By Haroon Khan, CPA, CA (Canada), CPA (USA)
Life is busy, and juggling with all the responsibilities and workload often affects some of the important tasks, such as forgetting to buy milk for morning coffee and that is important. However, in this day-to-day routine, it is quite understandable if you may have forgotten to file your tax returns. People often think if they are waiting on a refund on their previous taxes, it’s okay to file the taxes a little late. However, that may not be the case in certain situations for instance you may have to face significant tax penalties if you fail to report and document the sale of your principal residence.
In this blog, we will highlight the details of selling your principal residence and explore how new changes in tax regulations may impact you.
Background:
A new client came to our firm to catch up on his late-filed tax returns. He was advised by his previous accountants that because he is expecting a refund on these tax returns, he could file them late. It didn’t seem like a big issue at first, as the client was due a refund so what’s the rush in filing tax returns? But, not so fast.
As we started preparing tax returns for the client, we identified that the client failed to report and document the disposal of a joint-family home they sold in 2020. As a result, the client was charged penalties worth $1,900 for each spouse by the Canada Revenue Agency (CRA).
Penalties
Even when no taxes are owed, there are situations where filing tax returns is compulsory. Examples are as follows;
A. International Information Form
Forms such as T1135, T106, and T1134 are International Information forms that need to be filed in a timely manner, regardless of the fact if you owe taxes to the CRA or not. We will not delve into international information forms in this blog and will release a separate blog to address these requirements.
B. Sale of Principal Residence
The sale of your principal residence is considered an important financial event and needs to be reported via tax returns. According to the Canadian Tax Law, the capital gains from selling your principal residence are exempted from taxation. However, you need to prove that the property was your principal residence and was officially designated as such for the entire duration.
Before 2016, the homeowners were under no obligation to report the sale of their principal residence on personal tax returns. However, it all changed as the Federal Government introduced new laws that came into effect on October 3, 2016. Under these laws, homeowners were obligated to report the sale of their principal residence on Schedule 3 of their personal Tax Returns. This needs to be done to claim the Principal residence exemption.
With new rules came new penalties. In situations where property disposals are not reported swiftly, the CRA will reassess taxpayers past their standard reassessment period.
Moreover, if the property is reported after the deadline the seller will have to face late-filing penalties. According to the new ITAs. 220 (3.21), the seller will have to pay a penalty of $100 per month which may exceed up to $8000.
This is not it, in certain situations, you may be denied your principal residence exemption if you didn’t report the disposition and file the designation.
Conclusion:
Tax filing might be a hassle, but it is the most important thing to maintain your financial well-being. To avoid financial setbacks and penalties, it is wise to reach out for professional advice.
If you have failed to report the sale of your principal residence or are facing any other non-compliance issues, please reach out to our advisors at info@ictax.ca for assistance with the Voluntary Disclosure Program (VDP) or explore other available options.
