Income Tax Act s. 40(2)(b)
Principal Residence Exemption (PRE)
When a principal residence is sold, the gain is not taxable if it has been the person's principal residence for the whole time it has been owned. This is because the principal residence exemption eliminates the capital gain. In years prior to 2016, there was no need to report the sale on your tax return if the entire gain was eliminated. However, on October 3, 2016 the federal government announced that, starting with the 2016 tax year, the sale of a principal residence must be reported on Schedule 3 of the tax return, in order to claim the principal residence exemption. This change applies also for deemed dispositions, such as a deemed disposition due to change in use of the property.
Two other major changes to the Income Tax Act (ITA) regarding the reporting of the disposition of a principal residence:
Canada Revenue Agency (CRA) can, according to new ITA s. 152(4)(b.3), reassess a taxpayer outside of the normal reassessment period, if the taxpayer does not report a disposition. Normally for individuals the reassessment period is 3 years from the date of the initial notice of assessment, with some exceptions.
If the disposition of the principal residence is reported late, a late-filing penalty can be imposed @ $100 per month x the number of months late, to a maximum of $8,000. New ITA s. 220(3.21) is added to this effect.
To designate a property as the principal residence, it does not have to be the place where the taxpayer lives all the time. The property will qualify as a principal residence if the taxpayer, taxpayer's spouse or common-law partner, or any of the taxpayer's children lived in it at some time during the year. However, if it is rented out the situation may change. See the information below re change in use.
A taxpayer and spouse may only designate one principal residence between them for each tax year after 1981. For years prior to 1982, each individual taxpayer can designate one principal residence, so if a couple has owned both a primary home and a cottage for decades, the principal residence exemption is available for both homes for the years prior to 1982.
Reporting the Principal Residence Sale on Your Tax Return:
As indicated above, there is a penalty of up to $8,000 for a late-filing penalty. If you fail to report the sale of your principal residence at all, you may be taxed on the capital gain.
If your home was your principal residence for the whole time that you owned it, the sale will only have to be reported on Schedule 3, where you will provide the proceeds of disposition (selling price), year of acquisition, and address. If there is more than one owner, each will report the sale on Schedule 3, using only their share of the proceeds. For instance, when a home is owned jointly by a couple and each owns 50%, each will report 50% of the proceeds on Schedule 3.
Cottage as a Principal Residence:
If you have both a home and a cottage, and sell one of them at a profit, you must make a decision as to whether to designate the sold property as your principal residence for some or all of the years it was owned. If you sell a cottage that you have owned for 10 years, you could designate the cottage as your principal residence for the entire 10 years in order to eliminate capital gains tax, as long as you have not designated any other property as your principal residence during that time.
BOTTOM LINE ....
YOU MUST REPORT THE SALE OF YOUR PRENCIPALE RESIDENCE ON YOUR TAX RETURN.