Written by: Enzo Morini, MBA, CPA, CA | Williams and Partners
The principal residence exemption allows for all or part of the realized capital gain on the sale of a taxpayer’s principal residence to be tax free. For the purposes of the principal residence exemption, the Canada Revenue Agency defines the taxpayer to be a family unit consisting of the taxpayer, their spouse and any unmarried minor children.
The CRA permits a family unit to designate one residence as their principal residence for any given year. Families with one home would have only one principal residence which means they would get full exemption from tax on any capital gains.
Until recently, the CRA did not require a taxpayer to report the sale of their principal residence on their income tax and benefit return. Unlike the sale of a property not classified as a principal residence where the capital gains realized would be reportable and taxable, the sale of a residence designated as the principal residence was exempt from tax reporting and from inclusion of any capital gain or loss into income or as a deduction. However, on October 3, 2016, the Canadian Government announced administrative and legislative changes to CRA’s reporting requirements for the sale of a principal residence. Starting with the 2016 tax year, a taxpayer will be required to report basic information related to the sale of their principal residence. The minimum information that will need to be reported includes the year of acquisition, the proceeds of disposition, and a description of the property sold. In some cases, the principal residence exemption does not cover all of a taxpayer’s capital gain on the sale of their home. In those cases, additional information must be provided to determine the full amount of the gain and the portion of the gain that is exempt.
These changes only impact the reporting of the sale of a principal residence and do not change the tax exemption associated with the sale of a principal residence. However, not reporting the sale of a principal residence could be costly. The normal time limits on reassessments no longer apply to unreported real estate sales. CRA can reassess an unreported real estate sale at any time. CRA has the discretion to accept or reject a principal residence exemption claim that is not filed as part of the original tax return for the year of the sale.
These changes also apply to transfers of a principal residence other than a sale; for example a gift to a child, or a bequest under a Will.