Tax Reporting Change Will Affect All Homeowners

The Distinguished Advisor Workshops soon to be running across Canada will discuss a major change in reporting or principal residence dispositions that will affect Canadians and the tax preparation broadly:  all principal residence dispositions must be reported on the tax return starting in 2016.

In addition, CRA has been given expanded powers to go after missed reporting from the past, as well as  levy up to $8000 in penalties for late principal residence designations.

These rules will apply to anyone who disposes of their principal residence in 2016 or later. Taxpayers will have to report that disposition on their T1 tax returns on Schedule 3, effective January 1, 2016, according to CRA. This is different from the October 3 date mentioned by Finance Canada in their announcement. Actual, deemed and mixed-use dispositions are all affected.

Further, CRA will be given the authority to assess taxpayers beyond the normal assessment period for real estate transactions (currently three years)  to ensure reporting of the dispositions did take place. The proposals did not give a limit to the extent of the new, longer reassessment period. The opportunity for the CRA is to assess whether the principal residence should be tax exempt, or whether frequent flips of the home or failure to inhabit the home appropriately will amount to a taxable disposition.

Under the proposed legislation, taxpayers will have to report all dispositions of real property, even if that property was their principal residence for every year that they owned the property. Prior to 2016, no reporting was required at all when a taxpayer disposed of a property and claimed a full exemption for the gain under the principal residence rules.

In addition, new rules were introduced to prohibit permanent non-residents who acquired a home in Canada after October 2, 2016, from claiming the principal residence exemption.

Trusts are affected, too. They will be restricted from claiming the principal residence exemption for tax years after 2016 unless certain additional eligibility criteria are met. Qualifying trusts will include a spousal or common-law partner trust, an alter-ego or similar trust, a qualifying disability trust or a trust for the benefit of a minor child of deceased parents. The beneficiary of the trust must be a resident of Canada in the year the property is inhabited, and a family member of the person who creates the trust. Grandfathering criteria will be set in place.

At this time, new forms have yet to be drafted but early information indicates that, in the year of disposition of a principal residence, taxpayers will have to report the year of acquisition, proceeds of disposition and description of the property. The principal residence designation Form T2091 must be completed when a second residence is owned by the family. Be warned – it’s complicated.

For an advance update on these provisions and how the new rules will affect both you and your clients, join us at the Distinguished Advisor Workshops October 27 to November 3. Early registration ends October 15; thereafter full tuition fees will apply.

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