Canadian Finance Minister Bill Morneau introduced tax changes that are primarily targeting foreign investors in Canada’s real estate to ensure they abide by existing tax regulations. However,  Canadian residents are also paying tax on their principal residences.  Our tax rules are so complex that many Canadians don’t realize then when they sell a property they don’t have to pay taxes on their principal residence but then don’tpay taxes on the sale of other properties they may own.  Many have not paid taxes on every sale of their other residences thinking that every residential sale are tax-free, when they are not.   The Principal Residence Exemption (PRE) only applies to a Canadians principal property.  This has caused many not to report the sale and have paid no tax, even in situations where tax should have been paid.  These false dispositions have gone undetected by Canada Revenue Agency (CRA). That’s changing!

Example :  If a person purchased a home in year 2000, in 2005, he purchased a cottage, yet in 2011, he sold his principal home for a profit and purchased a new one. Then, in 2016, he sold the cottage for a profit.  If he didn’t report the sale of the city home in 2011 because the PRE sheltered his full capital gain from tax.  If he reported the sale of his cottage in 2016 because he correctly knew that a cottage can qualify as a principal residence.   The problem is that owners believe cottage sales are also tax-free, thanks to the PRE – but isn’t!  His city home was his principal residence for each year he owned it.  Since he did not file the form that designates a property as your principal residence and fraudulently not report the sale on his tax return.   The CRA thinks he designated his city home as his principal residence for the years he owned it, the result being no tax is owed. While the cottage is not entitled to designate it as his principal residence from the years 2005 to 2011, because he already “used up” those years on his principal home.  The result is that part of the capital gain on his cottage is taxable and he is required to file  the report that his cottage sale should have paid some tax.

Many Canadians are confused by the rules and have inadvertently escaped tax on the sale of all properties they owned.   Under the new rules, the CRA will mandatorily inform that tax is required to be paid on all property sales, other than the principal residence.  This new rule requires you to now report every sale of a principal residence on your tax return, whether you owe tax or not.  This starts with in 2016.  If you sold a home earlier this year, you’ll have to provide basic information (date of purchase, proceeds of disposition and a description of the property and sales amount) when you file your 2016 tax return.

If you fail to report a sale of a residence in 2016 or later years, you are not entitled to the PRE.  If you forget to designate a property as your principal residence in the year of it’s sale, ask the CRA to amend your tax return for that year.   The CRA will accept late designations but penalties usually are applied (penalty could be $100 for each complete month the designation is late, or $8,000, whichever is less).  The onus is on you to understand our principal residence rules.

Example :  When you have not sold your residence, you are deemed to have sold the place in certain situations (if you change all or part of your residence to or from a rental or business operation)  which will require you to report this to CRA.    You should keep track of all costs of capital improvements that you make to your residence.  Keep your receipts and invoices. These will increase the adjusted cost base (ACB) of your property and could save you tax later if it turns out you can’t fully shelter any gains on your property using the PRE.

You can thank the tax-loving greedy  LIEberal party of Canada.