Author: Igor Kastelyanets

Selling a home in Canada involves crucial tax considerations – particularly the principal residence exemption (PRE), which can eliminate or reduce capital gains tax on the sale of a qualifying principal residence. If a property meets the principal residence criteria for the years you owned it, the resulting capital gain can generally be excluded from your taxable income. This guide explains the PRE rules, how to claim the exemption correctly, the reporting obligations, key qualification requirements, partial‑exemption scenarios, and common CRA audit triggers related to real estate. Understanding these rules helps you avoid costly mistakes and stay compliant.

What is the Principal Residence Exemption?

The PRE is an income‑tax mechanism that can exempt the capital gain realized on the sale (or deemed sale) of your principal residence, provided the conditions are met. Broadly speaking, the exemption applies for each year the property is designated as your principal residence. For 2016 and later years, your return must include basic information (year of acquisition, proceeds, and a description) on Schedule 3; for 2017 and later, individuals also complete Form T2091(IND).

Only one property per family unit per year.

For 1982 and later years, you can designate only one home as the principal residence of your family unit – generally you, your spouse or common‑law partner, and unmarried children under 18 – for each tax year. If you own, for example, a city home and a cottage, only one may be designated for a given year. Planning the designation across years can help maximize the exemption.

Who must live there and what qualifies as a property?

You must own the property (alone or jointly), and it must be ordinarily inhabited at some time during the year by you, your spouse/common‑law partner (current or former), or your child. Short periods of occupancy can be enough. Qualifying properties include a house, condominium, cottage, an apartment (including in a duplex), a trailer/mobile home or houseboat, a leasehold interest in a housing unit, and a co‑op share acquired to secure a right to inhabit a unit. Land counts too, but generally only up to ½ hectare (1.24 acres) unless more is necessary for the use and enjoyment of the residence (e.g., municipal minimum lot size).

CRA Principal Residence Reporting Obligations

For 2016 and later tax years, a sale of your principal residence must be reported on Schedule 3 to claim the exemption. For 2017 and later, individuals must also include Form T2091(IND), Designation of a Property as a Principal Residence by an Individual (Other Than a Personal Trust). Additionally, there is Form T1255 – this form is intended exclusively for use by the legal representative of a deceased individual.

CRA will allow the PRE only if the disposition and designation are reported as required. If you forget to designate, ask CRA to amend your return; late designations can be accepted, but the penalty is the lesser of $8,000 or $100 per complete month from the original due date to the date CRA receives a satisfactory request.

Principal Residence Designation & Residency

To claim the exemption on sale, designate the property as your principal residence for each year you wish to shelter, and ensure no other property was designated by anyone in your family unit for those years. In general, a year can be included in the formula only if you were resident in Canada at some time during that year.

CRA Real‑Estate Audits and Common Triggers

• Frequent sales / flipping:

Effective January 1, 2023, gains on dispositions of a housing unit or a right to acquire one (e.g., an assignment) held for less than 365 days are deemed business income (no PRE; loss deemed nil) unless a listed life‑event exception applies. Even beyond 12 months, CRA may assess business income depending on intent and conduct.

• Multiple designations / ineligible use:

A common issue is attempting to designate multiple properties for the same year within a family unit, or claiming PRE on a property that was not ordinarily inhabited (e.g., held mainly for rental/investment despite brief occupancy). The onus is on the taxpayer to support the designation with facts.

• Unreported gains or rental income:

Dispositions must be reported. CRA also targets unreported assignment sales and unreported rental income (for suites or secondary properties).

• GST/HST and new‑home rebates:

If you buy or build a new or substantially renovated home and claim the GST/HST New Housing Rebate, CRA may verify that it was intended as your (or a relation’s) primary place of residence. In some cases, if you’re effectively a “builder” for GST/HST purposes (e.g., you built with an intention to sell), you must collect/remit GST/HST on the sale.

Need Help? Contact Taxpayer Law for Assistance

Navigating the principal residence exemption and related tax rules can be nuanced. Taxpayer Law – a team of experienced Canadian tax lawyers located in Toronto and Ottawa – can assist with your tax dispute with the CRA, collections and voluntary disclosure matters. Contact us for a confidential consultation.

Correctly distinguishing between an employee and an independent contractor is critical for businesses and workers. Misclassifying someone can trigger serious consequences – retroactive CPP/EI payroll assessments, income tax withholdings, penalties and interest. In short, getting it wrong is costly, so it’s essential to understand the rules and get it right from the start.

Why Worker Classification Matters

• Payroll compliance: Employers must withhold and remit income tax, Canada Pension Plan (CPP) contributions, and Employment Insurance (EI) premiums for employees. If a worker is truly a contractor, no such payroll deductions are required – the contractor handles their own tax filings. Misclassification (treating an employee as a contractor) means the employer could be on the hook for the missed deductions (both the employer’s and employee’s share) plus interest and penalties.
  
• Entitlement to benefits: Employees are protected by employment standards laws and could be entitled to things like minimum wage, paid vacation and overtime pay. Independent contractors are not covered by these statutory benefits. In other words, a genuine contractor isn’t owed vacation pay, overtime, or termination notice under employment standards legislation.
  
• Canada Revenue Agency (CRA) enforcement: The CRA can review a work arrangement at any time and issue a binding decision (CPP/EI ruling) on a worker’s status. Either the payer or the worker can proactively request such a ruling. If the CRA finds an employment relationship where a business treated someone as a contractor, CRA could assess the employer for any unremitted CPP contributions and EI premiums (often going back years), along with applicable taxes, penalties, and interest.

The CRA’s Two-Step Test for Employee vs. Contractor

Outside of Quebec (which has its own test), worker status in Canada is determined by common-law principles. The CRA and the courts look at the total relationship between the worker and the payer, using a two-step approach:

Step 1: Intention of the parties. Examine what the worker and the payer intended when they entered into the relationship. Did they intend to create an employment arrangement (“contract of service”) or an independent business arrangement (“contract for services”)? A written agreement can reflect this intention (e.g. labeling the worker an “independent contractor”), but it’s not decisive if the actual work conditions tell a different story. In some cases the intent is clear and mutual; in others, the two sides may disagree or have never explicitly discussed it. The stated intent is only one factor and cannot override the reality of how the work is carried out.

Step 2: Reality of the relationship. Regardless of what the parties call the relationship, the actual working conditions must align with that characterization. The CRA examines several key factors to see if, in practice, the worker is operating their own independent business or functioning as part of the payer’s business. The main factors (outside Quebec) include:

• the degree of control the payer has over the work;
  
• the worker’s ownership of tools and equipment used;
  
• whether the worker can subcontract work or hire assistants;
  
• the worker’s chance of profit and risk of loss in the arrangement;
  
• the worker’s responsibility for investment and management in the business; and
  
• any other relevant details (e.g. whether there is an exclusive relationship, how integral the worker’s role is to the payer’s business, etc.).

No single factor is determinative – all factors must be weighed together to decide if the worker is in business for themselves or is effectively an employee. The table below summarizes these factors and how they typically indicate either an employment relationship or an independent contractor relationship:

Factor	Indicates Employee if…	Indicates Contractor if…
Control	The payer has the right to direct how, when, and where the work is done. The worker is expected to follow the payer’s instructions and may need permission to work for others.	The worker is free to organize their work – deciding how, when, and where to do the job. They can generally accept or decline assignments and often work for multiple clients.
Tools & Equipment	The payer provides the tools, equipment, and resources needed for the job, or reimburses the worker for such costs. The payer also covers maintenance, insurance, etc. on those tools.	The worker supplies and maintains their own tools, equipment, and workspace at their expense. Any significant capital items (machinery, technology, office space) are purchased or leased by the worker.
Subcontracting	The worker must personally perform the services and cannot hire assistants or subcontract the work to others. The relationship is based on the individual doing the work.	The worker has the ability to hire assistants or subcontract parts of the work to others. They cover the cost of any helpers and manage their contributions as part of running their own business.
Financial Risk	The worker has little financial risk: they have few (if any) unreimbursed expenses. They typically earn a fixed wage or salary (steady pay) and are not responsible for operating losses.	The worker faces financial risk in the enterprise. They incur ongoing business expenses (equipment, home office, liability insurance, etc.) without guarantee of reimbursement, and they may incur a loss if their costs exceed their revenue.
Investment & Management	The worker has no capital investment in the payer’s business and no business presence of their own (no business premises, no employees of their own). They do not actively manage an independent business – they simply perform work as instructed.	The worker has made investments in their own business (such as office space, vehicles or heavy equipment, staff or subcontractors). They manage some or all aspects of delivering the services as a business owner would, exercising decision-making beyond just doing the assigned work.
Opportunity for Profit	The worker’s compensation is fixed – often an hourly, weekly, or salaried rate. There is little opportunity for additional profit beyond perhaps a performance bonus or commission. The worker’s income is relatively secure and does not directly depend on managing costs.	The worker has the opportunity to earn profits by working smarter or more efficiently. They can increase their income by taking on additional projects or clients, negotiating higher fees, or reducing expenses. In essence, they can realize a business profit (or loss) based on how they operate.

In addition to the above, the overall integration of the worker into the payer’s business could also be considered. If a worker is deeply integrated into the company’s operations (indistinguishable from regular employees), that leans toward an employment relationship. If the worker operates distinctly (e.g. under a separate business name, offering services to the market), that leans toward an independent contractor status. All factors must be examined together to get a full picture.

Tax Obligations

Worker classification also affects how taxes are handled:

Employees: When a worker is an employee, the employer is responsible for payroll deductions at source – this means the employer withholds the employee’s income tax, CPP contributions, and EI premiums and remits them to the CRA (along with the employer’s share of CPP/EI).

Independent Contractors: A genuine contractor is considered self-employed for tax purposes. They pay their own taxes – no income tax or EI/CPP is withheld at source by the payer. Instead, the contractor must report business income on their tax return and remit both portions of CPP contributions themselves (the equivalent of both employer and employee CPP) when they file taxes. EI premiums are generally not required for self-employed individuals.

Tax Consequences of Misclassification

If a business incorrectly treats an employee as an independent contractor, the retroactive costs and penalties can be substantial. The employer can be ordered to pay all back CPP and EI contributions that should have been made, for both the employer’s and employee’s portion. The CRA will also assess any overdue income tax that wasn’t withheld. 

Penalties can be added – generally 10% of the unremitted amounts, rising to 20% for repeat or gross negligence cases – plus compound daily interest on the entire balance. In essence, the employer might have to pay several years’ worth of CPP/EI premiums and taxes, with interest and hefty penalties, because they failed to remit them when due.

Given these serious repercussions, it’s clear that prevention is far better than cure when it comes to worker classification issues.

Need Help?

Worker classification can be complex. Taxpayer Law – a team of experienced tax lawyers in Canada (with offices in Toronto and Ottawa) can assists payers (businesses) with all aspects of this issue. Contact us for a confidential consultation.

We appreciate the contribution of Gulshakh Gill in the development of this article.

The Canada Revenue Agency (“CRA”) offers a relief program for taxpayers facing interest and penalties. Individuals and businesses that have personal income tax, corporate income tax, GST/HST, or other federal tax obligations may qualify.

Situations That May Qualify for Relief

The following are the general categories of circumstances that may qualify for relief:

• Financial Hardship: Tax relief could be available for taxpayers experiencing severe financial difficulty who are unable to make reasonable payments or afford basic necessities. Businesses may qualify if interest charges threaten operations, jobs, or community welfare.
• Extraordinary Circumstances: Situations that may qualify for relief include natural disasters, serious illnesses/accidents, severe emotional/mental distress (e.g., death of an immediate family member), civil disturbances, or service disruptions (e.g., postal strikes). Sometimes, the CRA will issue news releases for widespread adverse events, but taxpayers must still request formal relief.
• CRA Errors or Delays: The CRA may waive penalties and interest if they result from CRA actions, including errors in published material or information, processing mistakes, or delays in processing returns, providing information, or resolving disputes
• Other Circumstances: The CRA may consider circumstances that do not fall into the three categories above. For example, exceptional situations may apply where an error was made by a third party (e.g., a representative or tax preparer).

It is important to note that meeting the criteria does not guarantee relief. Moreover, as per the Taxpayer Relief Provisions, a taxpayer has only 10 years from the end of each calendar year or fiscal period in which the interest and/or penalties accrued to request relief. 

Applying for Relief

Taxpayers must submit a formal application outlining their situation when requesting a waiver of penalties and/or interest:

1. Complete the Appropriate Form(s): Form RC4288 is generally the default form for requesting relief from penalties and interest. Selected listed financial institutions (“SLFIs”) must instead file Form RC7288 to request cancellation or waiver of GST/HST and/or QST penalties and interest. Both forms require taxpayers to provide personal/business details, list relevant tax years, provide a reason for the requested relief, and specify whether the taxpayer is applying for penalty, interest, or both types of relief. For requests made based on financial hardship, individual taxpayers should attach Form RC376 or a written statement of their financial situation.
2. Gather Supporting Documents: Taxpayers must submit all relevant information, including basic account information (e.g., SIN, BN) and supporting documentation. Requests based on financial hardship should include income and expense statements or business records. Requests based on medical claims should include hospital records and/or doctors’ notes. Requests based on disaster claims should include insurance documents and/or news reports.
3. Submit the Request: Individual taxpayers can submit their request online via CRA My Account and businesses can submit theirs through My Business Account. Alternatively, the form(s) may be mailed or faxed to the designated office indicated on the last page of the form for the taxpayer’s province or territory of residence.

Processing typically takes several months. Interest continues to accrue until the CRA reaches a decision, so taxpayers should consider making minimum payments or arranging a payment plan. Whether a taxpayer took reasonable care in managing tax affairs and acted quickly to correct any delay or omission can influence the CRA’s decision to grant relief.

Get Help Navigating the CRA Taxpayer Relief Process

Applying for a waiver of interest and/or penalties requires carefully crafted submissions. Taxpayer Law can assist with preparing the necessary submission. Contact Taxpayer Law today for a consultation.

We appreciate the contribution of Simran Mann in the development of this article.

If a taxpayer accidentally over-contributed to an RRSP or TFSA, the taxpayer may face a significant penalty tax from the Canada Revenue Agency (“CRA”). Fortunately, there is a process to request a waiver of over-contribution tax. 

Understanding RRSP and TFSA Over-Contribution Penalties

Over-contribution tax applies when a taxpayer contributes more than their available contribution room. The CRA imposes a 1% tax on the highest excess amount for each month. For RRSPs, this penalty is imposed on unused contributions that exceed the taxpayer’s RRSP deduction limit by more than the lifetime $2,000 grace amount. For TFSAs, the 1% monthly tax applies to the entire over-contributed amount from the moment the taxpayer goes over their limit. Even if the excess exists for only a few days in a month, the 1% tax still applies for the whole month.

Example: Suppose a taxpayer over-contributed $5,000 to a TFSA. That taxpayer would incur a $50 penalty tax for each month that $5,000 remains in excess ($5,000 x 1% = $50). For an RRSP, contributing $5,000 would trigger a tax on the $3,000 exceeding the $2,000 grace amount ($3,000 x 1% = $30). In all cases, removing the excess as soon as possible stops further penalty tax.

Requesting a Waiver for Over-Contribution Tax

Applying for a waiver of over-contribution tax involves making a formal request to the CRA. The over-contribution must have arisen from reasonable error; simply ignoring the taxpayer’s limits is not enough. The waiver process typically works as follows:

1. Remove the Excess Contribution: For RRSPs, if the taxpayer has not already withdrawn the contributions, the taxpayer can complete Form T3012A to withdraw the excess contribution. For TFSAs, simply remove the excess. Maintaining documentation of the funds removed is important, as this demonstrates to the CRA that the taxpayer took prompt corrective action.
2. Gather Documentation: To establish an accurate timeline, the taxpayer may include account statements showing contributions and withdrawals, copies of the taxpayer’s RRSP or TFSA contribution room statements from CRA, and any correspondence from the CRA about the over-contribution. 
3. Complete the Appropriate Form or Letter: To waive RRSP over-contribution tax, the taxpayer will need to fill out Form RC2503. The taxpayer’s form should explain: 1) why the taxpayer made excess contributions and why this is a reasonable error; and 2) what steps the taxpayer is taking, or has taken, to eliminate the excess contributions. To waive TFSA over-contribution tax, the taxpayer will need to write a letter to the TFSA Processing Unit explaining why the tax arose and why it should be waived (there is no prescribed CRA form for TFSA waivers).
4. Submit the Application to the CRA: For a waiver of RRSP over-contribution tax, the taxpayer can send the request to the tax centre as shown on the taxpayer’s Notice of Assessment or Reassessment. For a waiver of TFSA over-contribution tax, the taxpayer can send the request to the Sudbury Tax Centre (P.O. Box 20000) or the Winnipeg Tax Centre (P.O. Box 14000). You may also use the ‘Submit Documents’ service in CRA My Account instead of mailing.
5. Await the Decision: Processing times can be several months due to high volumes. The CRA may contact the taxpayer if they need more information. If the taxpayer’s request is approved, the CRA will waive the over-contribution tax, or cancel it and refund any amount the taxpayer has already paid. 
6. If Denied, Consider an Appeal: If a request for a waiver is denied, the taxpayer can request a second review of the decision (a second administrative review within the CRA). If the taxpayer still disagrees with their decision after a second review, the taxpayer can apply to the Federal Court for judicial review.

Relief is discretionary. Meeting the above criteria makes the taxpayer eligible for consideration, but approval is not guaranteed. 

Get Professional Help with Taxpayer Relief for Over-Contributions

Navigating the over-contribution tax waiver process can be complex. Taxpayer Law is here to help. We have extensive experience assisting clients with CRA over-contribution tax relief applications, including cases involving RRSPs and TFSA contributions. Contact Taxpayer Law today for a consultation.

We appreciate the contribution of Simran Mann in the development of this article.

Over-contributing to a Tax-Free Savings Account (“TFSA”) can trigger unexpected taxes and penalties from the Canada Revenue Agency (“CRA”). This article explains what a TFSA over-contribution is, outlines its limits, and offers strategies for avoiding one.

What Is a TFSA Over-Contribution?

A TFSA over-contribution occurs when a taxpayer contributes more to a TFSA than their contribution room allows. Every Canadian aged 18 and over accumulates TFSA contribution room each year, and if a taxpayer deposits an amount beyond that limit (including carry-forward room from prior years), the surplus is considered an “excess TFSA amount” by the CRA and is subject to a special tax.

CRA TFSA Contribution Limits

A taxpayer should understand CRA TFSA contribution limits to avoid an over-contribution. TFSA contribution room consists of three components:

1. Annual limit set by the federal government ($7,000 for 2025)
   
2. Unused room carried forward from prior years
   
3. Amounts withdrawn in previous years – for instance, if a taxpayer withdrew $5,000 in 2024, they gain an extra $5,000 of room on 1 January 2025 (note: the extra room does not appear in 2024).

TFSA Over-Contribution Penalties and Tax Implications

TFSA over-contributions are subject to a 1% monthly tax on the highest excess amount until corrected. There is no buffer amount: even a $1 over-contribution triggers this tax. The CRA may notify the taxpayer of an over-contribution via a Notice of Assessment or an Excess TFSA Amount letter, but these typically arrive long after the excess tax first starts accruing. As a result, it is prudent for a taxpayer to act quickly if there is an over-contribution.

Correcting TFSA Over-Contributions (Using Form RC243)

If a taxpayer has an over-contribution, it is prudent to:

• Withdraw the excess funds immediately to stop additional tax from accruing.
  
• File Form RC243 (TFSA Return), due by 30 June of the year following the over-contribution; this form calculates the tax payable.
  
• Pay the tax promptly, even if the taxpayer intends to request relief.
  
• Consider using new contribution room next year. The taxpayer’s 1 January limit increase can absorb the over-contribution, but the 1% monthly tax applies until then.

TFSA Over-Contribution Relief

The taxpayer may request a refund of the 1% tax. This requires a detailed written explanation sent to the CRA’s TFSA Processing Unit. We regularly assist taxpayers with this submission.

Tax Planning and Strategies to Avoid TFSA Over-Contributions

• Track TFSA room carefully using both CRA tools and personal records.
  
• Have a withdrawal strategy for over-contributions. A common mistake is withdrawing funds and then re-contributing in the same year – this causes an over-contribution if no room remains. Wait until the next calendar year to re-contribute.
  
• Limit automatic contributions.
  
• Seek professional advice when transferring TFSAs or handling complex situations (e.g., non-residency).

Need Help?

TFSA mistakes are stressful, but you don’t have to navigate them alone. If you face CRA penalties, contact Taxpayer Law. Our seasoned team can assist with correcting TFSA over-contributions, filing Form RC243, and pursuing relief under the CRA’s discretionary powers.

We appreciate the contribution of Momina Malik in the development of this article.