The principal residence exemption (PRE) has been around for years and is probably the biggest tax break that taxpayers anywhere could get. But with the enormous rise in real estate prices, and with it the enticement to flip properties, the government recently decided to change the rules regarding reporting the sale of your principal residence.
The principal residence exemption allows for all or part of the realized capital gain on the sale of a principal residence to be tax free. If the property was solely your principal residence every year that you owned it you do not have to pay tax on the gain. If at any time during that period you owned the property and it was not your principle residence or solely your principal residence, you may have to report all or part of the capital gain.
For the purposes of the PRE, the Canada Revenue Agency defines a family unit as the taxpayer, their spouse and any unmarried minor children. Your principal residence can be any of the following types of housing units – a house, cottage, condominium, apartment in an apartment building or in a duplex, and a trailer, mobile home or houseboat. A property has to qualify to be a principal residence.
Before the changes the CRA did not require taxpayers to file forms claiming the exemption if the property was eligible for the full PRE. However, for dispositions in 2016 taxpayers had to report the sale and designate the property on schedule 3 of their income tax return and include certain information such as the address of the property, the date of acquisition, proceeds from the disposition and what years they’re claiming the PRE.
For dispositions in 2017 and later years, in addition to reporting the sale and designating their principal residence on schedule, they also have to complete a special form 2091. The information will help the CRA keep better track of activity and potential abuses.
For the sale of a principal residence in 2016 and beyond the CRA only will allow the exemption if you report the disposition and designation on your income tax return. Under the changes the CRA will be able to accept a late designation under certain circumstances but a penalty may apply.
“Taxpayers who have failed to designate their residence as their principal residence in the year of disposition can still qualify for a late designation by applying to the CRA to amend their tax return but they could be subject to a late designation penalty of the lesser of $8,000 or $100 times the number of complete months between the due date of their tax return and the date of application to the CRA,” says Aurele Courcelles, assistant vice president of tax and estate planning with Investors Group. “If a property does not qualify for the PRE 50% of the capital gain would be included in the taxpayer’s taxable income.”
Anyone who has participated in the housing market over the last couple of decades should probably be aware of the enormous rise of home prices in Canada.
According to the Canadian Real Estate Association, the average price of all homes in 1984 was $76, 351. By 1996 that had risen to $150,899, rising again to $226,604 in 2004 and reaching $442,264 in 2016. Between 1984 and 2016 that’s an increase of $365,913.
“The reporting changes were really made to catch people who were flipping houses and to determine which properties and for what years were being claimed for the PRE,” says Courcelles. “Some taxpayers could get tripped up by the new reporting changes. It only takes a few minutes to do but it’s important because but the tax exemption can be very significant.”
Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors.