New Rules for Principal Residence Exemptions

In the fall of 2016, the Federal Department of Finance announced a series of changes to the rules governing the principal residence exemption (PRE). These rules include additional restrictions on eligibility for the exemption, and for certain situations, extending the reassessment period of income tax returns for the year of disposition.  These changes could impact you, when a sale of your home is made, and represent a substantial increase in compliance associated with claiming the PRE.

The PRE is an exemption available to individuals from taxation on otherwise realized capital gains on the disposition of their ‘principal residence’.

Prior to the new rules, individuals did not have to report the disposition of a principal residence if their entire gain was exempt due to the PRE. Beginning in the 2016 taxation year (so reporting in early 2017), individuals who sell their principal residence MUST report the sale on their returns under Schedule 3.  If a gain is completely exempt, the principal residence designation may be made.  The year of acquisition, the proceeds of disposition and a description of the property will need to be reported.  In the event that only a portion of the gain is exemption, a separate form (T2091) must be completed.

The new rules increase the reassessment period under certain circumstances for an unlimited period beyond the normal 3-year period if a taxpayer fails to report a disposition of real property in a taxation year.   What this means is that should you fail to report the disposition (sale) of your principal residence on your tax return for the year, CRA is able to reassess the return for that year for an unlimited number of years in the future.  This unlimited reassessment period can only be stopped by subsequently filing an amended return to correctly report the disposition.  The filing of the amendment however does not preclude the minister from reassessing outside the normal reassessment period under another exception.  Late filing or amendment penalties may also be assessed.

It is important for clients to know of the changes to these rules, and to keep adequate records of the associated capital costs of a home, including purchase price, and costs of any and all upgrades to the property, in the event that only a partial PRE is available.

Please feel free to contact one of our lawyers for more information on the new rules affecting the disposition of principal residence, or to discuss how these new rules may affect you.