Earlier this month – on October 3, 2016 – Finance Minister Bill Morneau announced measures that will “improve tax fairness by closing loopholes surrounding the capital gains tax exemption on the sale of a principle residence”. The changes will effect the reporting requirements for the sale of a principal residence.

Prior to this change, the Canada Revenue Agency (CRA) held the following administrative position:

When you sell your home, you may realize a capital gain. If the property was your principal residence for every year you owned it, you do not have to report the sale on your income tax and benefit return.

This meant so long as your property qualified as your ‘principal residence’ for all the years you owned it, you were not required to fill out Form T2091 to report your proceeds and capital gains from the sale on your T1 General Income Tax and Benefit Return.

In making the reporting requirements as such, the CRA made it harder on themselves to catch potential errors or abuses made in claiming the principal residence exemption (PRE).

New changes

The new changes – which go into effect starting with the 2016 tax year – require you to report any sales – deemed or actual – of your property where you are claiming the PRE.

The intention of the CRA’s change in reporting requirements is to be able catch those who are incorrectly claiming the exemption. For example, in the past, taxpayers who simultaneously owned multiple properties may have been unintentionally and incorrectly reaping the benefits of the PRE for more than one property. Similarly, investors who practiced “house flipping” may have been incorrectly claiming the PRE if their property did not qualify as a principal residence.

What does this mean for you?

As an investor or someone who may be renting out their condo or home, the changes to the reporting rules for the sale of a principal residence can directly impact you. As an example, if there is a change in use of your property from personal use to income producing (i.e. rental) or vice versa, the CRA considers your property sold (“deem disposition”), meaning you have to report the disposition and capital gains from the sale with your tax return for that year. Failure to report the sale of a principal residence or an incorrect usage of the exemption, can result in capital gains tax owed along with significant penalties and prosecution.

To avoid any unintended consequences that may arise with the sale or change in use of your principal residence or find out more information on this topic, get in touch with an HST advisor.