Principal Residence Disposal Reporting Rules

Last summer, CRA reported that it had initiated a test program, manned by 70 government auditors, to review real estate transactions in Ontario and BC. The target included a) professional contractors b) individual serial fixer-uppers and c) “middle investors” flipping residences under construction.  Approximately 2,200 files were reviewed, which yielded approx. $65M in audit recoveries, and which tacked on $10M in penalties.

Appreciation of principal residences has always been tax-free to all Canadian residents, in almost all situations. The CRA administrative position has always been that sales of one’s home, thus, did not need to be reported on a tax return. However, beginning with the 2016 tax year this will no longer be the case, as CRA has instituted a new law to crack down on tax evasions.

The law is retroactive to the beginning of 2016, when all principal residence sales must be reported on the capital gains Schedule 3 of personal tax returns, even though any appreciation likely will be tax-free. The existing Form T2091 still will be required when a home was not the principal residence for all years owned. Historically, CRA’s club has been a bit clumsy, in that it must forage through the data banks of real estate transactions as filed with Land Title offices. Now CRA’s audit data bank will be fed internally from tax return filings! So, for instance, serial renovation flippers will be flagged easily.

CRA will frown upon non-compliance, with a penalty assessable of $100 per month to a maximum of $8,000 for over-looked reporting. They promise a lenient approach in transition for 2016. An extra hitch is that the granting of tax-free appreciation on the home requires compliant filing. Technically, this means not filing could ultimately cause the gain to become taxable!

Lastly, the over-arching Statute of Limitations for taxpayer transgressions is waived for these transactions, leaving them open to attack forever!

So…this Spring taxpayers and their tax preparers will need to be mindful of what before was a non-consequential event: changing homes. Penalty assessments for non-compliance will not be greeted happily by either party!

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