Changes to the Reporting of the Principal Residence Exemption and How This Affects All Residential Real Estate Sales for the 2016 Year
Wednesday, January 11, 2017
One of the greatest tax saving incentives offered by Canada Revenue Agency (CRA) is the principal residence exemption (PRE). The basics behind this exemption is that whenever an individual or a family sells their principal place of residence in Canada, any gain they incur on this sale is tax sheltered. For example, say you originally purchase a property for $500,000. 5 years later when you sell the property, it sells for $600,000, net of expenses. Using the PRE, this $100,000 gain from the sale is 100% sheltered from tax.
As this exemption offers such a large tax saving, it is no surprise that there is a lot of misinformation surrounding it, such as the following myths:
All of these statements are false.
Due to the large amount of sales that took place in the hot real-estate markets this year, such as Vancouver, and the past abuse of the exemption, CRA has made it their personal objective to crack down on the reporting of this exemption moving forward to ensure all real estate transactions are properly reported.
For the 2016 personal tax year, and all years subsequent, all sales of residential properties must be reported on your client’s personal tax return, regardless as to whether or not there is a tax implication on the sale. As well, if a property is sold and it qualifies for the principal residence exemption the tax payer is required to file a specific form to claim this exemption.
CRA has warned that if you fail to report the sale of your principal residence on your tax return and are assessed, you will be subject to a penalty of the lessor of $8,000 or $100/month for each complete month from the original due date of the election. This penalty will also not include any professional fees incurred to file the amended return, and the exemption election form.
The effective date for this change is January 1, 2016, meaning that any sale that took place during the 2016 calendar year must be reported. Also, they have noted that although most tax returns become barred by statute after 3 year from the date of reassessment, CRA, has waived this restriction, and can go back as far as they want in future years to ensure that this reporting requirement is met and that the abuse of this exemption comes to a halt.
If you would like more information on the above changes to the principal residence exemption, information on tax planning opportunities using the principal residence exemption, or know of an individual who would like assistance in filing their 2016 personal tax return to report the sale of their principal residence, please do not hesitate to have them contact our firm.