Maximize benefits of the principal residence exemption

Some questions have come up concerning the application of the Canada Revenue Agency (CRA) principal residence exemption to special situations. I always advise people with a particular case involving significant sums of money to consult an accountant or tax lawyer, but here are the principles behind the principal residence exemption and tips on how to maximize your benefit while respecting our Canadian Income Tax Act.

Per the CRA website (http://tinyurl.com/yby- g34l), a designated principal residence must meet all four of the following conditions:

The property was acquired for the right of habitation.

The property is owned alone or jointly with another person.

The property is inhabited during the year by one or more qualified family members.

The property is designated by you as your principal residence.

Special cases that can affect the principal residence exemption can arise in the following situations: Renting your property. Owning a cottage and a city residence. Having a large lot. If you rent your house, you are no longer occupying it, so the exemption does not apply to any capital gains accruing during that time. It is prudent, however, to obtain an evaluation of your property before converting its use so that you have evidence of the rise of value, if any, during the rental period. There are situations where you can still rent out your home for a limited time and reason (i.e. you need to relocate for work in another province), but consult a tax accountant to ensure you do so within the CRA rules so as to not compromise your eligibility claim to the principal residence exemption upon final disposition.

With the rise in country home values, many people are aware that they can claim a cottage property as their principal residence instead of the city home. What you may not know is that one can alternately claim the city home in some years and the country home in other years — a great advantage when we know many cottage property values spiked at different times in the past 20 years while some city property values were flat.

Furthermore, one does not have to make this detailed year-by-year designation until the actual disposition of one or the other property. The catch is that you need credible backup to the values you are reporting. If you know you will have significant capital gains to shelter on a second property, get a professional evaluation so you are not relying on municipal evaluations, which often underestimate the true market value.

You may have completed a special capital gains election back in 1994 (when the CRA eliminated a general $100,000 capital gains exemption), allowing you to further reduce your tax payable. In any event, the CRA form (T2091 IND Designation of a Property as a Principal residence by an Individual) can be tricky to fill out, so do seek professional guidance if you have a complex situation to report.

Speaking of country properties, the CRA defines the land portion of an “ordinarily inhabited” principal residence as being no more than half a hectare (about 5,000 square metres). The CRA may accept a larger property size as being part of the principal residence if, for example, it is demonstrated that a property requires a larger lot to access public services or the property cannot be divided by the owner and sold separately because of legal restrictions. Again, if this is your situation, seek advice from a professional knowledgeable in this area.

Most homeowners blithely go about buying and selling their homes without worrying about paying tax on the subsequent capital gains. But be aware that the CRA does monitor short occupation periods and frequent home-selling activity to root out people who are benefiting from the principal residence exemption when they are actually running a real estate business.

Home ownership is the foundation for household wealth for many Canadians, so do enjoy your “Home sweet Home”!