By Myles Shane
In 2019, Canada Revenue Agency (CRA) assessed a 65-per-cent year-over-year increase in gross taxes related to real estate – some $171 million. Penalties totalled more than $57 million, which is more than double the year prior.
Recently REM spoke to Mariska Loeppky, director of tax and estate planning for IG Wealth Management, to explain why Canadians are paying more than ever before in gross taxes and penalties related to real estate.
A key point that Loeppky makes is how Canadians should appropriately report real estate dealings amid CRA’s increased analysis surrounding these transactions. Loeppky says that since 2016, CRA now requires Canadians to report the sale of their home on their tax return. “Previously, if you could claim the principal residence exemption to shelter the entire gain, you didn’t have to report the disposition on your tax return. Canadians are very aware generally if you had only one home and lived in it the entire time you owned it, you were able to shelter the gain that you realized from tax by claiming your principal residence exemption. Today you can claim this exemption by completing a T2091 with your tax return,” she says.
A taxpayer who misses reporting the sale could be subject to penalties – $100 for every month that they are late up to a maximum penalty of $8,000.
Loeppky says that CRA could ask for back-up documentation to support what’s been reported.
“Canadians can only claim one principal residence exemption for a given year for one property. Sometimes taxpayers keep their receipts for the property they purchased last or the property they think will have the bigger gain, but when it comes time to sell it makes more sense to claim the principal residence exemption for the home with the largest average gain per year and that can change over time with the market.”
She says it is imperative to keep accurate records of what you’ve paid for a property. This includes receipts for any capital improvements made for any properties you own, in order to optimize claiming the principal residence exemption.
Loeppky listed some examples that occur regularly where the tax consequences of the sale of a property may come as a surprise: “If you purchased vacant land in 2019 for $100,000 and built a home on it in 2024 for $200,000 and you sell that property for $600,000 in 2034, you will not be able to shelter all of the capital gain realized from tax,” she says. “You would not be able to claim the property as your principal residence for the years 2019 – 2023 inclusive and you would only be able to shelter the property for 12 years (11 years as principal residence plus one extra year provided for under the principal residence exemption formula) out of the 16 years that you owned it. The seller in this example would have to pay tax on a capital gain of $75,000.”
Tax issues could become prevalent when transferring property to a family member or adding a joint owner to the property, Loeppky says.
“Sometimes, taxpayers will transfer a property to a family member for less than its fair market value. This can create a double tax scenario because the transferor is considered to have sold the property at its fair market value regardless of the proceeds received. The transferee has a cost base equal to the consideration that is paid. So, if a father transfers a property with a fair market value of $300,000 to his son and his son only pays $200,000, the father will need to report the sale of the property for proceeds of $300,000 but the son when he sells it would only have a cost base of $200,000. Essentially the $100,000 difference could be subject to tax twice,” she says.
“Sometimes a joint owner is added to title of the property. If beneficial ownership is transferred, this type of transfer has tax consequences as well,” says Loeppky. “First of all, the original owner is deemed to dispose of a portion of their interest in the property at fair market value – again, there’s a requirement to report this type of transaction on the tax return for the year in which the transfer occurred. From then on, the income earned on that property must be reported by the joint owners and a gain on a subsequent sale would need to be reported by joint owners as well.
“If one of the owners dies, the property passes outside of their estate to the surviving owner, which avoids probate fees but it could also disinherit other beneficiaries as the value of the property is not part of the deceased’s estate,” she says.