By: Kevin-Barry Henry, #1 Bestselling Author
In order for a person to be entitled to claim the principal residence exemption in any given year, the owner must “ordinarily inhabit” the home and the owner, his/ her family unit (normally a spouse, common-law partner (CLP) or minor child) cannot claim any other property as their principal residence for the year. If the owner does not inhabit the home, the exemption is still available if a spouse, CLP, former spouse or CLP or child (of any age) occupies the home.
When the time came for our family to start looking for an extended care facility for my father, we all knew something would have to happen to my father’s home, the house we all grew up in. Homes are called assets on the balance sheet and a principal residence to CRA, but in our case there was a very emotional tie to the house. I suspect we are not the only family that views the family home in this way. That said, after my father’s fall at home alone, circumstances meant we had to find the solution and find it fast.
The capital gain on your home is simply the price you sell your home for minus the price you paid for it. For most other types of investments, if you are able to incur a capital gain, you must pay taxes on your capital gain.
There are registered, tax-deferred plans such as RRSPs and RRIFs for example, and then there are registered tax-free plans like the TFSA, all of which you should consider in your overall plan, but for the purposes of this article, let’s keep it simple and focus on the principal residence exemption.
Excluding the use of these registered accounts, if you buy a stock (or mutual fund or investment property, etc.) for $10 and you sell it for $12, your capital gain is $2 and CRA will want their share. In the case of the principal residence, the gain is not taxable thanks to the capital gains exemption.
For those who have read my book, you know that although our journey was not a straight line, we did manage to find a wonderful new home with care for our dad and we were also able to come up with a great solution for his principal residence, the home that meant so much to all of us.
But what if a person wanted to keep their house for financial or sentimental reasons or both, but is forced to move into a residence for seniors or an extended care facility? What happens to the oh-so-precious principal residence exemption? Is there a way to preserve it?
Well, the short answer is… it depends. It depends upon who will be inhabiting the house when you (or your parents) will no longer be living there. There are rules in place with CRA and they do provide some options for you or your parents if you or they are thinking about a move or are suddenly faced with one.
Our friends at CRA tell us that the rules regarding the principal residence exemption are as follows:
Regarding the principal residence exemption rules, for a person to be entitled to claim the exemption for a given year, a taxpayer must “ordinarily inhabit” the home and no other property can be claimed by the taxpayer or his/ her family unit (normally a spouse, common-law partner (CLP) or minor child) for the year. Where the taxpayer does not inhabit the home, the exemption is still available if a spouse, CLP, former spouse or CLP or child (of any age) occupies the home.
So, you do have some options.
The question also becomes what does “ordinarily inhabit” mean? In my family’s case, we knew that my father’s stay in his new extended care residence was likely going to be permanent, barring something miraculous, so that meant that he would no longer be considered to “ordinarily inhabit” his house. We went on to sell the house and crystalize the principal residence exemption.
If, however, your stay (or your parents’ stay) in an extended care facility or nursing home is only temporary, then it is likely that you would be considered to continue to “ordinarily inhabit” your (or your parents’) home. In the case of the temporary stay, the principal residence exemption would remain intact, and the home would be sheltered from capital gains tax.
As previously noted, there is flexibility to preserve the principal residence exemption, even if you are in the care of an extended care facility or nursing home, and you chose to keep your home. If a child, common-law-partner, former spouse or CLP of the owner inhabits the home, under CRA rules, you can still claim the property as your principal residence and fully shelter it from capital gains tax – as long as you don’t claim any other property as your principal residence at the same time. The rental income that you charge the inhabitant will of course be taxable income, but the principal residence exemption will remain intact.
You do have options when it comes to claiming the principal residence exemption if a child or the other listed possibilities inhabit a home owned by a parent. It doesn’t matter what amount of rent the parent charges either. It can be fair market value or otherwise, but fair market – or close to it – is probably a good idea to avoid attracting any unwanted attention. Using this concept, the child can occupy the home until the parent sells it and takes full advantage of the principal residence exemption or the death of the parent as long as the parent does not claim any other property as her or his principal residence.
The rental income paid to the parent who owns the home will have to be reported as taxable income, so you will need to be aware of that as well when making your decision regarding your all-important principal residence.
I know from personal experience that sometimes these decisions can be emotional ones. Knowing the rules and what your options are can sometimes help make the decision a little bit easier, and that is my wish for you and your family.
With Gratitude,
Kevin-Barry Henry
Ask Me Anything Order My Book On Sale Now!THIS ARTICLE IS PROVIDED AS A GENERAL SOURCE OF INFORMATION ONLY AND SHOULD NOT BE CONSIDERED TO BE PERSONAL INVESTMENT OR LEGAL ADVICE. READERS SHOULD CONSULT WITH THEIR FINANCIAL OR LEGAL ADVISOR TO ENSURE IT IS SUITABLE FOR THEIR CIRCUMSTANCES.