Earlier this year, the federal government introduced new tax rules that should be of interest to any Canadian homeowner, particularly those interested in selling their home. The changes pertain to the ‘principal-residence exemption’ (PRE) which, until recently, stipulated that homeowners who sell their principal residence need not report the sale on their income tax return, and do not have to pay tax on any gains made from the sale.
Under the new rules, homeowners must report all sales of primary residences, whether or not the exemption applies. Although the changes were implemented primarily to ensure that foreign investors adhere to Canadian real estate tax laws, they have implications for Canadians as well.
Real estate law is a complex, multi-faceted field. Before you decide to invest in real estate or sell a property, make sure to acquire the services of an experienced Ontario real estate lawyer.
Inadvertent tax evasion
Because the PRE previously did not require home-sellers to report their sales, some Canadians may have inadvertently avoided paying taxes on some real estate exchanges. In a recent article for the Globe and Mail, columnist Tim Cestnick explains how this might take place:
“Consider an example. William purchased a home in the year 2000. In 2004, he purchased a cottage. In 2010, he sold his city home for a profit and purchased a new one. Then, in 2014, he sold the cottage for a profit. He didn’t report the sale of the city home in 2010 because the PRE sheltered the full capital gain from tax. No problem. Nor did he report the sale of his cottage in 2014 because he correctly understood that a cottage can also generally qualify as a principal residence. The problem? William believed the cottage sale was also tax-free, thanks to the PRE – but it wasn’t.”
Because William never filed Form T2091, which designates a property as a principal residence, and did not report the sale of his city home, the Canada Revenue Agency (CRA) automatically designated the city home as his primary residence during the full time he owned it. As such, William cannot call the cottage his primary residence, and can be taxed on some of the gains from its sale.
“Like William,” Cestnick writes, “many Canadians don’t understand how these rules work and have inadvertently, in the past, escaped tax on the sale of all properties.” This situation can be avoided with the help of an Ontario real estate lawyer.
How could this new rule affect you?
The new PRE rules apply for 2016 onwards, so if you sold your home during this calendar year, you will need to declare the sale on your taxes. Failing to report the sale of a permanent residence will disqualify you from the PRE, which could mean higher taxes in April. An experienced Ontario real estate lawyer can help you understand the CRA’s new rules for the sale of primary residences, and ensure your home sale goes off without a hitch.
If you are planning on selling your home or investing in a new property, contact a Nanda & Associate Ontario real estate lawyer today to learn how our team can help.
