The sale is finalized, now there is one last thing to do
You sold your house, you survived the move and your boxes are all unpacked -- great job! That can be quite an undertaking, I know. But the work isn't quite done yet. Recently, the government announced important changes that will add an extra step to selling your home -- reporting it.
While the changes were mainly targeted at non-residents who invested in Canadian real estate, it could catch many Canadian residents off guard who, in the past, may have missed paying some taxes on their principal residences without even knowing it.
What do I need to report?
The new rules require you to report the sale of a property you are designating as a principal residence on your tax return. This includes any sales as of January, 2016. So, if you sold a home earlier this year, you'll have to provide basic information including the year you bought the house, how much you sold it for and the house address information. All of this should be included on the Schedule 3 when you file your 2016 tax return.
How do I know whether to pay taxes or not?
As long as you are designating your home as your principal residence for all the years you owned it, you don't have to pay tax on the profit of the sale, thanks to the principal residence exemption (PRE). Just remember that you can only designate one property as your principal residence for a particular year. So if you own a home in the city and a cottage up north, only one of these can be considered your principal residence.
If you can't designate the property as your principal residence for all the years you owned it, then you may need to pay tax on a portion of the sale. You will need to use form T2091 (IND), Designation of a property as a principal residence by an individual (other than personal trust) to determine how much tax you will have to pay.
What if I'm not a Canadian resident?
Non-residents who own property in Canada are not entitled to the principal residence exemption even if the home was occupied by a family member who is a Canadian resident. Previously, a loophole allowed the non-resident to designate it in the year they bought the property but with the new rules, that loophole is no more.
Easy enough, right? If you sold your principal residence in 2016, report it in the upcoming tax season. If you don't report it, you will not be eligible for the principal residence exemption. And although new rules allow the CRA to accept late designations, they are not required to do so, so make sure you file on time.
New rules also allow the CRA to reassess you beyond the standard three-year reassessment period if you don't report a sale of real estate on your tax return. Think of it as the reassessment period being extended indefinitely. Plus, failing to report the sale of your principal residence -- whether that was intentional or not -- means you risk not only being reassessed but also paying penalties and interest charges in the future. And nobody wants that.
Follow HuffPost Canada Blogs on Facebook
Also on HuffPost:
Finance Minister Bill Morneau's new mortgage rules, enacted in October, 2016, could "reduce the risk of a knock-on to the Canadian economy" from any possible corrections in Toronto or Vancouver, BMO economist Sal Guatieri told The Financial Post. The Bank of Canada has long warned that interest rates could go up again — and Canadians should ensure they can still afford to pay. Now they have to prove it to lenders.
First-time homebuyers tend to be the "primary users of mortgage insurance," according to Royal Bank of Canada. So the "stress test" could make it difficult for them to borrow as much as they'd like to. In a way that's a good thing. It means they can only borrow what they can afford. But it also means they won't have as much purchasing power in a hot market. That said, the new rules are probably protecting them from a debt burden they can't handle.
Home sales could fall as much as eight per cent in the first year after the new mortgage rules come into effect, Bloomberg reported. Of course, that depends on what buyers do. They may decide not to buy homes at all, they could also opt to buy cheaper properties, or dig into their savings just to afford their purchases, finance department spokesman Jack Aubry told the news agency. Meanwhile, the Bank of Canada says home sales could fall by as much as 10 per cent, while prices could drop by five per cent.
Stricter mortgage rules could mean that borrowers start turning to "shadow-banking," according to Canaccord Genuity. "Shadow-banking" refers to activities that happen outside traditional financial institutions. While bigger banks lend money using cash from deposits, shadow banks use money from groups of investors and aren't subject to the same scrutiny as major financial firms. They could therefore be more likely to hand out bad loans.
Canada's economy as a whole grew by $4.2 billion from the fourth quarter of 2014 to the second quarter of 2016, according to Macquarie Research. But residential investment increased by 3.5 times that amount ($14.7 billion) in the same time frame as housing activity skyrocketed in Vancouver and Toronto. Watch for residential investment to decline.
There are concerns that the new rules don't create an even playing-field for mortgage lenders outside the big banks, The Globe and Mail reported. Alternative lenders such as Home Capital Group, which generally target riskier borrowers with lower credit scores, may find themselves scrambling for business now that mortgage clients have to qualify for loans at higher interest rates.
Follow Caroline Battista on Twitter: www.twitter.com/Caroline_HRB