Principal Residence - Changes you should know

CRA has been very busy of late and their focus has landed on policies that effect principal residency followed by all taxpayers. In 2015 and earlier years, taxpayers were required to complete form 2091, which designated your home as a principal residence. The form required you to designate the years in which the home was your principal residence. The nice thing with this form was that it was required to be filed in the year if disposition (although most often this form was never filed as the capital gain was often fully offset by claiming the principal residence exemption). From an administrative perspective, CRA had waived this requirement to file if the exemption eliminated the gain.

However for the taxation years that end on or after October 3, 2016, if you sell a house that is your principal residence, you are required to report the sale and the resulting capital gain or loss on the schedule 3 of your T1 and to file the corresponding T2091 form. These forms are now mandatory regardless of whether your exemption fully offsets your capital gains.

Failure to file and disclose this as noted above will have significant implications.  Firstly, there is no limitations period where your return will be statute- barred. Hence CRA will have the ability to reassess at any point in the future. Therefore, CRA will retain their ability to re-open the tax return at any point in the future unless the information had properly been disclosed.

Secondly, the principal residence exemption itself will be allowed if the dale and the designation of principal residence are reported on your income tax return. If you realize that subsequent to the year of the sale and filing, that you failed to report the disposal of your principal residence, the CRA is not required to accept a late filing that designates the principal residence sale. Should they accept the late filing, the taxpayer is still subject to penalties which are the lesser of $8,000 or $100 for each complete month from the original filing due date.

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CRA Update Info

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Restrictive Cov...

Restrictive Covenants


On June 26, 2013 Bill C-48 received Royal Assent entacting the proposed legislation related to the taxation of Restrictive Covenants (RCs). This legislation is retroactive to years as far back as 2003, although it is uncertain whether CRA could reopen a return past the normal reassessment period for legislation passed long after the return was filed.


Subsection 56.4(2) provides that any amount received or receivable for a RC will be treated as ordinary income for tax purposes. Obviously when dealing with the sale of a business by means of shares sale the difference is declaring the income as a capital gains and ordinary income (or 50% inclusion and 100% inclusion). A RC is an agreement between parties, or an undertaking or waiver of an advantageous right that affects, or is intended to affect, in any way, the acquisition of property or services. This agreement need not be legally enforceable.


Some Exceptions to the General Inclusion

There are three narrow exceptions (56.4(3)) to the general income inclusion rule provided that the vendor and purchaser deal at arm’s length, as follows:


1)      Employment income – if the amount is required to included in employment income or would be so if the amount had been received in the year.

2)      Eligible capital property – if the amount would be included in in the tax payer’s cumulative eligible capital in respect of the business carried on in Canada by the taxpayer.

3)      Shares and partnership interests – if the amount is the disposition of an eligible interest


Reallocation of Proceeds

Due to the preferential tax treatment of capital gains, as compared to the full income inclusion for the proceeds related to the RC, CRA retains the rights to challenge and reallocate the proceeds under Section 68 which generally allows CRA to challenge unreasonable allocations of proceeds. There are some very specific cases, certain employee relationships (subsection 56.4(6) and arm’s length and non-arm’s length transfer of goodwill and certain property subsection 56.4(7)) where CRA cannot reallocate the proceeds.


Election Required

To fall within the exception 2 or 3 above, the vendor and thebuyer must jointly elect in a prescribed form. As the prescribed form is not yet available, the seller and buyer must file a jointly-signed letter to make the election. SEE BELOW FOR CRA RULES FOR THE ELECTION


            Election for restrictive covenants

Since we have not published a prescribed form for the elections contained in section 56.4 of the Income Tax Act, the seller (grantor) and buyer (payor) have to file a jointly-signed letter to make the election.

This letter must include the following information concerning the grantor:

  • Full name
  • Social insurance number or business number
  • Address, and mailing address if applicable
  • The taxation year of the grantor in which they sold the restrictive covenant

This letter must include the following information concerning the payor:

  • Full name
  • Social insurance number or business number
  • Address, and mailing address if applicable
  • The taxation year of the payor in which they bought the restrictive covenant

This letter must include the following information concerning the covenant:

  • A description of the covenant
  • The full name of the taxpayer granting the covenant
  • The full name of the taxpayer receiving the consideration for the covenant
  • An indication that these parties deal at arm's length
  • Under which provision of section 56.4 is the election being made by the parties

The election is deemed to be filed on time if it is filed on or before the day that is 180 days after Royal Assent, That is December 23, 2013. Otherwise, the prescribed form (or letter) must be filed on or before the person’s filing due date for the taxation year that includes the date the RC was granted for persons resident in Canada. For non-residents, the deadline is 6 months after the day the RC was granted.

Note that the basic requirements for exception 3 to the general rule include that the RC must be a non compete. As such various other RC’s such as non-solicitation and non-disclosure (or confidentiality agreements) may not qualify for the exception.
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The Undergrou...

The Underground Economy


Early in 2015 a CRA Newswire announced that on April 29, 2015 Statistics Canada released the new underground economy estimates for Canada for the period from 1992 to 2012. Some figures included:

- from 2007 to 2012 underground economy activity increased 14% compared to a 17% increase in GDP; and,

- four sectors accounted for 66% of the total estimated underground activities - residential construction (28%); finance, insurance, real estate, rental, leasing and holding companies (14%); retail trade (12%); and accommodation and food and services (12%).

CRA noted that they will analyze the results of this study to develop targeting strategies. Further, the 2015 budget proposes to provide an additional $118 million over 5 years to enhance CRA's underground economy audit efforts.
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