In our last column we talked about the tax benefits for Canadians owning a principal residence. One of the positve parts about selling a principal residence in the past was that you didn’t even have to let Canada Revenue Agency know you sold it.
That is about to change.
On October 3, 2016, the Government announced that the Canada Revenue Agency now has a new reporting requirement for the sale of a principal residence. Starting with the 2016 tax year, individuals will be required to report basic information about the sale. This new rule will require individuals who sell a home at any time during 2016 to report the disposition in their 2016 tax return.
The reporting of the sale will be done on Schedule 3 of your tax return. CRA will modify this form for the 2016 tax year. It is anticipated that you will be required to report the date of acquisition, proceeds of disposition, and description of the property.
If the disposition is not reported to CRA, it will not be bound by the normal three-year limitation period for reassessing the disposition. The reassessment period for unreported dispositions will be extended indefinitely, regardless of whether the taxpayer’s failure to report the disposition was innocent or not. Prior to this change, the CRA could only reassess beyond the normal three year limitation period where the CRA could prove carelessness, negligence, willful default or fraud in failing to report the disposition.
Listed on the Canada Revenue Agency website, a property qualifies as your principal residence for any year it meets all of the following four conditions:
- It is a housing unit, a leasehold interest in a housing unit, or a share of the capital stock of a co-operative housing corporation you acquire only to get the right to inhabit a housing unit owned by that corporation.
- You own the property alone or jointly with another person.
- You, your current or former spouse or common-law partner, or any of your children lived in it at some time during the year.
- You designate the property as your principal residence.
The actual rules with respect to the disposition of your principal residence have not changed other than the disclosure component. CRA has been increasingly focused on those non-compliant with the rules.
In British Columbia, the CRA doubled their efforts on auditing the real estate sector in 2015 and they have started a review of 500 high dollar value real estate transactions in this province.
The end goal for CRA is likely to uncover any unreported tax issues. With computers, real estate information obtained from third parties can more easily be used in their risk-assessment tools, and analytical work.
It always amazed me over the years that CRA focused on the reporting of investment income on dividends, interest, and other income as it was mandatory that those amounts were recorded on a tax slip such as a T3 or T5.
For most of the years that I have been a Wealth Advisor, CRA did not have a mechanism to monitor the actual disposition of stocks in taxable accounts.
As Wealth Advisors we would send a realized gain (loss) report to clients which they would report in part 3 of Schedule 3. If clients failed to report this, CRA had no mechanism linked to a third party to monitor for non-compliance. It is not until recent years that CRA has required financial firms to report the capital disposition of securities in taxable accounts to CRA. CRA now has a mechanism to monitor for non-compliance for sale of publicly trades shares, mutual fund units and the like.
Of course, the process of non-compliance is not black and white. A simple example is CRA targeting the short holding periods (the home may not qualify as capital property, a condition of being a principal residence), a house that was not ordinarily inhabited in each year of ownership by the vendor (another condition to qualifying as principal residence), or builders who build, then occupy, a house before selling (these would be considered inventory and not a capital property).
No doubt this change will result in many more audits and reassessments to deny the principal residence exemption. Careful attention should be paid by trustees and executors to obtain a clearance certificates prior to distributing estates where there has been a recent home sale where the principal residence exemption could be questioned.
Kevin Greenard CPA CA FMA CFP CIM is a Portfolio Manager and Director, Wealth Management with The Greenard Group at Scotia Wealth Management in Victoria. His column appears every week in the TC. Call 250.389.2138. greenardgroup.com
This is for information purposes only. It is recommended that individuals consult with their financial advisor before acting on any information contained in this article. The opinions stated are those of the author and not necessarily those of Scotia Capital Inc. or The Bank of Nova Scotia. ScotiaMcLeod is a division of Scotia Capital Inc., Member Canadian Investor Protection Fund.