Big changes surround the Principle Residence Exemption (PRE) for the 2016 Tax Year.
The Canada Revenue Agency (CRA) states the following:
Starting with the 2016 tax year, individuals who sell their principal residence will have to report the sale on Schedule 3, Capital Gains of the T1 Income Tax and Benefit Return. Reporting will be required for sales that occur on or after January 1, 2016.
You will complete Schedule 3 and file it with your T1 Income Tax and Benefit Return for the year you sell the property. If the property was your principal residence for every year that you owned it, you will make the principal residence designation in your Schedule 3. In this case, the year of acquisition, proceeds of disposition and the description of the property are the information that will have to be reported. Schedule 3 will be modified accordingly. Form T2091 (or Form T1255) will still be required for the designation in the case the property was not your principal residence for all of the years that you owned it.
The major things you need to be aware of going forward is that if you sold your principle residence after January 1st, 2016, then you need to report it on your tax return in order to claim the full PRE. CRA generally allows your principal residence to include your primary home plus 1/2 hectare (1.25 acres) of property.
Please make sure you have the following information ready and available when you are ready to have your 2016 return completed:
• the address of the property
• the date it was originally acquired
• the original purchase price
• the amount of the proceeds of the sale
• legal and realtor fees due to the sale of the property
• the amount of total home renovations done during the time that you owned the house.
In the event you fail to report the sale of a residence in 2016 or later years, you WON’T automatically be entitled to the PRE. If you forget to designate a property as your principal residence in the year of the 2016 sale, or later years, you should ask CRA to amend your return for that year. CRA will often accept a late designation but be prepared to pay penalties should they apply. The penalty could be $100 for each month the designation is late, or $8000, whichever is less. The bottom line is this is not something you want to forget!
To help ease your tax burden later, you’ll want to keep track of all capital improvements. Have you installed new windows, added a garage, made home upgrades and improvements, paved your driveway, put on a new roof, etc? Keep your receipts and invoices as these improvements will increase the adjusted cost base (ACB) of your property, thus saving you tax later if it turns out you can’t fully shelter any gains made on your property using the PRE.
The reason for this change in reporting is that until now, the CRA never really had a way to track PRE abuses. Theoretically, tax evaders could easily have sold multiple properties and overlapped ownership periods without reporting any of the sales to CRA and paying no capital gains taxes.
Does Your Principle Residence Generate Income?
Do you have a home office, operate a home daycare, or have you turned your hobby into a profitable business while doing it all out of your own home? If you use a portion of your home to generate income, this change to the PRE is of special importance to you as well. There are specific conditions that are set out by CRA as follows;
you are usually considered to have changed the use of part of your principal residence when you start to use that part for rental or business purposes.
However, you are not considered to have changed its use if:
• your rental or business use of the property is relatively small in relation to its use as your principal residence;
• you do not make any structural changes to the property to make it more suitable for rental or business purposes; and
• you do not deduct any CCA on the part you are using for rental or business purposes.
If you meet all of the above conditions, the whole property may qualify as your principal residence, even though you are using part of it for rental or business purposes.
However, if you do not meet all of the above conditions, when you actually sell the property you have to:
• prorate the selling price between the part you used for your principal residence and the part you used for rental or business purposes; and
• report the capital gain on the part you used for rental or business purposes. You do not have to report any capital gain for the part you used for your principal residence following the PRE rules.
In the example of a home office, CRA will be looking at the over-all percentage of the home used for the home office and not the square footage of the office itself. That’s something to keep in mind when writing off expenses related to your home office, especially if you ever plan to sell your home in the future. If you are running a daycare or have a workshop in your home that is generating income, then it would be wise to keep track when this business began, as well as the square footage of your home that you are using to generate income, so that an accurate percentage can be obtained when the time comes to calculate any gain on the portion of your home you used for business purposes.
As you can see, these new changes are all encompassing and can seem overwhelming. If you have any questions about this at all, let us help you!