Tax Myth: I don’t have to report the sale of my principal residence on my tax return.
That is no longer correct. You are required to report the sale price, the acquisition date and a description of your principal residence on your tax return if you sold or are “deemed” to have sold your principal residence on or after January 1, 2016 – even if you don’t have to pay taxes on the sale!
And it may surprise some taxpayers that even a “change in use”, such as switching from a principal residence to a rental property, could result in a reportable transaction via the “deemed disposition” rules. These rules are complex and may not apply to all changes in use (despite what some articles have reported recently). We recommend a professional accountant be consulted regarding your unique principal residence situation.
It is important to note that the rules around the taxation of principal residence transactions have not changed. But, now the Canada Revenue Agency is armed with significant information that could be used for risk profiling when selecting files to audit.
So, what happens if you omit a reportable principal residence transaction from your tax return? A penalty could be assessed equal to $8,000 or $100 for each month beyond the original due date, whichever is lower. Now more than ever, claiming the principal residence exemption on your tax return should be done with support from an expert.
Per the CRA website, audit recoveries from their income tax program between April 2015 and December 2016 (inclusive) totaled $26.6 million. At Birrer Sangret LLP, we have noticed an increase in audit activities over the last 12 months and we expect this to continue or increase in the future. It appears that the $444 million invested in the Canada Revenue Agency from the 2016 Budget is starting to rear it’s head and we expect the principal residence exemption will be getting a lot of attention this year.
The 2016 tax year is one of the riskiest in years for people that pay to have their tax returns filed. Not all tax preparers are created equal, but you can protect yourself by hiring a professional. And remember, there’s only one professional accountant in Canada: a Chartered Professional Accountant.
If you have any questions about the principal residence rules or other tax questions, contact us today!