T2091(IND). While there are no taxes on this sale, penalties for not reporting can be substantial.

At Shajani CPA Chartered Professional Accountants and Advisors, our team of Calgary Accountants, Edmonton Accountants, and Red Deer Accountants is ready to assist you with your personal tax filings, ensuring compliance and optimizing your tax situation.

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Shajani CPA is a CPA Calgary, Edmonton and Red Deer firm and provides Accountant, Bookkeeping, Tax Advice and Tax Planning service.