Principal Issues: Various concerns related to the administrative change to the CRA’s reporting requirement for the sale of a property designated as a principal residence.
Position: a) When an individual sells his only principal residence (property A) and acquires a new principal residence in the same year (property B), the CRA is of the view that he could tick box 1 at line 179 on page 2 of Schedule 3 to designate property A as his principal residence for all years (or for all years except one year). In such a case, the CRA will not require Form T2091 to be completed with his or her income tax return. In other situations, the CRA is of the view that the individual should tick box 2 or box 3 according to his situation. The individual must also file Form T2091 with his or her income tax return. b) The individual should keep his decision in writing for future reference, especially when he or she sells property B or other property that qualifies as a principal residence, depending on the case.
Reasons: This position is listed on the Government of Canada Web page titled "Sale of your principal residence".
APFF FEDERAL TAX ROUNDTABLE 6 OCTOBER 2017
APFF CONFERENCE 2017
Question 3
Principal residence designation and obligation to file Form T2091
As a consequence of amendments proposed in October 2016, an individual with property qualifying for the principal residence exemption must complete page 2 of Schedule 3 of the federal income tax return. In this schedule, the individual must include the year of acquisition of the property, the address of the property in question and the proceeds of disposition. Depending on the individual’s own situation, the individual must also check one of three boxes provided on the page, which may or may not result in the requirement to file Form T2091, according to the box ticked.
When an individual checks box 1, he or she designates the property as having been his or her principal residence for all the years during which he or she was the owner, and in doing so, does not have to file Form T2091. Because of the "+1" rule in the calculation of the exemption under paragraph 40(2)(b), such a designation for all years could result in wasting the extra year for the purposes of calculating the principal residence exemption when disposing of another property eligible for this exemption. This could very well be the case, for example, if the individual owns a cottage that could also qualify as a principal residence.
Question to the CRA
(a) Is the CRA prepared to recognize that an individual, who checks box 1 on page 2 of Schedule 3 of the federal income tax return, benefits from a complete exemption when disposing of a property that qualifies as principal residence, having designated the property as principal residence for all years of holding minus one (for example, 2017 being the year of the sale) due to the "+1" rule?
(b) What evidence must the individual maintain as documentary support lest there be a disposition of a second property that could be designated as a principal residence for 2017?
CRA response
(a) If the principal residence exemption is claimed on the disposition of a property, Schedule 3 must be completed and filed with the individual’s income tax return for the year in which the property was disposed of. The individual must then complete the Table on page 2 of Schedule 3 by checking one of the three boxes.
Where a taxpayer owns only one property and designates it as his or her principal residence for all years in which he or she owned the property, the taxpayer must check Box 1.
Where an individual sells the only principal residence owned by the individual (House A) and acquires a new principal residence in the same year (House B), the CRA is of the view that Box 1 may be checked to designate House A as the individual’s principal residence for all years (or for all years less one year). In this situation, the CRA will not require Form T20911 to be completed with the individuals’ income tax return for the year. This position is referenced on the Government of Canada Web page, “Reporting the sale of your principal residence for individuals (other than trusts)”.2
In other situations, the CRA is of the view that Box 2 or Box 3 should be checked as applicable to the individual’s situation. Form T2091 should also be filed with the individual’s income tax return. Such an approach allows the individual to clearly indicate the taxation years for which the individual is making a principal residence election. The representative of a deceased person must instead use Form T1255.
(b) A written copy of the individual’s election should be retained for future reference, especially for when there is a sale of House B or another property that will qualify as the individual’s principal residence, as applicable.
The forms may be modified and our response is based on the documentation currently available. The individual must read this response taking into account any changes that may be made to the forms.
Anne Dagenais
October 6, 2017
(613) 670-9050
2017-070901
FOOTNOTES
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 Schedule 3, Capital Gains (or Losses) of the T1, Income Tax and Benefit Return.
2 T1, Income Tax and Benefit Return.
3 Form T2091(IND) Designation of a Property as a Principal Residence by an Individual (Other Than a Personal Trust)
4 GOVERNMENT OF CANADA, Sale of your principal residence (on line: https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics...)
5 Supra note 3.
6 Form T1255, Designation of a Property as a Principal Residence by the Legal Representative of a Deceased Individual.