Most people are familiar with the principal residence exemption which allows one property to be designated as a principal residence for each “family unit” in any given year.  This prohibits two spouses from each claiming the principal residence exemption which exempts the property from capital gains tax.

The principal residence exemption has been abused by non-residents who claim the tax exemption but do not reside in Canada.  In order to prevent non-residents from claiming the exemption in the same year that they acquired the property, the government has changed the rules so that an individual will not qualify for the principal residence exemption in the year they acquired a residence if they were a non-resident of Canada in that year.

The government has also added an additional reporting requirement.  For all dispositions of property on or after January 1, 2016, individuals must report the sale of a principal residence to the Canada Revenue Agency as part of their income tax return.  If you fail to report, the CRA may impose a penalty and worse – they may deny your ability to claim the exemption!  Furthermore, the new changes allow them to review previous dispositions of real estate and to go back in time indefinitely – rather than the standard three years.

The bottom line is to make sure that you report the sale of your principal residence on your income tax return.