Did you know that you may have to pay income tax and deal with additional CRA reporting even if you do not sell your home? We often remind our clients to review possible tax implications before not only selling their property but especially if they are considering renting or transferring it to another taxpayer (e.g., adult child, corporation or a family trust).
Information below is not tax, accounting or legal advice. This article is intended to provide you with general information which should be used to discuss your specific situation with your lawyer or accountant.
You may need to engage your lawyer and accountant when:
1. You decide to turn your principal residence into a rental income property
You should work with all of your professionals before renting your home. A real estate agent will help you to find the right tenant for your property. A lawyer can assist you with reviewing a rental agreement. An accountant can advise you about potential tax implications.
Did you know that renting your home could trigger a capital gain or loss? If you decide to convert your home into a rental income property the CRA normally considers that you sold your home and then immediately reacquired it at the fair market value and vice versa. This is called a deemed disposition. Generally, you would not need to pay income tax if the property qualifies as your principal residence for all years. However, any capital gain will still have to be reported to avoid negative tax consequences in the future.
The good news is that you may be able to elect out of a deemed disposition and continue claiming a principal residence exemption for up to four years – even if you do not live in the property.
2. You decide to buy or sell real estate
Your lawyer will work together with you and your real estate agent on the Agreement of Purchase and Sale. See our blog article “Five mistakes to avoid when buying or selling a residential property” for more information.
accountant, on the other hand, can help you determine:
⦁ if the sale may result in a taxable event;
⦁ options that may be available to you to minimize or defer taxes;
⦁ estimate potential tax liability;
⦁ ensure that any CRA reporting is done on time;
⦁ double check to see if you may be eligible for any tax credits, such as first-time home buyer tax credit.
3. You did not report the sale of your home
You may wonder why you need to report a disposition of your home even if it is your principal residence. Technically, a sale of your home always needed to be reported. The CRA, however, used to have an administrative practice that did not require homes that were fully covered by the principal residence exemption to be reported.
This changed on October 3, 2016. The Federal Government announced an administrative change to CRA’s reporting requirements for the sale of a principal residence. Starting with the 2016 tax year taxpayers are required to report all home sales on their tax return, including a principal residence, regardless of whether the resulting gain is taxable or not.
You may want to speak with your accountant about options that are available to you, such as a volunteer disclosure if you inadvertently forgot to report a sale.
4. You decided to transfer a property to a family member
You may have to deal with punitive tax consequences if you transfer a property to a close family member for an amount below its fair market value.
The worst possible way of transferring a property to a family member, for example, is to ‘sell’ it to them for $1. At first glance, it may seem that there is nothing wrong with this strategy. The tax rules, however, paint a different picture. You would generally be deemed to have disposed of the property at its fair market value, which may trigger a capital gain. On the other hand, the family member who receives the property would be deemed to have acquired the property for the amount paid for it – in this case, $1. Each of you may end up paying tax twice on the same appreciation in value: first when you sell the property for $1 and second when the family member sells it because taxes will be calculated on the amount that represents the difference in value between $1 and the [future] sale price.
Having said this, remember that there are always exceptions and of course, there are always exceptions to the exceptions!
5. You are or were a non-resident of Canada
The sale of a home owned by a non-resident is commonly subject to a withholding tax. Your lawyer needs to know if tax (often up to 50% of the sale price) needs to be withheld until the CRA issues a Certificate of Compliance. This process could take many months even if all other tax reporting for the non-resident is up to date.
If you were a non-resident of Canada when you purchased your home, you may not be able to claim the principal residence exemption for all of the years you owned it.
It is always best to discuss your strategy with your tax and legal professionals when considering a change of use or sale of your home. There is not much, if any, planning that can be done once the sale has been completed. Often your only choice is to report it and pay tax!