It is the summer — one of the busiest seasons for residential home sales. For many of us, our home is one of our most valuable assets. With many investors now owning multiple properties, thinking ahead to their eventual disposition may be worthwhile.
As a reminder, when you sell your home and a capital gain is realized,* the resulting tax may be eliminated or reduced if the property is designated as a “principal residence” by claiming the Principal Residence Exemption (PRE). As of 2016, you must report the sale of a principal residence on your income tax return and claim the PRE. Under new “anti-flipping” rules, property owned for less than 365 consecutive days is generally not eligible.
If you own multiple properties, and more than one meets the definition of a principal residence, you will need to decide which one to designate as the principal residence for each of the years it was owned: only one can be named each year.1 This will need to be determined at the time you sell or dispose of one of the properties. Generally, you should consider designating the property with the largest average capital gain per year to reduce the overall tax liability. Yet, the decision is rarely straightforward and may involve multiple factors, such as predictions about the future value of the remaining residence(s).
Here are six common questions relating to the PRE that should also be considered as you plan ahead:
1. To qualify, do I have to live in the unit most of the time? A principal residence generally refers to a housing unit that is “ordinarily inhabited.” The definition of ordinarily inhabited does not mean that the taxpayer needs to live in the unit the majority of the time. The property may qualify as a principal residence if the taxpayer, their current/former spouse/common-law partner, or children lived in it for “a short period of time” during the year.
2. Can a cottage/cabin qualify? Yes, seasonal residences — even those located outside of Canada — may be designated. However, only one property per year, per family unit, can be designated.
3. What if I forget to report the sale on my income tax return? The Canada Revenue Agency may charge a late-filing penalty of $100 per month, up to a maximum of $8,000. As well, the PRE may be denied at a further date and the owner would be taxed on the capital gain.
4. Can I use my property for rental/business income? If the property is used predominantly to produce income, it will not be eligible for the PRE. However, if part of the principal residence is used for rental/business purposes, you may be able to claim the PRE for the portion used as a residence. If you change the use of a property, if the property was a principal residence prior to the change, the PRE may be claimed for those years. Note: a “change in use” often results in tax reporting requirements and tax implications beyond the scope of this article. Please see the Government of Canada website for more information about the tax implications
5. What if I leave Canada for extended periods? If you were not a resident of Canada for the entire time you owned the designated property, your period of non-residence may reduce the amount of the principal residence exemption or eliminate it.
6. What if I move into a care home? The PRE is only available if the unit is ordinarily inhabited. Some families are caught off-guard when a property does not qualify during the time the owner lived in a seniors’ facility or long-term care home. As you plan ahead to use the PRE, one option may be to have an adult child occupy the home during this time.
The information contained herein has been provided for information purposes only. Graphs, charts and other numbers are used for illustrative purposes only and do not reflect future values or future performance of any investment. The information has been provided by J. Hirasawa & Associates and is drawn from sources believed to be reliable.
The information does not provide financial, legal, tax or investment advice. Particular investment, tax, or trading strategies should be evaluated relative to each individual’s objectives and risk tolerance. This does not constitute a recommendation or solicitation to buy or sell securities of any kind. Market conditions may change which may impact the information contained in this document. Wellington-Altus Private Wealth Inc. (WAPW) and the authors do not guarantee the accuracy or completeness of the information contained herein, nor does WAPW, nor the authors, assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Before acting on any of the above, please contact me for individual financial advice based on your personal circumstances. WAPW is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada.
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