2016 Tax Change relating to Real Estate
We are posting this message to let you know about an important change that happened relating to the filing of Canadian personal income tax returns! Because of the significant nature of this change and its potential negative consequences we wanted to ensure we brought this to your attention.
What has changed
For the majority of personal income tax returns going forward, starting with your 2016 return, you will now be required to report on your tax return the sale of any real estate in that year. This rule will apply even if the property is your principal residence and the only property you own. The tax consequences of reporting the sale have not changed. If the property you sold was your principal residence, the gain on that sale will still be eligible for the principal residence exemption, likely making it tax free.
What has changed is that now, under this new rule, by not reporting that tax free sale you could;
- Be subject to a penalty of $100 per month up to $8,000
- Make it so that the sale could no longer be eligible for the principal residence exemption, (meaning that you would have to pay tax on the gain of your principal residence, which could have been a tax free sale.)
How to prevent paying this unnecessary tax or incurring a penalty
The easiest way to prevent paying this unnecessary tax or incurring a penalty is to ensure that we receive a copy of the lawyers closing documents for the sale of any property that happened on January 1, 2016 or later. There is no need to wait until you bring us the rest of your personal tax documents. Send us these documents now or as soon as the property closes. We can then ensure that the sale is properly reported.
Do you own multiple properties?
If you own multiple properties and you sold one of them in 2016 there is an opportunity to shelter some of the gain on the property even if it is not your primary place of residence. For example if you own your home and a cottage, and the cottage was sold, it is possible to allocate some of your principal residence exemption to the sale of your cottage and reduce the taxes on the capital gain. These rules in this area are complex and require some good professional judgment, but the tax savings can be significant. If you own(ed) multiple properties and sold one this year please contact our office to schedule a planning meeting.