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Reporting the Sale of Your Principal Residence

Reporting the Sale of Your Principal Residence

Author: Tracy Ruddell

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The Government of Canada has changed the requirements for individuals reporting the sale of Real Estate on their tax returns. If you sold your principal residence last year, you must report it on your 2016 tax return on so forth for future years, even if a capital gain was not realized.

 

Principal Residence Sale Must be Reported on Your Tax Return

On October 3, 2016, the Federal Government announced a change to the Canada Revenue Agency’s (CRA) reporting requirements for the sale of a principal residence. Historically, Canadians were not required to report the sale of their principal residence providing that the home was their principal residence for every year that they owned it. Now, you must report the sale regardless.

Does this mean you’ll be charged capital gains on the profits? Not necessarily. Again, if the property was your principal residence for every year you owned it and the CRA doesn’t smell “investment property” in anyway (such as in a flip), then you don’t owe tax. The principal residence tax exemption still applies for Canadians; nothing has changed there.

If the property was ever rented for a period of time OR if the CRA can prove that your intent at the time of purchase was to flip the property in order to turn a profit, then be prepared for the Tax Man to come knocking. Even in the case of a rental property or flip, however, you may not owe tax on the entire profits. This is where employing the services a savvy Accountant can pay off.

Now, to be fair, this isn’t anything new; capital gains or, in some cases such as in professional flippers, business income tax owed from the sale and/or rental of income properties has always been in place. The change is that now, ALL Canadians must to report the sale of principal residence(s) and this is to help the CRA more easily detect the tax dodgers.

 

What Qualifies as a Principal Residence?

The CRA defines a principal residence as follows:

A property qualifies as your principal residence for any year if it meets all of the following four conditions:

-It is a housing unit, a leasehold interest in a housing unit, or a share of the capital stock of a co-operative housing corporation you acquire 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.

 

Why the Change?

For the average homeowner, this may seem like a lot of additional work and stress for nothing. The impetus behind the change was to start cracking down on investors who are skirting tax obligations, helping to fuel the housing affordability crisis. This was one of three measures introduced in fall 2016 including the new Canadian mortgage rules we’ve reviewed previously.

The Department of Finance, Canada, announced that these new measures were being introduced to:

Bring consistency to mortgage insurance rules by standardizing eligibility criteria for high- and low-ratio insured mortgages, including a mortgage rate stress test;

Improve tax fairness by closing loopholes surrounding the capital gains tax exemption on the sale of a principal residence; and,

Consult on how to better protect taxpayers by ensuring that the distribution of risk in the housing finance system is balanced.

There’s no doubt (in our opinions) that we need some form of Government intervention. Just last month, the average cost of detached Toronto homes for sale topped $1.573M. Average. The February Toronto Real Estate Market left everyone stunned.

Is focusing on holding flippers and other investors accountable for taxes enough to swing the market pendulum in the other direction? Likely not. It certainly won’t solve our supply issues in one fell swoop but the Feds are backing it as one step of many that could inch us towards a more balanced market.

It’ll be interesting to see the trend lines for Toronto Real Estate capital gain payments in 2016 over previous tax years. Certainly, local investors are a sizeable market segment although the media and some politicians are focused mainly on foreign investors (and we're certainly seeing a lot of that in our condo buyer segments) but GTA wide hard data on foreign buyers just doesn't exist currently.

 

Make Sure That Your 2016 Tax Return is Complete

If you sold your property in 2016, you must claim the sale on your tax return due by April 30, 2017. You’ll do so by filling out Schedule 3 and including it with your return. It'll ask for basic information such as the date of acquisition and sale, the proceeds and a description of the property.

Further information is available on the CRA website:

Overview on Principal Residence Reporting Requirements

2016 Guide to Capital Gains

General Info on Filing Your 2016 Tax Return

 

 

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