Tax season is fast approaching and advisors have an important role to play in helping their clients optimize returns and meet new requirements
Tax season is fast approaching and advisors have an important role to play in helping their clients optimize returns and meet new requirements. One such change is an update to rules around the Principal Residence Exemption (PRE). Up until this year, Canadians have benefitted from a tax exemption on capital gains from the sale of their primary home, but now the CRA has tightened the rules. All Canadians are now required to report the sale of a primary residence on schedule three of their personal tax returns.
“Prior to 2016 there was no requirement to report the sale on your tax return unless part of the gain was taxable,” says Aurele Courcelles, Assistant Vice-President, Tax and Estate Planning at Investors Group. “The CRA assumed that, if you did not report the disposition of your principal residence, you were using the exemption against the full gain for all the years you owned it.”
Courcelles believes that many Canadians who did sell their principal residences last year are preparing 2016 tax returns unaware of the new reporting requirements. In theory, if a client was eligible for the tax exemption on gains before the change, they still should still be: the only real change is the requirement to report. “Although, if you don’t report it on your 2016 return, a penalty could now apply and they are pretty stiff,” Courcelles says. “There is a late filing penalty of $100 a month, to a maximum of $8,000, for simply not reporting. The CRA has said they will probably not assess penalties for 2016 because it’s the first year, but going forward those stiff penalties will apply.”
The change in rules is likely come as a surprise to many Canadians. Included in the overarching change is a number or less significant changes, which are mainly based on when the property was originally purchased, how long it was owned for and the size of the land. “Typically, the PRE exemption applies to the building itself and half a hectare of land: if you have more land than that, then it is assessed on a case by case basis,” Courcelles says. “There are different rules for farmers and farm houses and a whole bunch of rules around principle residences converted into rental properties.”
The changes are not overly complex and advisors should be making their clients aware of the new requirements. “For those advisors who do not feel comfortable with the intricacies of the rules, the CRA has a folio that’s available online,” Courcelles says. “It’s written in relatively plain English and is a good way to get educated.”
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