It is always pleasing to go to a professional education session and learn some valuable things, especially when it is a subject about which you thought you "knew it all."
In helping out clients over the years who own cottages and vacation properties, as well as their houses, we have done a lot of research on the principal residence exemption (PRE) and have been able to save them thousands of tax dollars as a result.
The PRE allows the tax-free sale of a residential property that is "ordinarily inhabited" by the taxpayer, spouse (or former spouse), common-law partner or children of the taxpayer claiming the exemption. You can also claim a trust or estate.
If you sell your cottage, can you claim that as your principal residence (PR)? Yes, you can. Even a mobile home or houseboat can qualify, as long as you have slept there, basically. There is no time limit imposed on how often it was "ordinarily inhabited." Foreign vacation property may also be claimed.
Raw land does not qualify until a residence is constructed on it. Large properties and farmhouses require specific advice.
If you own one residence only and sell it, you do not have to claim that sale on your tax return. The claim is assumed.
However, if for some reason you do not want to claim the exemption on a particular sale, then you must file form T2091 (IND) to account for the capital gain. This would be the case, for example, if you sold a house with a small gain and wanted to pay the tax on half that gain while retaining the exemption for your cottage, which had a much larger gain.
Be sure to use this form in such a situation or you will lose the right to make the claim for all the years you owned the property that is sold.
You would also use the T2091 if not all of your gain on a sale is covered by the PRE.
Only one PRE is claimable by each married or common-law couple. The exception is for years up to 1982 when each spouse was allowed a principal residence.
One of the things I learned recently, in the excellent presentation by Aurele Courcelles to the Society of Trust and Estate Practitioners, is common-law spouses can claim two exemptions for years up to, and including, 1993, when the Canada Revenue Agency included them in the definition of "spouse."
Further, same-sex couples can claim two exemptions up to 2001, when they became "spouses" under the tax rules.
Other good news for me was the PRE can be claimed by people who used a portion of their house as a business, as long as there is no separate area for the business and no capital cost allowance was claimed on previous tax returns.
For a duplex or triplex which is partly rented, the exemption can still be claimed on the residential (non-rental) portion when sold.
If you move into a property you have previously been renting out, or if you start to rent out your principal residence, then you have a "change of use" and a deemed disposition for tax purposes. In the first example, that would mean paying tax on half the gain at the time of change.
However, according to Courcelles, an election can be filed to defer the deemed disposition and maintain the PR for another four years if certain criteria are met. An advantage would be to defer paying tax until you actually sold the property, for example. The election "form" is simply a letter.
The PRE makes the gain on most people's house tax-free, whether they sell it while they are alive, or if it is sold by their executors after they die. If you own one property with none of the complications mentioned here, then you have nothing to worry about.
If you own multiple properties or have any of these other situations, then it's best to get good advice before selling any of them. At the very least, proper application of the PRE calculation formula will net you an extra year of exemption. Your saving from proper planning may be much more substantial.
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Thanks to everyone who came out to McNally Robinson last night for the signing and party to launch my book, Managing the Bull. Special thanks to the Bob Watts Trio and Katherine Penfold for making it a real musical happening as well.
I hope to see you tomorrow night at the King's Head Pub, where our band, Highway 59, will be rockin' the joint until the wee hours. (I will be the guy they have to wake up to play the third set!)
David Christianson, BA, CFP, R.F.P., TEP, is a financial planner in Winnipeg and author of Managing the Bull, Detect and Deflect the Crap in Personal Finance.