Are you getting ready to buy a home? Here’s a quick summary of the principal residence tax exemption in Canada – and its recent changes – and what it can mean for homeowners.
What administrative changes in reporting requirements does the Canada Revenue Agency (CRA) stipulate regarding principal residence tax exemption Canada? Previously, once you disposed your principal residence or were deemed to have sold it, you didn’t have to report it in the income tax or benefit return.
Equally, this also meant you didn’t have to pay tax for any gain from the transaction. But this came with a caveat. And you only qualified for this full income tax exemption after confirmation that the property was your principal home throughout the period you owned it.
Conversely, from the onset of the 2016 tax year, more emphasis is now placed on reporting basic information relating to; acquisition dates, gains made from the sale, and details of the property. And upon filing your income tax returns, this allows you to claim the entire principal residence exemption after selling your premises.
What’s more, if you fail to meet the set resident time requirements, the principal residence exemption amount may either reduce or be non-applicable.
What Informs the changes?
Commencing from January 1, 2016, you will have to report the sale of your residence on schedule 3. And this aims at not only improving compliance but also the administration of the tax system.
Is Late Filing Possible?
Under certain circumstances, you can claim the exemption late (for the income tax return year of sale) upon requesting the CRA for an amendment of that year’s tax returns. However, this deferred filling is likely to attract an applicable penalty of $8,000 or $100 for each month the request remains overdue—whichever amount is the lesser. Also, you have to make the application in a format that is satisfactory to the CRA.
Moreover, the CRA places concerted efforts on communicating to taxpayers the need to report the sale of a principal residence in the subsequent income tax returns. Further, it provides remedies for dispositions that occur during the transitional period (including those that arise in the 2016 taxation year). Consequently, the CRA will assess the late filing penalties based on the extreme scale of each case.
How Does the Rule Apply for Deemed Disposition of Property?
The new rule covers deemed disposition. More so, when you retain the ownership of the asset but change the use of the property. These alterations may be in the form of:
- Changes to parts of the principal residence to rental or business premises
- Transformation of a rental or business enterprise to a principal residence.
Generally, any change in the use of your property translates to a sale of the asset (at a reasonable market price) and subsequent acquisition of the property for that amount. For reporting purposes, you have to file the disposition (and designation) of the principal residence. Besides, the associated capital gain or loss for the year in question. Contact us for more insights.