The Principal Residence Tax Rules - Recent Changes

Late last year Finance Minister Bill Morneau introduced tax changes that will impact every homeowner in Canada. In particular, the newly announced rules will tighten and enforce the requirements necessary for claiming the capital gains tax exemption on a principal residence. To help you understand how this impacts you, here is some basic information.

What qualifies as a principal residence?

According to the Canada Revenue Agency, any residential property owned and occupied by you or family at any time in a given year could be designated as a principal residence.

How do capital gains and the principal residence exemption work?

All property—including your home, cottage, real estate rentals, even stock portfolios—are subject to capital gains tax when they increase in value.

If the accommodation you’re selling isn’t an investment but your principal residence, the CRA provides a full exemption from all capital gains tax you would’ve incurred.

How do the recent changes impact homeowners?

First, there are no changes to the principal residence exemption. What has changed, however, is that you have to report to the CRA when you file your tax return, in order to qualify for the principal residence exemption. Up until the recently-announced changes, you did not have to do that.

This reporting requirement will now apply to every property sold in Canada, even if the entire gain is fully protected by the principal residence exemption.

Is there a penalty for not reporting?

There is no immediate financial penalty for failing to report the sale of your home, however, much like other omissions, if the CRA audits and finds the sale you could be subject to interest on taxes owed, as well as penalties.

You're strongly recommended to take accounting/legal professional advice about this. Thanks.

(For details, go to ‘Money Sense’)