New Reporting Requirements for Sale of Principal Residences

On October 3, 2016, the Canadian federal government announced that when you sell your principal residence (or are considered to have sold it) you are now required to report on that sale.  That is a change. Until now you were not required to report the sale of a principal residence which was tax exempt.

Starting in the 2016 tax year (generally due by the end of April 2017) you are required to report basic information (date of acquisition, proceeds of disposition and description of the property) on your income tax return when you sell your principal residence to claim the full principal residence exemption.  The tax treatment of the principal residence exemption has not changed, at this time, only the reporting requirement.

To report the sale of your principal residence you will complete Schedule 3 of your T1 Income Tax and Benefit Return for the year you sell the property.  If the property was your principal residence for every year that you owned it, you will make the principal residence designation in your Schedule 3. In this case, the year of acquisition, proceeds of disposition and the description of the property are the information that will have to be reported.

CRA will only allow the principal residence exemption if you report the sale and designation of principal residence in your income tax return. If you forget to make a designation of principal residence in the year of the sale, it is very important to ask the CRA to amend your income tax and benefit return for that year. Under proposed changes, the CRA will be able to accept a late designation in certain circumstances, but a penalty may apply.

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).

The new rules also 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.

We recommend you talk to your accountant or refer to CRA’s website, or call CRA, and consult its form T4037, Capital Gains 2016, for more information.