On October 3, 2016, Minister of Finance Bill Morneau announced a number of measures to address perceived abuses of the PRE. The PRE essentially allows gains experienced upon the sale of a principal residence to be tax free. Here are some of the major changes.
Reporting the Sale of a Principal Residence
While the legislation has always required that property be designated as a principal residence, CRA has historically waived the requirement for any filings or disclosure where the entire gain was exempt due to the PRE. However, effective for sales of property eligible for the PRE occurring on January 1, 2016 and later, individuals will be required to report the sale in their personal income tax return. Basic information such as the year of acquisition, proceeds of disposition, and the address of the property must be disclosed. This reporting may also be required where the property has not been sold but there is a deemed disposition. A deemed disposition may occur, for example, when a personal home is converted into something else, like a rental property.
If the disposition is not properly and timely reported, the PRE may not be available. However, CRA does have the discretion to accept a late designation. If the late submission is accepted, CRA also has the option to levy a penalty ($100 per month late, up to a maximum of $8,000). The penalty may or may not be issued depending on the circumstances.
Extended Assessment Period
A further proposal would provide CRA with the authority to assess taxpayers beyond the normal assessment limitation period (generally 3 years) when the disposition of real estate is not appropriately reported in the tax return. In other words, there would be no time limit for such an assessment. However, CRA’s ability to reassess will be limited to only the unreported disposition of the real property.
Note that this extended reassessment period is not restricted to real estate used as a principal residence – most real estate counts. If the tax return is later amended to report the disposition, CRA’s ability to reassess will end approximately three years after the adjustment or amendment is filed.
This amendment applies to taxation years that end on or after October 3, 2016.
Action Item: If disposing of any real estate, discuss with an advisor as to how this should be reported on your tax return.
Article originally published in: Tax Tips & Traps 2017 First Quarter – Issue 117.