If you sold a home in 2016, even your primary residence, you must report it when filing your tax to the Canada Revenue Agency or you could be penalized as much as $8,000.
If you’re thinking, hey, I never used to have to do this, you’d be correct. Up til the end of 2015, what you did with your primary residence was up to you. If you sold other property, you were subject to capital gains tax. However, when the Liberal government took over in introduced the new mortgage rules AND this little tax tidbit last October.
Hopefully, if you have already filed your 2016 return, you noticed it or where prompted to do it with tax filing software or perhaps your accountant saw it.
Principal residences are still tax exempt
You will not have to pay tax on your principal residence if you sold it last year. That hasn’t changed. Even if you made a good chunk of change on the sale, the proceeds are still yours tax free. So, the major difference is that you have to indicate on your return that the sale happened because now you have to apply for that exemption whereas before the 2016, it didn't have to be reported anywhere.
Why is the CRA doing this?
This requirement starting in the 2016 tax year has been implemented to help crack down on Canadians who avoid paying taxes on real estate transactions when required. At a time when markets in Ontario and the B.C. coast especially are really hot, this move by the CRA will close a loophole which speculators in these overheated markets have been taking advantage of.
Especially people who purchase homes simply to renovate and flip them. Buying a home, fixing it up and selling several months later meant house flippers were selling these properties and making a profit without claiming the income. This is a grey area especially when flippers would live in the basement or would believe that this home counted as a primary residence. However, because the purchase was never recorded with the CRA there was no opportunity to either prove or disprove that the property was a primary residence at all. A method of auditing these transactions is necessary according to the federal agency.
When this requirement was announced last October, many believed it was to get a handle on foreign buyers, but really the excuse by flippers that transactions involved a primary residence has involved, for the most part, Canadians.
With increased data now being collected by the CRA these transactions will be closely scrutinized.
Want to make sure you don’t get in trouble?
If you still have to file your 2016 taxes, here is the process to report any property sales you may have been involved in:
- Use Schedule 3 of your T1 2016 form: On this form you will have to report the date that the home was purchased, the date you sold it and the difference between the purchase and sale price. You will also be asked to provide a brief description of the property.
- Form T2091: You will need to fill out this form if you didn’t actually live on the property for the entire length of time that you had ownership of it. The form is on the CRA website. This would apply if the residence was a vacation property.
- Did you rent a portion of the residence out to others or use a portion of it for business? You may still be able to indicate that this home was your principal residence. Check the CRA website for details.
- Have you already filed your 2016 taxes and missed this? You are able to file a correction but do it as soon as you can. By law, the CRA can assess a penalty of $100 per month up to a maximum of $8,000 should you own money on the proceeds of a sale it it doesn’t qualify as a primary residence.
- Since this is the first year of this requirement, the CRA has stated that the penalty will only be assessed in extreme cases.