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 if they are considering any dealing with real estate, especially renting or transferring it to another taxpayer (e.g., adult child, corporation or a family trust).
Engage your lawyer and accountant in the following cases!
You will need to work with all of your professionals when 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? The CRA normally considers that you sold and then immediately reacquired your property at the fair market value when you change the use from personal to business 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. The capital gain will still have to be reported to avoid negative tax consequences in the future.
The good news is that taxpayers may not only be able to elect out of a deemed disposition, but also continue claiming a principal residence exemption for up to four years even if they do not inhabit the property.
You decided to buy or sell a real estate property
Your lawyer will work together with you and your real estate agent on the Agreement of Purchase and Sale. See our blog article “5 mistakes in real estate transactions to avoid” for additional information.
Your accountant, on the other hand, could help you determine:
- if a sale may result in a taxable event;
- options that may be available to you to minimize, or defer taxation;
- estimate potential tax liability;
- ensure that any CRA reporting is done on time;
- double check if you may be eligible for any tax credits, such as first-time home buyer tax credit.
You did not report the sale of your home
You may wonder why you need to report a disposition of your home, especially if it is your principal residence. Technically, a sale of all real estate properties always needed to be reported. The CRA, however, used to have an administrative provision when disposition of properties that were fully covered by the principal residence exemption, did not have to be reported.
This changed on 3 October, 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 real estate sales on a 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 volunteer disclosure, if you inadvertently forgot to report the sale.
You decided to transfer a property to a family member
Families may have to deal with punitive tax consequences, especially if trying to transfer a property between close family members for an amount below the fair market value.
The worst possible way of transferring a property to a family member, for example, is for $1. At a first glance, it may seem that there is nothing wrong with this strategy. The tax rules, however, would paint a different picture. The transferor, for example, would generally be deemed to have disposed of the property at the fair market value. This would likely trigger a gain or a loss. On the other hand, the transferee would be deemed to have acquired the property for the amount paid for it, in this case $1. Thus, transferor and transferee may end up paying tax twice on the same appreciation in value.
Having said this, remember that there are always exceptions and of course, there are always exceptions to the exceptions!
It is always better to discuss your strategy with your tax and legal professionals before completing a transaction. There is not much planning that can be done (if any), once the transfer has been completed. Often the only thing that is left is to do, is to report it and pay tax!
You are or were a non-resident of Canada
The sale of a real estate owned by a non-resident may be subject to a withholding tax. Your lawyer needs to know if tax (often up to 50% of the sale price) may need to be withheld from the sale price until 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.
You may not be able to claim a principal residence exemption for all years, if you were a non-resident of Canada when you purchased your home.
The best time to engage with your legal and tax professionals is when you start contemplating any real estate transaction, rather than after the fact.