Real estate continues to have a very high profile in our society. In the past few months, both the Feds and the province of BC have initiated new laws to shore up their revenue streams from real estate appreciation. The Federal “quasi-Budget” of October 3rd plugs a long-standing hole in the dyke. 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.
Truthfully, this opened a crack to tax evasion in the circumstance where appreciation of one’s home did not qualify to be free. 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.
The new October 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 databank 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…next 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!
Immigrants take a hit as well with new principal residence rules. A taxpayer must be a Canadian resident in order to designate a principal residence for any given year. The law includes a “1+” in the tax-free calculation. Effective after October 2, 2016, the immigrant also must be resident in the year of acquisition. Previously, the residence could have been bought whilst the taxpayer was still a resident elsewhere in the world: the “1+” would have covered that year as tax-free, but no longer.
Trusts also take a hit with new rules. A principal residence belonging to a testamentary trust and which is occupied by an adult specified beneficiary no longer will be eligible after 2016 to shield the further appreciation of the property as a principle residence of that party. A transitional provision allows the property to be marked to market at the end of 2016 to lock in the tax-free gain accrued to that date.