Are you thinking about selling your home in the not-so-distant future? If so, you’ve most likely got a lot of things on the go. From interviewing real estate agents to staging your property, it feels like there’s an endless list of things that need to be taken care of before you can officially list your home.
That being said, once you’ve finally sold your property, there’s a final task that you’ll need to do: report the sale to the CRA.
If you’re wondering, “why do you need to report the sale of your home to the CRA?” or “how does the CRA know if you sold a house?”, you can find the answers to these questions in the following paragraphs.
Continue reading to learn more.
Why do you need to report the sale of your home to the CRA?
As of October 3, 2016, the CRA (Canada Revenue Agency) has required Canadian property owners to report the sale of their homes, investment properties and rental properties on their tax returns.
The primary purpose of this change is to curb non-compliance-related issues in the Canadian real estate sector. The CRA also hopes that the changes will gradually improve the administration within the Canadian tax system.
How does the CRA know if you sold a house in Canada?
As the seller, you are responsible for notifying the CRA that you’ve sold your principal residence, investment property or rental property in Canada.
Under certain circumstances, the sale of your principal residence is exempt from taxes, but in other situations, you’ll need to include it in your tax return as business income or capital gains.
Whether the sale is considered taxable or not is heavily influenced by the property’s intended or previous use.
Reporting the sale of a principal residence to the CRA
As the seller, you need to report the sale of your primary residence to the CRA. However, most homeowners can use the principal residence exemption to avoid paying taxes on their capital gains. The principal residence exemption applies for every calendar year that the home is deemed as your principal residence.
Simply put, if the property was your primary residence each year that you owned it, you’ll need to report the sale to the CRA, but you most likely will not need to pay taxes on the capital gains. Be sure to keep this information in mind if you’re selling your home in the near future.
Reporting the sale of a flipped house or investment property to the CRA
As the seller, you need to report the sale of your flipped house or investment property to the CRA.
Generally, the gains or losses generated by the sale of a property (that you bought with the intention of “flipping” or renovating for profit) are considered to be a part of your income (for that calendar year). This applies even if the property owner lived in the home during the renovation process.
The CRA requires property flippers to pay taxes on their property sales due to the fact that they purchased the property with the intention of selling it for a profit. This means that the home does not qualify for a principal residence exemption. Because of this, any profit made from the sale of the home is considered fully taxable business income.
Simply put, if you purchase a home with the intention of modifying and selling it for a profit, you’ll need to pay taxes on your earnings.
Reporting the sale of your rental property to the CRA
Are you planning on selling a property that you partially or fully rent out? If so, you’ll need to report the sale of the property to the CRA.
However, determining whether or not you’ll need to pay taxes on the sale of the property isn’t as straightforward. Once again, it comes down to the context of the living situation.
For instance, if the property was used as a principal residence by the owner but a portion of the home was rented to a third-party tenant, the sale can qualify for the principal residence exemption.
In this situation, the following requirements need to be met:
- The rental income is used to support the principal residence
- You didn’t claim a capital cost allowance
- The property is in suitable condition with no major structural damage or issues
On the other hand, if your rental property was solely used to generate income, the sale would be taxed as a capital gain.
Bonus tip — Is your landlord selling the rental property that you live in? If so, check out our blog to learn your rights as a tenant.
How to report the sale of your principal residence on your tax return in Canada
If you sold your principal residence, you’d need to fill out Schedule 3 and include it with your T1 Income Tax and Benefit Return for the year you sell your home.
On the other hand, if you sold a property that wasn’t your primary residence, then you’ll need to fill out Form T2091 or Form T1255.
Can you correct a previous tax return if you didn’t report the sale of your home?
Yes, the CRA allows sellers to correct their mistakes if they leave out important information pertaining to the sale of their primary residence. You can do so by requesting an adjustment to your tax return with CRA primary residence Form T1-ADJ. For complex or niche situations, the Voluntary Disclosure Program may be the best solution.