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Sometimes, seniors must move out of their home. What are the tax implications of selling the home? Does principal residence exemption apply?
Does the fact that a senior citizen moves out of her home and rents a unit in a nearby senior’s building impact her principal residence exemption when she sells the home, given that she no longer is “residing” in it?
— David
The principal residence exemption allows a homeowner to sell their home and receive the proceeds tax-free. A home can include a house, an apartment, a cottage, a mobile home, a trailer or even a houseboat.
There are a few important criteria from the Canada Revenue Agency (CRA) to claim the principal residence exemption, David. One is that the taxpayer must ordinarily inhabit the home for each year that the exemption is claimed. That does not necessarily mean that they need to live in the home at the time of the sale. This is a common misconception. I have even come across people who mistakenly think that moving into a rental property and living there for a year before they sell it makes the proceeds tax-free. News: It does not.
The principal residence exemption is based on each year of ownership. As an example, if someone owned a house and a cottage for 10 years, then sold their home and moved into their cottage and lived there another 20 years, they may be able to claim the principal residence exemption for both properties. That is, they may claim the principal residence exemption for their house for the 10 years it was owned, and then claim a prorated principal residence exemption for their cottage. The prorated exemption would be based on the 20 years out of 30 years (2/3 or 66.6%) that the cottage was the only property they lived in and owned (more details to follow on the formula).
Interestingly, a cottage can be claimed as a principal residence even if you only live in it for part of the year. The principal residence exemption is not for the home you primarily live in, but for any home that you ordinarily inhabit over the year.
To dig a little deeper on the formula for the principal residence exemption, there is a special “plus 1” rule that adds one year to the years of ownership when calculating the exemption.
The reason is so that if you sell and buy a property in the same year, you can still treat both properties as your principal residence in that year. It also means if someone moves out of their house and sells it the next year, the property may qualify as their principal residence for that additional year.
One question for you, David: Why the is property not being sold despite the senior moving into a retirement residence? I appreciate this can be a sensitive subject. For a homeowner who is starting to lose their independence, they may not want to sell their home or move out in the first place. Or they may want to reserve the right to move back home, even if it is unlikely to happen. For children, the home may be the one they grew up in and they are emotionally attached to it.
Whether you are acting as a power of attorney or not, if the house is going to be vacant, you should at least consider renting it out if you are not planning to sell it. In the Greater Toronto Area, where I live, I find people tend to hold onto real estate in situations like this because their future expectations for price appreciation—rightly or wrongly—are based on the high rate of growth seen in recent years.
The property could be rented out and, from a financial perspective, probably should be if it could otherwise generate annual rent of 3% to 5% of the market value. There is even a special election that could be filed to have the property qualify as a taxpayer’s principal residence for up to four additional years even if it is being rented out.
Subsection 45(2) election can apply if the taxpayer does not designate another property as their principal residence (generally applies for a senior in a retirement home, for example), reports the net rental income earned, and does not claim capital cost allowance on their tax return. Capital cost allowance (CCA) is depreciation on the property that reduces the net rental income and resulting tax.
Another consideration, David, is that if a child lives in the home while the senior is living in a retirement residence, the property can still qualify as their principal residence. It must be ordinarily inhabited by the taxpayer, their spouse or common-law partner, their former spouse or common-law partner, or their child.
The property in this case may still qualify as the senior’s principal residence depending upon past principal residence claims, when it is sold, who lives there subsequently, and if any special elections apply. At worst, if the property sits vacant for a few years, there may be a prorated capital gain to claim on sale or on the taxpayer’s death when there is a deemed sale of their assets.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever. If you have a question for Jason, please send it to [email protected].
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That is not what I asked. I am asking if the senior apt is exempt
from a tenant claiming the rent paid over the year. I do not get care, I can look after myself
We have a secondary residence in a leasehold building. The building was re-piped and we had to pay $20,000.00 (as did all the leaseholders in the building. If we sell our leasehold, will we have to pay capital gains tax on the $20,000.00 improvement because of the new pipes?