Some Facts About “Principal Residence” designation in Canada
Continuing on from last week's article, here are some principal residence and capital gains rules we all need to be aware of. A principal residence is:
Generally any residential property owned and occupied by you or your spouse or common-law partner, your former spouse or common- law partner or your child at any time in the year...and it need not be located in Canada.
If you sell your principal residence, any gain from the time you purchased the property to the time you sell is tax free. However, just because you live in your house doesn't automatically make it your principal residence. Flipping house is a good example of demonstrating a pattern to Revenue Canada that you buy and sell houses for a living therefore you may be subject to regular business tax.
You can designate a home as your principal residence for every year that you have lived in it. You can only designate one house per year. The rules were more lenient prior to 1982, however since then couples and their unmarried children must only designate one home in total as their principal residence each year.
As for rental properties they can be designated as your principal residence for up to four years after you rent them out, or longer if you moved out because of work requirements. Now, if you have a rental property you want to make your principal residence the “change in use” can result in a deemed disposition which could trigger a capital gain. However, you can elect to defer this gain until you actually sell the home. Obviously you will need professional tax advice regarding the tax rules on what constitutes your principal residence and the implications of your particular circumstances.
The capital gains exemption on your principal residence, along with an insurance policy death benefit payout and lottery winnings, remain the few sources of significant income which our benevolent government allows us to keep tax free. It is very important that you make sure you know where you stand regarding principal residence rules as previous enforcement inconsistencies has now drawn the attention the federal government and Revenue Canada. Not knowing these rules could potentially cost you a lot of money.
Source: Tax Planning Guide