Monica Bing Monica is a client of your firm and she has sent you an email in a panic. The email relates to her personal taxes. Monica received a notice of reassessment for her 2019 personal taxes asking to pay a lot in tax plus interest and penalties. She is not sure what to do or why the CRA assessed her return.

Dear CPA, Re: Email 1 of 2- Personal Taxes 2019 Notice of Reassessment

As you know, 2020 was a crazy year for me (pandemic aside) with my divorce finally settled, so I had decided to ambitiously file my 2019 taxes on my own. Well, it turns out I am never doing that again, as the CRA reassessed my 2019 return and is asking me to pay A LOT of taxes plus interest and penalties. It appears that the CRA disallowed the principal residence claim on the condo I sold in May 2019.

I had purchased the condo in question back in 2013 - the year I got married. It was a pre-build and the developers at the time were advertising that the condo would be fully built and ready to move in by the summer of 2016. Long story short, that did not happen. The developers kept pushing the date (very frustrating) and so I received title (i.e., when the property actually becomes mine) on November 30, 2018. On the bright side, it turns out this worked out well since my now ex-husband and I sold our Toronto home in October 2018 after we separated in September 2018. Given that I needed a place to stay, I moved into the condo in December 2018. For the month of November 2018, I lived with a girlfriend and her family in Toronto.

I had purchased the pre-build condo with the intention at that time to hold it long term keep it as an investment property. The condo is located close to the University of Toronto, so I knew the location would be perfect for a student. I had never bought a condo before, so I was very proud of this transaction. I was the sole owner of the condo. My now ex-husband did not give me a cent towards any payment. I did this all on my own.

When I received title in December 2018 (again the timing was perfect as I needed a place to stay for a short while) I decided that I would not rent out the condo. I lived there throughout the month of December 2018, although I went to live with my parents in Vaughan for two weeks over the Christmas holidays. In the new year, I lived there full time until the condo was sold in May. As you know, I travel a lot for work so there were about 3 weeks during those 5 months that I spent out of town. However, at least I had a place to call mine to start all over post separation.

In December 2018, I knew I was not going to keep the condo for very long. I would use it as a place to stay in the meantime, but my priorities had changed post separation and I wanted to buy a home for myself just north of the city. The condo was too small for my vast wardrobe and shoe collection. I do read often and find myself reading various articles on the Toronto real estate market, so I keep myself informed. The fact that the condo market in Toronto had skyrocketed at the time was a bonus. Back in December 2018, my realtor had told me that I could sell this unit for $850,000. I could not believe it. When I took title of the condo my cost base was $425,000. Turns out my realtor knew what she was talking about because I sold the property in May 2019 for $852,000.

One final point. When I received title in December, I did not take out a mortgage. Instead, I financed the remaining $150,000 with a short-term line of credit. The interest rate was higher on the line of credit than on a mortgage, but I knew I would not be staying there for long.

So where did I go wrong? When my ex-husband and I sold our joint home in 2018, I know that I claimed the principal residence exemption on the home. You had prepared the return. At that time I remember us allocating every year we owned the property from 2013 to 2017. I recall something called the +1 rule that eliminated the entire gain on the home for both my exhusband and me. So, for my 2019 return, I claimed the principal residence exemption on my condo and allocated the 2018 year. The +1 rule wiped out the entire gain on the condo. Is it because I claimed the principal residence exemption two years in a row? Or perhaps I sold shortly after I received title? I mean, I gave you the facts above, so if I should not have claimed the principal residence I need to know. Can you please help?

Also, if the CRA is wrong what remedy do I have? I received the notice of reassessment dated two weeks ago. Now having looked at the notice of reassessment in more detail, it looks like they added the entire $427,000 gain to income. I thought gains on the sale of property were half taxable? What is going on!?