Capital Gains – Understanding the New Tax Rules

Understanding The New Tax Rules Before You Sell Your Home – What You Need To Know Today!

It is that time again, are you ready to file your tax returns? If you own a home, you need to understand the rules about how to report the sale of your home.

You are going to need to determine the potential deductions as well as how much to put into a registered retirement savings plan or a tax-free savings account. As you can see, when the tax season arrives it brings up a group of sorted questions. With all of the new changes to the tax rules, it has left many Canadian homeowners confused and unsure of how to proceed. Thankfully, it is not going to be as complicated as you may think to comply with the new rules.

Below you are going to find everything you need to know about the changes to the principal residence exemption rules to ensure you do everything right during this tax season.


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Learning About The New Tax Rules And Principal Residences

In October 2016 a group of new rules were introduced to the homeowners of Canada. These rules changed the requirements of reporting the sale of your principal residence. Prior to 2016, there was no need to report the sale of your principal residence on your income tax return or even pay any tax on the capital gains from the sale.

What You Need To Know As A Homeowner

There is some good news with the new rules and that is the fact that you do not have to pay capital gain taxes still when you sell your principal residence. This, of course, is dependent upon you being a Canadian residence or have the ability to satisfy other requirements. However, you will have to include more details about the sale of the residence on your tax return. You will need to be able to provide the year you bought your home, the sale price, as well as the address. You will find this form included in your tax package listed under schedule three. There are also new changes to the way that nonresidents are able to calculate the length of time that they have owned their principal residence.

Understanding A Principal Residence

The Canada Revenue Agency has determined that a “principal residence” is the residence that is typically inhabited by you or the family member for the year. In addition, it does not necessarily need to be a physical house. It may be a mobile home, houseboat, cottage, or a new condominium. One does not need to live in the property for the entire year, it can also be for short periods of the year. The principal residence does not even have to be located in Canada! However, one can only have one dwelling listed as a principal residence during the year, yet you are able to decide which dwelling it is. If you do sell a property that has not been designated as a principal residence, you will need to report half of the capital gains from the sale and pay taxes on those.


Why Are There New Rules?

These new rules were placed in effect to close a loophole. This change was designed to avoid allowing owners unique ways of calculating the number of years that they owned the property, where foreign investors and house flippers were able to avoid paying any capital gains taxes on the sale of residential property that claimed to be principal residences With these reporting requirements it allows the CRA to monitor compliance with the rules and ensures only those able to use the PRE can. When these rules were changed for the 2016 tax year it only affected the sale of your principal residence. It is essential that you understand the rules in the here and now because regardless of when you sell your home you need to understand them.

Understanding Capital Gains Taxes

When you sell real estate, stocks, and shares for more than you purchased that is what is known as a capital gain. You are taxed on the 50% of the gain at a marginal tax rate, which will depend upon your income. Read more on managing income from the sale of your home.



What Happens For Non-reporting

It is essential that you inform the sale of a residence on the tax return for the year of the sale. If you do not report the sale, you may become liable for capital gains on the sale as well as interest and late charges. It is possible to ask the CRA for an amendment to a tax return to designate a home as a principal residence. However, if the CRA does agree to a tax amendment there may be a penalty. As of this writing, the penalty is $100 a month for each month that you are late up to a maximum of $8000. However, due to these rules still be a new the CRA will typically show leniency if you do not report. However, it is best to get ahead of these rules and be sure you are in compliance.

Understanding The Bottom Line

The CRA has no way to check on every single Canadian residents, however, it does monitor the trends. The CRA has the ability to access real estate sales transactions and will more than likely notice if you have the habit of selling and buying homes on a frequent basis.

No one enjoys the process of paying taxes. However, it is much better than the process of being audited. That is a pain that should be wished upon no one!