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New Tax-Related Rules: What you need to know

As a result of considerable volatility in the real estate sector and our economy, the Canadian government recently made changes to the Income Tax Act, along with some significant changes to our mortgage rules. These rules are being introduced in an effort by the government to stabilize the Canadian housing market, although some are concerned the new housing rules will lead to higher mortgage rates, hurt the real estate markets and potentially drive borrowers toward unregulated lenders.

Let’s explore some of the new tax-related rules.

Principal Residence Designation

“One-plus” Rule: When a person sells a home, some of the gain is exempt. The exemption is calculated with the following formula:

(1 + number of years designated) / (number of years owned)

Only one home can be designated as a principal residence for a particular year by a family. This is to prevent one spouse from designating the main home as principal residence while the other spouse designates the cottage or other vacation property.

The purpose of the “one-plus” portion of the formula is to account for the fact that people will often sell their old home and buy a new one in the same year. Without the “one-plus” rule, on the second house sale, there would be a year that could not be designated, causing some of the gain to be taxable.

The new rule also requires that the taxpayer must be resident in Canada during the year of acquisition in order to use the one-plus rule on a particular property.

Reporting

In the past, the Canada Revenue Agency (CRA) has administratively allowed individuals claiming full principal residence exemptions to forgo reporting the disposition on their personal income tax return. Starting 2016 tax year, individuals who sell their principal residence will have to report the sale on their tax return. Reporting will be required for sales that occurred on or after Jan 1, 2016.

Form T2091 will continue to be required for the principal residence designation if the property was not the principal residence for all the years of ownership. The new rules apply also for deemed dispositions, such as a deemed disposition due to change in use of the property.

If you forget to make a designation of principal residence in the year of the sale, it is very important to ask the CRA to amend your income tax and benefit return for that year. Under proposed changes, the CRA will be able to accept a late designation in certain circumstances, but a penalty may apply.

Reassessment time

Normally, the CRA can reassess a taxpayer up to three years after the date the notice of assessment is issued. With the new rule, if a taxpayer fails to report a disposition of real estate (using the T2091 form), the CRA will be allowed to assess at any time. You read that right. ‘At any time’ means forever!

For more information, please contact:

Mark Hoag, CPA, CA
Business Advisor, Real Estate and Construction Services

T: 778.372.5307
E: mark.hoag@mnp.ca

Maggie Chan, CPA, CGA
Business Advisor, Tax Services
T: 604.637.1519
E: maggie.chan@mnp.ca