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Principal Residence Tax Trap

The principal residence exemption ensures any gain on the sale of our home is not taxable. Although the tax rules have not significantly changed over the years, new reporting requirements by CRA may subject taxpayers to severe penalties. Effective in 2016, the maximum penalty for not filing the appropriate tax forms when a family sells their principal residence is $8,000.

 

Prior to 2016, there was no requirement that any gain on the sale of your home be reported on your tax return, but new reporting requirements have been introduced. If a family sells their home after January 1, 2016, they must comply with the following reporting requirements:

  • Effective for the 2016 taxation year, the sale of a principal residence must be reported on your tax return

 

  • Effective for 2017, taxpayers the must complete form T2091 – “Designation of a Property as a Principal Residence by an Individual.” The sale must also be reported on Schedule 3 of your tax return

Even if there are no taxes payable because of the principal residence exemption, the penalty for non-filing the forms are $100 a month to a maximum of $8,000. If a family sold their home since 2016 and did not file the appropriate forms, file an amended tax return as soon as possible and CRA may waive the penalty.

These new reporting requirements were introduced to allow CRA to scrutinize transactions related to the flipping of homes and families that own both a home and a cottage.

Other issues to consider when selling your principal residence include:

 

  • Never claim capital cost allowance on your home if you are running a business from your home. This will jeopardize the principal residence exemption on the portion of the home that was used a business

 

  • The principal residence exemption covers the building and land, but only one-half hectare of land is included unless the taxpayer can argue the additional land was necessary for the enjoyment of the property

 

  • Living in a vacation property for a few weeks annually will normally result in the property qualifying for the principal residence exemption

 

  • The tax department will consider the increase in the value of the property to be an equal amount each year and will not take market conditions into consideration

 

  • If a family owns both a home and a vacation property, they can determine which property will be their principal residence at the time the first property is sold

 

Bottom Line – The profit from the sale of the family home is not taxable but ensure the proper tax forms are filed to avoid significant penalties.

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