What is the Principle-Residence Exemption?
The Principle-Residence Exemption (PRE) has long been used by Canadians to avoid paying tax on capital gains arising from the sale of a primary residence. However, tax changes introduced by the federal government on October 3rd, 2016, may affect not only the foreign investors in the Canadian real estate, but also Canadian residents. The tax changes were introduced as a way to tighten the rules to ensure that the PRE is only being used in appropriate cases.
The new rules provide for new reporting obligations for the sales of the property and for deemed dispositions of the property. Starting with the 2016 tax year, to claim full PRE taxpayers will be required to report basic information, such as date of purchase, proceeds of disposition and description of the property on their tax return. Taxpayers will be required to report by filling out Schedule 3, for sales that occur on or after January 1, 2016. Form T2091 will still need to be filled out in cases where the property was not the principle residence for all the years that it was owned. Failure to report the sale of residence will result in an inability of receiving the PRE. If the taxpayer forgets to make a designation in the year of the sale, they can contact the Canada Revenue Agency and request amendment of their income tax return for that year, but a penalty may apply.
The onus will be on the taxpayers to understand the PRE rules and to follow them. It is recommended that taxpayers keep all receipts and invoices for any capital improvements done to the residence, to ensure there is evidence for the increased adjusted cost base, which may result in lower capital gains for those who are unable to rely on the PRE.
For more information, please visit: http://www.cra-arc.gc.ca/gncy/bdgt/2016/qa11-eng.html