Designating your principal residence in Canada

Accountant Mark Goodfield, aka The Blunt Bean Counter, warned The TaxLetter readers in April about new reporting rules regarding the sale of a principal residence. Simply put, if you sold your principal residence in 2017, you should have completed Schedule 3 and Form T2091 when you filed your income tax return. If not, there may be punitive repercussions.

Tax_PlanningEffective last Fall, you must now report the sale of your principal residence (typically your house, but can also be your cottage) on your income tax return.

For 2016, you just had to report the sale on Schedule 3, unless the gain was not fully exempt, in which case you had to file Form T2091 (IND) Designation of a Property as a Principal Residence by an Individual (Other Than a Personal Trust). However, for 2017 and any future years, you must now file Schedule 3 and Form T2091 in all cases.

If you designate your home/cottage as your principal residence for all the years you owned it on schedule 3 (box 1), other than the free plus 1 year, the form is fairly simple to complete. (You may recall the formula to determine the exempt portion on the sale of your principal residence is the capital gain on the sale of your principal residence, times the ratio of the number of years you have lived in your home [i.e. designated the home as your principal residence] plus 1, divided by the number of years you have owned the property.) You just need to fill out the first page of the T2091 form. You will need to include the following information:

■ the year you acquired the property you sold;

■ the proceeds of the disposition;

■ the address of the property being designated as a principal residence; and

■ the years you owned the property and are designating it as your principal residence.

Stiff penalty for not filing

There are stiff penalties for not filing the principal residence designation on time. New paragraph 220(3.21)(a.1) will allow for late-filed forms subject to certain time restrictions. The penalty will be the lesser of the following amounts:

■ $8,000; and

■ $100 for each complete month from the original due date of the relevant income tax return to the date that your request for a late-filed designation is made in a form satisfactory to the CRA.

The CRA says on their website that a penalty may apply where the principal residence election is late-filed. I would work on the assumption that the penalty is applicable and you will need the CRA to be merciful to have the penalty removed.

It is also important to note that if you do not file the T2091 form, your return can be re-assessed at any time. This means the usual statute barred period of 3 years is not applicable, and your return remains open until the end of time or three years from when your return is assessed, when you finally file the form.

If you sold your principal residence in 2017, simply put, you should have completed schedule 3 and filed Form T2091. If not, there may be punitive repercussions.

This article provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisor.

 

This is an edited version of an article that was originally published for subscribers in the April 2018, issue of The Taxletter. You can profit from the award-winning advice subscribers receive regularly in The Taxletter.

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