Report Home Sales to Avoid CRA Crack Downs
The exemption allows homeowners to sell their primary residence without paying tax on any capital gains. However, the Canada Revenue Agency (CRA) has become increasingly vigilant about enforcing reporting rules, as highlighted in a recent Tax Court decision.
Since 2016, all homeowners must disclose the sale of their principal residence on their tax return, even if the gain is fully sheltered by the PRE. This requires completing Schedule 3 and Form T2091. Failing to do so can lead not only to reassessments but also to penalties, as one Toronto taxpayer recently learned.
The individual, an experienced real estate investor, sold multiple properties in 2016, including the home he had lived in for several years. Although he was entitled to claim the PRE on that sale, he failed to report the transaction altogether. The CRA reassessed his return and, while still allowing the exemption on the principal residence, penalized him for failing to report the disposition.
The taxpayer also sold another property in 2016, claiming it was a principal residence. The CRA rejected this position, pointing out that he never actually lived there, had already designated another property as his residence for that year, and failed to file the required forms. The result was a taxable capital gain of more than $159,000, along with a gross negligence penalty of $21,000.
The case serves as a reminder that ignorance of reporting obligations is no defence. Even when a home qualifies for the PRE, the transaction must still be disclosed. In situations involving multiple properties, the CRA closely examines whether a residence truly qualifies, and speculative activity can raise red flags.
With new anti-flipping rules introduced in 2023, which prevent the PRE from being claimed on homes owned for less than a year, enforcement is expected to intensify. Canadians who fail to properly report property sales risk hefty reassessments, penalties, and additional scrutiny from tax authorities in future years.
