11/28/2016 04:15 EST | Updated 11/28/2016 04:25 EST

What Selling Your House Can Mean For Your Next Tax Return

Kimberlee Reimer via Getty Images
Real estate sold sign against a slightly cloudy blue sky.

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.

If you sold your principal residence in 2016, you now need to report this on the Schedule 3, Capital gains of the T1 Income tax and benefit return.

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.

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