Summer is often one of the busiest seasons for residential home sales. With many investors 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/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. If you own multiple properties and sell one, 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 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:
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.” This doesn’t mean that the taxpayer needs to live there the majority of the time. The property may qualify if the taxpayer or member of the family unit lived in it at some point during the year.
2. Can a cottage/cabin qualify? Yes, seasonal residences, even those outside of Canada, may be designated as a “principal residence.”
3. What if I forget to report the sale on my income tax return? The Canada Revenue Agency (CRA) 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.
4. Can I use my property for rental/business income? If a property is predominantly used to produce income, it will not be eligible for the PRE. If part of a 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 it was a principal residence prior to the change, the PRE may be claimed for those years. Note: a “change in use” may result in additional tax implications.2
5. What if I leave Canada for extended periods? If you weren’t a resident of Canada for the entire time you owned a designated property, the period of non-residence may reduce/eliminate the PRE.
6. What if I move into a care home? The PRE is only available if the unit is ordinarily inhabited, so a property may not qualify during the time an owner lived in a seniors’ facility. As you plan ahead to use the PRE, one option may be to have an adult child occupy the home during this time.
*Or a deemed sale for tax purposes; 1. Per family unit. For years before 1982, each spouse can designate a different property; 2. www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/personal-income/line-12700-capital-gains/principal-residence-other-real-estate/changes-use.html
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