Principal Residence Excemption
By Nizam Shajani, CPA, CA, MBA, Partner
New rules effective for the 2016 tax filing year require disclosure of the sale of your principal residence to qualify under the exemption rules. Properties that do not qualify are subject to tax. To qualify as a principal residence, all of the following four conditions must be met:
- It is a housing unit, a leasehold interest in a housing unit, or a share of the capital stock of a co-operative housing corporation you acquire only to get the right to inhabit a housing unit owned by that corporation.
- You own the property alone or jointly with another person.
- You, your current or former spouse or common-law partner, or any of your children lived in it at some time during the year.
- You designate the property as your principal residence.
The land your principal residence is located on may be included as part of your principal residence- however there are limitations on size (usually ½ hectare).
Only one property can be designated as a principal residence per family unit in a particular tax year. A family unit may include yourself, your spouse or common law partner and your children that are under the age of 18. The designation of a property as a principal residence is to be made on your personal tax return for the tax year in which the property has been disposed of.
Where the criteria above are not met – the disposition would be subject to a capital gain tax.
Where you own more than one property and sold one of the two properties (and all of the conditions above are met) – it may be advantageous to calculate which property to include as your principal residence for tax purposes. Calculations also take into account when more than one property is a principal residence – such as the sale of one property partway through the year and the acquisition of anther in that same year.
Where your principal residence is completely converted to an income producing property, you are deemed to have disposed of that property at fair market value – and re-acquired it for the same. The gain in this instance would be offset with the principal residence exemption. There is option to defer recognition of any gain to a later year by electing under subsection 45(2) to be deemed not to have made the change in use of the property. This is done by letter for the year in which the change occurred. CRA does accept late-filed elections for this purpose as long as no CCA has been claimed on the property. With this election – a property can qualify as a your principal residence for up to four tax years, even if the property is not ordinarily inhabited during those years – as long as you remain a resident in Canada. Note any rental income during this time should be reported – however, no CCA should be claimed on the property.
Where there is a change I use of a property form income-producing to principal residence – and no election under subsection 45(2) has been made – the property is deemed to have been disposed of at fair market value and reacquired it for the same. This may result in a taxable capital gain. The tax on this gain may be deferred by filing a subsection 45(3) election. Note this election will not be permitted if at any time CCA had been claimed on the property. It should also be noted that under this election, the property may qualify as your principal residence for up to four tax years prior to the change in use in lieu of fulfilling the ordinarily inhabited rule.
There are several rules and regulations around the use of a principal residence exemption and it is recommended you consult with our firm before making assumptions or filing your tax return to make this claim.
This information is for discussion purposes only and should not be considered professional advice. There is no guarantee or warrant of information on this site and it should be noted that rules and laws change regularly. You should consult a professional before considering implementing or taking any action based on information on this site. Call our team for a consultation before taking any action.