Most Canadians know they don’t have to pay capital gains tax on the sale of their primary residence and, until recently, you didn’t even have to mention a sale on your tax return. But while your main house can still be sold tax free, there are new reporting requirements that, if not followed properly, could cause you some major tax-related headaches.
Last October the Canadian government began requiring everyone to report the sale of their home on their upcoming tax return. Fail to do it and the Income Tax Act now states that you could be re-assessed.
Last October the Canadian government began requiring everyone to report the sale of their home on their upcoming tax return. Fail to do it and the Income Tax Act now states that you could be re-assessed. You may even be subject to a penalty in the future. The Canada Revenue Agency (CRA) has stated that it is unlikely a penalty will be issued when the sale occurred in 2016, given that the reporting requirement is brand new, but it may not be so lenient going forward.
The new rule is part of the government’s attempt to reign in potential abuses of the principal residence exemption (PRE), such as non-Canadian residents claiming the exemption and others claiming it on a second property. Usually, 50% of a gain on an asset must be reported as taxable income. But the PRE allows Canadian residents to be exempt from paying tax on capital gains, as long as the home they’re selling is their primary residence. They do have to pay gains on the sale of a second home, like a cottage or an investment property.
“The rule is only that the house must be ‘ordinarily inhabited’ and there is a great deal of flexibility on that definition,” says Dave Ablett, Director of Tax & Retirement Planning at Investors Group. “The property doesn’t even have to be in Canada, as long as it’s owned by a Canadian resident.”
Now, you have to fill out the Schedule 3 form and report the date the house was purchased, the address of the home, and the proceeds received. Doing that will help the CRA prevent the PRE from being claimed by Canadians on more than one house for a specific period of time.
“What’s in the past is done,” says Dave Ablett. “But now the CRA is looking to the future and they’ll want these records to help verify. The Schedule 3 helps them build a much more sophisticated database.”
Though the change has been public since October, it hasn’t been widely publicized, says Ablett. Likely, the news of this reporting requirement was overshadowed by the new mortgage qualification rules, which made for much splashier headlines.
This headline is much plainer: If you sold your home in the 2016 tax year, find Schedule 3 and fill it in at tax time. If you’re eligible to receive the PRE, you will continue to do so. And if you have to pay taxes on any capital gains, the CRA will now know.