home, principal residence, CRA, tax, exemption

CRA and your home

Selling A Principal Residence? Required Report To Canada Revenue Agency

The Canada Revenue Agency (CRA) is starting to crack down on real estate tax cheats. From April 2015 to March 2017, the CRA increased real estate audits in cities such as Calgary, Vancouver and Toronto. The results? They uncovered more than $329.4 million in taxable income that went unreported. Recently, the CRA have implemented even more measures to keep tax cheating at bay. On October 3, 2016, income tax amendments came into effect. Reporting principal residence sales is now mandatory in Alberta and all of Canada. Read on to find out what these changes are and how they impact you.

What Is The Principal Residence Exemption?

The principal residence exemption allows Canadian homeowners to avoid pay taxes on capital gains (profits) from the sale of their primary residence. According to the Income Tax Act, homeowners are now required to report every property sold (including the property where the tax payer lives) on their tax return. Even though reporting principal residence sales is required, any profits fall under the principal residence exemption. Previously the CRA allowed taxpayers to not report the sale at all. In an effort to ensure only eligible home owners take advantage of this exemption, new tax report laws are now in effect. Mandatory reporting principal residence sales ensures that the government can track how many such sales any person makes.

Reporting Principal Residence Sales Now Required

Prior to the 2016 tax year, if for every year you have owned your property, it was your sole residence, you did not have to report any income tax on the profits from the sale of your home. In fact you were not required to report the sale at all. On or after January 1, 2016, if you sold any properties (including your primary residence), you must report the transaction on either a modified Form T2091 or on Schedule 3, Capital Gains of the T1 Income Tax and Benefit Return. This law applies, even if the gain falls exclusively under the principal residence exemption.

Reporting Principal Residence Sales: What Tax Returns Need To Disclosed

The tax return will ask for a description of the property disposed of, the date of the disposition and the profits from the disposition.

What If I Do Not Report My Gain from the Sale of my Property?

Failing to report the payable taxes resulting from the sale of your property puts you at risk of being subject to tax penalties and even possible jail time.
Before 2016, the CRA was limited to a three year period to prove that an individual committed fraud, carelessness, or negligence in failing to report a disposition on their tax return.
Effective January 1, 2016, with mandatory reporting principal residence sales, the CRA may extend this period indefinitely, even if the taxpayer made an innocent mistake in failing to report their disposition. While this may seem like a small change, this time extension gives the CRA a limitless amount of time to find and act on audit leads, which will likely increase the amount of homeowner audits and reassessments.

What To Do If You Sold Your Principal Residence And Forgot To Report It

You forgot to report the sale of principal residence. While the CRA will accept a late designation, in extreme cases, you may be fined $8,000 or $100 for every month starting from the original date your taxes were due. To avoid being penalized, you should contact the CRA immediately and request for your income tax return to be amended.

Who is at Risk of Violating Income Tax Laws?

Property Flippers

Individuals who purchase and resell homes for profit within a short amount of time are engaged in “property flipping”. Some flippers “move” into the home and call it a principal residence. Typically, the types of individuals that engage in this include:

  • Investors who engage in shadow flipping, otherwise known as middle investors who profit from buying a property from a seller and selling to another buyer, often without informing the original seller until the signing date.
  • Individuals who repeatedly buy a property, renovate it, sometimes live in it for a short period then sell it for a profit in order to be eligible for the principal residence tax exemption.

While the profits from flipping real estate are sometimes considered business income (fully taxable), there are instances where flips are considered capital gains. Each situation will differ on a case-by-case basis. Mandatory reporting principal residence sales now allows the government to track these people with serial changes to their principal residence.

Property Builders

Individuals who build new developments or significantly renovate a home are required to charge the buyer GST/HST. This tax is calculated on the how much the market value of the property is including the land value. Builders are legally obligated to report the collected tax to the CRA.

Builders also lease themselves new or significantly renovated properties. The builder is considered to have sold the home to himself/herself. In this situation, GST/HST is also owed and the builder is legally obligated to report the tax to the CRA.

Note: If the property constructed by the builder is being used (more than 50% of the time) as his/her place of residence, this is not considered a sale and you can apply for a new housing rebate.

Are There Any Exceptions to the New Housing Rebate?

If you build/buy a property in Canada but you primarily live outside of Canada, your Canadian property would be a secondary place of residence and you will not be eligible for a new housing rebate.

If you buy or build a property in Canada that you intend on flipping, you will also not qualify for the new housing rebate. You are treated like any other home builder.

National Leads Centre

To assist the Canada Revenue Agency with identifying those who violate tax laws, the CRA launched the Informant Leads Program. Taxpayers who suspect individuals that fail to report GST/HST or income earned from a real estate transaction can report this anonymously.

Need Help Reporting The Sale Of Your Alberta Principal Residence?

We help all our clients who are selling their principal residence with the new disclosure form. While it only has to be reported at tax time, we will give you the correct form so that you can make sure that you properly report the sale. We are able to help answer your questions. Call Kahane Law Office in Calgary, Alberta now if you are selling your principal residence. Call 403-225-8810 or email us here directly.