Penalty for Failing to Report the Sale of a Principal Residence in Canada

Many homeowners assume that selling a home they lived in is tax-free and does not need to be mentioned. That was once common practice, but the reporting rules changed, and some people only learn this years after a sale.

If that sounds like you, this article explains why the report matters, how the late designation penalty is calculated, and how you can ask CRA to correct the return.

This article covers Canadian federal tax law, which applies in every province.

Why the sale has to be reported

Since the 2016 tax year, the sale or deemed sale of a principal residence must be reported on Schedule 3 of the T1 return, even if there is no gain or the whole gain is exempt. CRA allows the exemption only if the disposition and the designation are reported.

So the risk of not reporting is not only a penalty. If the designation is missing, the exemption may not be allowed, and the gain could be taxed. Half of a capital gain is taxable.

How the late designation penalty works

If you forget to designate in the year of sale, you ask CRA to amend the return for that year. CRA may accept a late designation in certain circumstances under subsection 220(3.2) of the Income Tax Act, but a penalty may apply.

The late-election penalty under subsection 220(3.5) is the lesser of $8,000 and $100 multiplied by the number of complete months between the due date and the date of the application. The $8,000 figure is therefore a ceiling, not a flat charge. A shorter delay generally means a smaller penalty.

Time limits and possible relief

• The Minister may extend the time for a late designation if the request is made within ten calendar years after the tax year ends.
• The Minister may waive or cancel penalties or interest if the request is made within ten calendar years after the tax year ends.
• Whether CRA accepts a late designation and whether a penalty applies depends on the facts, so it is worth getting advice before you apply.

Because time matters both for the penalty amount and for the ten-year window, acting early is generally better than waiting.

What a correct report looks like

On Schedule 3, the designation is made in Part 1 by ticking box 1 at line 17900 if the home was the principal residence for all years owned or all but one, or box 3 at line 17900 if it was not the residence for every year owned. Part 2 reports the sale.

You designate the property and calculate any gain on Form T2091(IND). If the home was sold for land and building, the selling price must be split between land and building on Schedule 3. Remember that a loss on the sale of a home cannot be claimed, because it is personal-use property.

What to do next

• Confirm the tax year of the sale and whether the sale was reported.
• Gather the purchase and sale documents, including legal and selling costs.
• Work out which years the home was your principal residence and whether any other property was designated for your family unit.
• Prepare Schedule 3 and Form T2091(IND) for that year.
• Speak with a lawyer or accountant about the request to amend the return and any penalty relief.

Selling costs such as legal fees, transfer taxes and advertising reduce the gain, so keep your records.

Frequently asked questions