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Tuesday, August 11, 2015

Is the place you live your "principal residence"? Only if these conditions are met

Lately I've been receiving a lot of emails and questions about the principal residence exemption to the capital gains tax rules. While I feel the best advice a lawyer can give a client about tax matters is "talk to an accountant", I would like to set out here the basic rules of whether or not a property is a principal residence.

The reason I want to address this topic is that I keep seeing people who think that "my principal residence" is the same as "where I live". In legal and tax terms, there is much more to it than where you live, and I want the readers of this blog to be aware that they may have to learn more before believing the place they live is actually their principal residence. I also want readers to realize that adding names to your title may cause tax issues.

Understanding this term and how it works can make a huge difference in how an individual's estate is taxed. For example, take a look at this story in the Toronto Star. A couple put their kids' names on their home because they thought it would be simple and save on probate. They ended up creating a $700,000 tax bill for their kids. Had they left the title in their own names, there would have been no tax because it was their principal residence. 

Canada Revenue Agency (CRA) has said that the following conditions must be met in order for a particular piece of property to qualify as a person's principal residence:

1.  The person must own the property, either alone or jointly with others. People sometimes miss this part. People often tell me that they think a parent's home is the (adult) child's principal residence because the child lives there, even though the child doesn't own it.

2.  The person must live there, or as CRA says, must "ordinarily inhabit" the property. It may also be considered to be a person's principal residence if the house is not occupied by the person, but is occupied by the person's spouse, former spouse, common-law spouse, former common-law spouse, or child. This means that rental properties don't qualify as principal residences, since they aren't available to live in if they're rented out. Renting to your child could still mean that the property is a principal residence. Also, you don't necessarily have to live in the property for a large part of a tax year in order for it to qualify. This is one of those complicated rules that, as mentioned earlier, should be discussed with an accountant if you're not sure how it applies to your specific situation.

3.  The property must be designated by the person as his or her principal residence for the tax year. A husband and wife can only designate one property between them. A principal residence might be a different property one year than it was in a previous year.

To see the CRA Income Tax Folio that discusses principal residence requirements, click here

I strongly suggest that anyone who is thinking about putting their kids' names on their property should speak with a lawyer and perhaps also an accountant. Anyone who owns real estate should take the time to find out whether the property will be subject to capital gains tax. In other words, don't simply assume that you know what legal terms mean and how they apply to you. 

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