In October of 2016 new rules were introduced regarding the reporting of sale of a ‘Principal Residence’ in the sellers’ income tax return. Prior to 2016 the seller of a ‘Principal Residence’ was not required to report any ‘Capital Gains ’ from the sale on his or her income tax return.
What is a Capital Gains Tax?
Where a person purchases and sells common types of capital property such as real estate, stocks and shares for more than the purchase price, the profit made is known as a Capital Gain. Under the new law 50% of this profit or Capital Gain may be taxed at the persons marginal tax rate which depends on the said persons income.
What is a Principle Residence?
A ‘Principal Residence’ of a person is any residence ordinarily inhabited by him/her or his/her family in the tax year. The law does not require this residence to be a house, but may also be a cottage, mobile home, houseboat or condominium. The principal residence need not be dwelled in or inhabited through out the entirety of the year; even short periods of inhabitancy during the year may be enough to designate the property as a principal residence. However, the law restricts the designation of a Principle Residence to only one property. Furthermore, there is no requirement that the principal residence even has to be in Canada. The sale of this property is exempt from a Capital Gains tax. However, if a person sells a property which is not designated as their principal residence 50% of any Capital Gains or profit must be reported and tax must be paid on them.
Steps to take as a homeowner?
To the relief of many homeowners the sale of a Principal residence under the new rules is still exempt from a Capital Gains tax (subject to a few additional requirements). A real estate lawyer facilitating the sale of the property should be consulted regarding this. However, under the new rule’s homeowners selling their Principal Residence after 2016 are now required to disclose additional information regarding the sale in their Tax return. The additional information is disclosed using the form now included in the tax passage, namely schedule 3 of the tax returns. The additional information required to be disclosed is;
- The address of the Property
- The year the property was purchased
- And the price or amount the Property was sold for.
Liabilities in cases of a failure to report?
Homeowners selling their principal residence after October 2016 should not undermine the importance of reporting this sale. In instance where they fail to report the sale, the residence which might otherwise be exempt from the Capital Gains Tax may now be held subject to it, along with any interest and late charges. The CRA can be requested to allow for an amendment to the tax return form in order to designate the property sold as a principal residence. Nevertheless, even if the CRA agrees a penalty may still be applicable. The late penalty is $100 per month to a maximum of $8000.
Objectives of the new rules:
The new reporting requirement rules were introduced in order to assist the CRA in the monitoring the compliance to the rules by homeowners selling their properties. This monitoring is done in order to ensure that the Principal Residence Exemption from the Capital Gains tax is only relied upon where the seller is entitled to it. Additionally, the new rules help curtail loopholes where foreign investors and non residents would invest and sell properties in Canada in order to make profits and rely upon the Principal Residence Exemption in order to escape a Capital Gains Tax.
For more information please contact one of our experienced Real Estate Lawyers at MEHDI AU LLP.
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