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Important changes to the principal residence rules

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  • On October 3, 2016, the Department of Finance released a Notice of Ways and Means Motion proposing changes to the principal residence rules. The amendments revise the calculation of the principal residence exemption for individuals who are non-residents of Canada throughout the year of acquisition of the property. As well, certain trusts will no longer be able to designate a property as a principal residence after 2016.


    Other proposals introduced—dealing with assessments and reassessments of returns and new reporting requirements—have a much broader application.


    Provided certain conditions are met, the principal residence exemption allows an individual to designate a property as a principal residence for any number of years during which the property was owned to eliminate or reduce the capital gains tax on the disposition of the property. For tax years after 1981, a taxpayer and members of the taxpayer’s family, including the taxpayer’s spouse and minor children, cannot designate more than one property as the family’s principal residence for the taxation year.


    The CRA’s administrative position1 has been that an individual does not have to complete and file Form T2091 (IND), Designation of a Property as a Principal Residence by an Individual (Other Than a Personal Trust) with his/her income tax return unless there is a taxable capital gain on the disposition of the property after using the principal residence exemption formula.


    What has changed?
    Under proposed legislation, beginning with taxation years that end after October 2, 2016, the CRA may at any time reassess an income tax return beyond the normal reassessment period (generally, three years after the date of the initial notice of assessment) where the taxpayer did not report the sale or disposition of real estate in his/her income tax return. This change also applies where the property is owned indirectly through a partnership. Under current rules, a reassessment after the normal assessment period is only allowed if the CRA can demonstrate that the failure to report the gain was attributable to neglect, carelessness or wilful default.


    In conjunction with this proposal, the CRA has also changed its administrative position discussed above. Starting with the 2016 tax year, individuals who sell their principal residence will have to report the sale on Schedule 3, Capital Gains of the T1 Income Tax and Benefit Return. Reporting will be required for sales that occur on or after January 1, 2016. More details on this new administrative position can be found on CRA’s website.


    When you sell a principal residence in 2016 or later, the CRA will only permit the principal residence exemption if the sale and designation of principal residence is reported in your income tax return. If you fail to report the disposition as well as make the designation of principal residence in the year of sale, the proposed changes will permit you to make a late-filed designation in certain circumstances, but a penalty may apply. Therefore, if you sold your residence in 2016, make sure that the disposition is reported on your 2016 tax return.


     
     


    1 See Income Tax Folio S1-F3-C2 (Principal Residence) – paragraph 2.15

    January 17, 2017