Principal Issues: 1) Whether, following the change in the CRA's administrative policy concerning the reporting of a disposition of a principal residence, a taxpayer who omitted to report such a disposition in its 2016 income tax return must amend its tax return in order to report the disposition? 2) If such an amendment to the tax return is made, whether, in the different scenarios provided, the CRA will apply the penalty for late-filed elections under subsection 220(3.5), given the CRA’s comments on its website providing that the penalty would only be applied in the "most excessive cases"?
Position: 1) Yes. 2) Question of fact.
Reasons: 1) According to the new CRA administrative policy provided on the CRA’s website and press release dated October 3, 2016. 2) Ministerial discretion is exercised on a case-by-case basis, after a review of all facts and circumstances surrounding each specific situation.
FINANCIAL STRATEGIES AND INSTRUMENTS ROUNDTABLE 5 OCTOBER 2018
2018 APFF CONFERENCE
Question 11
Missing Information with respect to the disposition of a principal residence
In 2016, the CRA changed the way in which an individual was required to report the disposition (actual or deemed) of a principal residence on the individual’s income tax return. Previously, the CRA did not require the reporting of any information related to the sale of a principal residence if the property was the individual's principal residence for each year in which the individual was the owner, being situations where the gain was completely exempt. However, since 2016, an individual is required to report basic information (the date of acquisition, proceeds of disposition and description of the property) on page 2 of Schedule 3 when doing so. In addition, an individual is required to check the box (out of a possible three) that applies to the individual’s situation. Depending on which box is checked, Form T2091 may need to be filed.
Also in 2016, another change was proposed on October 3, 2016. If an individual forgets to make the principal residence designation on the individual’s tax return in the year of sale, the CRA will now be able to accept late designation in certain circumstances, but a penalty can apply. The penalty is the lesser of $8,000, and $100 per full month of delay. In short, the late filing of Form T2091 is now included in the late, amended or revoked elections rules (subsections 220(3.2) and 220(3.21)).
On the CRA's website page which deals with the reporting of the sale of individuals’ principal residence, the CRA states that for dispositions that occurred in the 2016 taxation year (for which, as a general rule, the designation was required in income tax returns to be filed before the end of April 2017), the penalty for late-filing a principal residence designation will only be assessed in the most excessive cases.
What in fact has happened is that individuals who filed their own 2016 tax returns did not meet the new administrative requirements for the disposition of their principal residence, since they were not aware of these new procedures. Thus, no information was provided on page 2 of Schedule 3 with respect to the residence sold, and no Form T2091 was completed. Since the individual had only one residence in these cases, there was no capital gain to be calculated in respect of the disposition. In short, the individual simply had to check Box 1 on page 2 of Schedule 3 and provide the information requested for the residence, but that was not done. In other situations, individuals simply did not tell their accountants that they had disposed of their only home.
Questions to the CRA
(a) In the cases discussed above, does an individual have to amend the individuals’ 2016 tax return to provide the information requested on page 2 of Schedule 3?
(b) If such an amendment is required, can the CRA confirm that it will not impose a late filing penalty for a principal residence designation to be made by such a taxpayer, since this does not, in our view, correspond to “the most excessive cases” CRA contemplated for the 2016 tax year?
CRA Response to Question 11(a)
As stated on our website (footnote 1), the CRA requires, for the 2016 and subsequent years, that taxpayers who have failed to report the disposition of their principal residence amend their income tax return if the disposition has not been declared.
For the sale of a residence in 2016, Schedule 3 of the T1 Income Tax and Benefit Return must be completed, on which must be stated the year of disposition of the property, its proceeds of disposition as well as its description. In addition, for the 2016 year, Form T2091 (IND), Designation of a Property as a Principal Residence by an Individual (Other Than a Personal Trust) (or Form T1255, Designation of a Property as a Principal Residence by the Legal Representative of a Deceased Individual), is required for the designation if the property was not the taxpayer's principal residence for all the years in which the taxpayer was the owner.
For dispositions in 2017 and subsequent years, in addition to having to report the sale and designate the principal residence on Schedule 3 of T1, taxpayers will also be required to complete Form T2091 (IND) (or Form T1255). If the sold property was the taxpayer's principal residence for all years, or for all but one year, while the taxpayer was its owner, the taxpayer is only required to complete the first page of Form T2091 (IND) (or Form T1255).
CRA Response to Question 11(b)
The CRA cannot confirm that no penalty will be imposed in the circumstances of your example. Each situation must be studied on a case-by-case basis, according to its specific facts. It should be noted that the administrative practice stated on the CRA's website, allowing the reduction of the penalty for late-filing a principal residence designation, except in the most excessive cases, has been extended to dispositions that occurred in the 2017 taxation year.
Hugo Gravel
5 October 2018
2018-076157
FOOTNOTES
Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:
1 Online: https://www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/federal-government-budgets/budget-2016-growing-middle-class/reporting-sale-your-principal-residence-individuals.html