Ready to file your 2019 tax return? If you sold your home last year or are planning to sell in 2020, we want to make sure you understand the rules about reporting the sale of your home!
What are the tax rules about principal residences?
The new rules were introduced in October 2016 and they changed the reporting requirements concerning the sale of your principal residence.
Before 2016, if you sold your principal residence, you did not have to report the sale on your income tax return, but now it is a requirement.
What do I need to do as a homeowner?
The good news is that you still don’t have to pay capital gains taxes when you sell your principal residence (provided you’re a Canadian resident and otherwise satisfy certain requirements under the new rules). But now, you need to include some details about the sale of your home on your tax return.
You’ll need to provide the year you purchased your principal residence, address and sale price.
The form to use is included in your tax package (Schedule 3 of your tax return). There has also been a change to the way non-residents calculate the length of time they’ve owned their principal residence.
What is a principal residence?
According to the Canada Revenue Agency (CRA), a “principal residence” is any residence ordinarily inhabited by you or a family member in the applicable year.
There’s no need to live in the property for the entire year, and even short periods of time during the year (like vacations) can meet theh criteria. Your principal residence doesn’t even have to be in Canada, but only one dwelling can be a principal residence at a time, and you can decide which dwelling it will be.
If you sell a property that you haven’t designated as your principal residence, you must report half of any capital gains from the sale and pay tax on them.
So why are there new rules anyway?
The new rules were designed to close a loophole. In theory, the change to the way property owners calculate the number of years they owned a property should hypothetically reduce the number of foreign investors and "house-flippers" who previously avoided paying capital gains taxes on the sale of residential real estate by claiming their properties as their principal residences.
The reporting requirements also let the CRA monitor compliance with the rules, to ensure that only those entitled to the “PRE” Principal Residence Exemption, can use it.
What happens if I don’t report?
If you don’t, you may be liable for capital gains on the sale, plus late charges and interest. The penalty is $100 per month for each month you’re late, to a maximum of $8,000.
So the bottom line is, when you sell your principal residence you will need report it on your tax filing for that tax year.
Here is a link to CRA and information on:
Reporting the Sale of Your Principal Residence
Of course, we recommend you consult an income tax expert to ensure you follow the proper procedures and receive advice based on your specific situation.
We hope you find this information helpful!
~ Karin & Jen
Your Proven YQR Real Estate Team