Related to the changes discussed in the preceding section, the Canada Revenue Agency (CRA) is changing its administrative policy with respect to the designation of a principal residence. The changes apply to all taxpayers, including those who have always been resident in Canada.
Under the Income Tax Act, you are technically required to file Form T2091 to designate your home as a principal residence for any particular year. The form must be filed with your tax return for the year you sell the home. On the form, you designate which years the home was your principal residence.
Despite this rule, until now, the CRA did not require you to file the form if the entire gain from your home was exempt under the principal residence exemption. Because of the policy, most Canadians selling their homes did not file the form, and did not report the gain.
Beginning with the 2016 taxation year, if you sell your home, you will be required to report the sale and report the gain (or loss), along with the principal residence designation, on Schedule 3 of your Income Tax Return. This reporting is required even if the entire gain is exempt from tax under the principal residence exemption. If the entire gain is not exempt, you must also file the form T2091.
If you do not report a sale of real property (whether or not it is your residence) and any portion of the gain is taxable, the CRA will be able to reassess you to impose that tax indefinitely, rather than only for 3 years after your Notice of Assessment, as is normally the case. (If you discover the error and report it later, the CRA will have 3 years from when you do report it.)
The CRA specifically states that for the sale of a principal residence in 2016 or later, it will allow the principal residence exemption only if you report the sale and designation of principal residence in your income tax return. If you do not make the principal residence designation in the year of the sale of your home, you can later request that the CRA amend your income tax return for that year to accept a late designation. Under the proposed amendments released on October 3, 2016, the CRA will be allowed (not required) to accept a late designation in certain circumstances, but even if it does accept it, a penalty will normally apply. The penalty is the lesser of the following amounts:
- $8,000; or
- $100 for each complete month from the original filing due date to the date your request was made in a form satisfactory to the CRA.
Because of this significant change, the CRA states that it will focus on communicating to taxpayers the requirement to report the sale and designation of a principal residence in the income tax return. Accordingly, for dispositions during this communication period, including those that occur in the 2016 taxation year, “the penalty for late-filing a principal residence designation will only be assessed in the most excessive cases”.