What’s new on your 2016 tax return: Sale of a principal residenceMarch 23, 2017
By Sheryl Smolkin
For many Canadians, the family home is the most valuable asset they own and an important factor when they are planning their retirement. When you sell your principal residence, any increase in value is not subject to capital gains tax. However, if you sold your principal residence in the last year, there is a new form you will need to complete for the first time when you file your 2016 income tax return.
Your principal residence can be any of the following types of housing units:
- A house
- A cottage
- A condominium
- An apartment in an apartment building
- An apartment in a duplex, or
- A trailer, mobile home, or houseboat.
For one of the above to qualify as a principal residence you must have owned it alone or jointly with another person. In addition, you, your current or former spouse or common-law partner, or any of your children must have lived in the home at some time during the year.
You are only allowed to designate one home as your principal residence for a particular year. If you are unable to designate your home as your principal residence for all the years you owned it, a portion of any gain on sale may be subject to tax as a capital gain. The portion of the gain subject to tax is based on a formula that takes into account the number of years you owned the home and the number of years it was designated as your principal residence.
The principal residence exemption calculation formula is:
The extra year in the top of the equation (the “one-plus rule”) means that when a person moves, both the old home and the new home will be treated as a principal residence in the year of the move, even though only one of them can actually be designated as such for that year. However, for dispositions occurring after October 3, 2016, the “one-plus” factor applies only where the taxpayer is resident in Canada during the year in which they acquire the property.
In years prior to 2016, there was no need to report the sale on your tax return if the entire gain was eliminated. However, on October 3, 2016 the federal government announced that, starting with the 2016 tax year, the sale of a principal residence must be reported on Schedule 3 of the tax return in order to claim the principal residence exemption. This change applies also for deemed dispositions, such as a deemed disposition due to change in use of the property.
The purpose for the new reporting requirement is two-fold. The federal government wants to ensure that Canadian residents only claim the capital gains exemption for principal residences in appropriate circumstances. In addition, under the new rules, foreign buyers who were not residents at the time a home was bought will no longer be able to claim a principal residence exemption.
There are two other major changes to the Income Tax Act (ITA) regarding the reporting of the disposition of a principal residence:
- Canada Revenue Agency (CRA) can, according to new ITA s. 152(4)(b.3), reassess a taxpayer outside of the normal reassessment period, if the taxpayer does not report a disposition. Normally for individuals the reassessment period is three years from the date of the initial notice of assessment, with some exceptions.
- If the disposition of the principal residence is not reported on the tax return as required, a late-filing penalty can be imposed @ $100 per month x the number of months late, to a maximum of $8,000. New ITA s. 220(3.21) is added to this effect.
For a more in depth assessment of how changes to the principal residence exemption may impact you, contact your accountant or other tax advisor.
Dec 28: Best from the blogosphereDecember 28, 2015
By Sheryl Smolkin
This is the last Best from the Blogosphere for 2015 and I’m taking a break, so the next one will be published on January 25, 2016. We wish all savewithspp.com readers a healthy, prosperous New Year.
As we look back on 2015 and ahead to 2016, there is much to think about. We have a new Federal government, the loonie is at an all-time low and Canadians have extended extraordinary hospitality to Syrians and other refugees from war-torn lands.
Here are some interesting stories we are following:
In TFSA vs. RRSP: How are Canadians saving? I interviewed Krystal Yee (Gen X), Tom Drake (Gen Y) and Bonnie Flatt (Boomer) to find out how Canadians are taking advantage of the tax-sheltered savings vehicles available to them.
In What Sean Cooper Really Achieved By Paying Off His Mortgage In 3 Years Robb Engen from Boomer and Echo tells us that Sean Cooper didn’t just pay off his $255,000 mortgage in three years; he taught us all a lesson in personal branding. Mr. Cooper, a pension analyst by day, mild-mannered blogger by night, took an almost Machiavellian-like approach by achieving fame through mortgage freedom at age 30.
Jim Yee offers some Year End Finance Strategies that will take advantage of ongoing changes to our tax rules. For example, in 2016, the new Liberal government will be lowering the tax rate on the middle income bracket from 22% to 20.5% so those individuals making more than $45,283/year but less than $90,563/year, deferring income to next year might save some tax dollars.
On the Financial Independence Hub, Doug Dahmer writes about the timing of CPP benefits. He says the CPP benefit for a couple can be in excess of $700,000 over their lifetime and the study demonstrates that the difference between starting your benefit at the least beneficial date and starting at the best date can be more than $300,000.
And finally, Rob Carrick at the Globe and Mail offers some thoughts on how to prepare for a frugal retirement. Frugality is assumed to be a virtue in the world of personal finance writing, but on the outside, frugality is sometimes a synonym for cheap. He refers to a blogger on Frugalwoods who argues that making the choice to be frugal is about asserting your independent thinking about money.
Do you follow blogs with terrific ideas for saving money that haven’t been mentioned in our weekly “Best from the blogosphere?” Share the information with us on http://wp.me/P1YR2T-JR and your name will be entered in a quarterly draw for a gift card.