Prior to 2016, the sale of your principal residence wasn’t usually reported on your income tax return. Generally speaking, unless your home was used to generate income (ex. as a rental unit), the specifics of the sale were not sent to CRA. For the tax year 2016 and beyond, this is no longer the case. Even if you’ve never earned income from your home, you now must report the details of the sale on Schedule 3 of your return.
What has changed?
To be clear, the exemption rules surrounding the sale of your principal residence haven’t changed. If your home was your principal residence the entire time you owned it, any profit you make from the sale is still exempt from capital gains. The difference is that now the details of the sale must be reported. Same goes for “changes in use” rules meaning that if your principal residence became a rental at some point for example, you may be subject to capital gains tax for that period of time.
Along with the reporting requirements, CRA has also made a couple of other significant changes surrounding principal residences:
- The reassessment period has been extended – indefinitely. Usually, CRA only reassesses taxpayers within three years of the original Notice of Assessment. Under the new rules, if you failed to report the sale of your principal residence, CRA can reassess you more than three years later. As of 2016, if you sell your principal residence and don’t report it, CRA can reassess you at any time in the future.
- Specific late-filing penalties have been put into place for those who don’t report the sale of their principal residences on time. The rate is listed as $100 X numbers of months late – to a maximum of $8,000.
Reporting the Sale
The sale of a principal residence is reported on the newly revamped Schedule 3.If the home you sold was your principal residence for the entire time you owned it, reporting the sale is rather simple. Just check the box beside the option “I designate the property described below to have been my principal residence for all years owned.” and enter the details below. You’ll need to enter:
- The complete address of the residence
- The year you acquired the property
If the home you sold was only your principal residence for part of the time you owned it, you sold multiple properties in one year, or the property had a change in use, check the corresponding box on the Schedule 3. You’ll also need to complete the additional form T2091 (IND).
Form T2091(IND) – Designation of a Property as a Principal Residence by an Individual – must be completed if the home you sold wasn’t considered to be your principal residence for the entire time you owned it. This form calculates the amount of capital gains your sale is subject to. The resulting number is entered on Schedule 3 to complete the capital gains calculation.
Designating a Cottage as a Principal Residence
You may choose to designate another property as your principal residence, other than your family home. For example, if you sold your cottage last year for a sizable profit, you may consider designating it as your principal residence for the time you owned it. Keep in mind that if you do choose this route, when you sell your family home, you may end up with a capital gain. Here’s an example:
Penny bought her home in the city in 2001 and her cottage in 2010. She has used neither property in business or as a rental. She sold the cottage in 2016 for a profit of $150,000. Penny can name her cottage as her principal residence for the years 2010-2016. This means that the profit from the sale would be exempt under the capital gains rules.
However, If Penny sells her home in the city in 2017, capital gains may apply if she makes a profit. This is because between the years 2010 and 2016, the cottage was named as her primary residence. It’s important to consider all of the possible gains scenarios before designating your primary residence.