Until recently, an individual selling his or her “principal residence” did not have to report anything on their tax return for the year of disposition. For ages, the administrative position of the Canada Revenue Agency (CRA) allowed taxpayers to not report the sale as long as the entire gain was sheltered by the principal residence exemption. This is about to change.
For taxation years ending on or after October 3, 2016, any sale of a principal residence must be reported in the seller’s tax return for the year of sale even if the entire gain is fully protected by the principal residence exemption. This new rule will require individuals who sell a home at any time during 2016 to report the disposition in their 2016 tax return.
If the disposition is not reported the CRA will not be bound by the normal three-year limitation period for reassessing the disposition. The reassessment period for unreported dispositions will now be extended indefinitely, regardless of whether the taxpayer’s failure to report the disposition was innocent or not. Prior to this change the CRA could only reassess beyond the normal three year limitation period where the CRA could prove carelessness, negligence, wilful default or fraud in failing to report the disposition.
The proposals are targeting the short holding periods (the home may not qualify as capital property, a condition of being a principal residence), a house that was not ordinarily inhabited in each year of ownership by the vendor (another condition to qualifying as principal residence), or builders who build, then occupy, a house before selling (these would be considered inventory and not a capital property). No doubt his change will result in many more audits and reassessments to deny the principal residence exemption.
Careful attention should be paid by trustees and executors to obtaining clearance certificates prior to distributing estates where there has been a recent home sale.