Explained: Principal residence exemptions

Do you know what happens if you use the property to earn rental income or run a business? Learn more about this and other factors affecting the Principle Residence Exemption.

At various points in your life, there may be circumstances in which you will not use your Principal Residence (PR) for a place to live with your family. For example, you may have to move, or rent a portion out, or run a business from your home. All these changes are considered a change in use and may need to be reported on your personal tax returns starting with the 2016 tax year.

Using your PR for a home-based business or for rental income may affect your ability to claim the PRE and may need to be disclosed in your personal tax returns. Failure to disclose can cause you to lose your PRE when selling your home in the future.

MIXED USE OF PRINCIPAL RESIDENCE

The Canada Revenue Agency (CRA) will still allow you to qualify for the PRE if the income you earn from your Principal Residence is “incidental,” i.e., not the primary use of the property. However, your eligibility for the PRE can be affected if you make any structural changes to the property to earn the income (e.g. renovations, extensions etc.), or if you claim capital cost allowance. Capital cost allowance is a way to claim back value lost on a property due to wear and tear, or depreciation of property value. If your PR does not meet these conditions, the portion used to earn income would not qualify for the PRE and the capital gain (the difference between the sale price and the price you bought the property for, adjusted for the portion used to earn income) would be taxable.

CHANGE IN USE OF PRINCIPAL RESIDENCE

To qualify for the Principal Residence Exemption, you or your family must live in your Principal Residence at some time during a year in the PR you are claiming the PRE for. Your family is generally considered to be your spouse and children. When circumstances change, for example, if you must leave your home for a job in another province, take note of your move in/out dates, as it may affect your eligibility for PRE, and you may have to report the move in/out dates on your personal tax returns

If you move out of your home and start renting it, you must report the change on your personal tax returns for tax years beginning from 2016. The change from primary residence to rental property will be a considered the same as if you sold it. Your PR will be considered to be sold at a fair market value on the date of change. The difference between what you paid for the property and the fair market value (the gain) on the day it became a rental property will be sheltered with your PRE and hence, there will be no tax payable. Your property can continue to qualify for PRE for up to four years after the change in use to a rental property as long as you do not list any other property as your PR (and you are a resident of Canada). If a change in your PR is related to employment, you can elect to have your PRE qualify for longer periods.

If you move back into a property you own, this too would be considered a change in use and must be reported in your personal tax returns starting from the 2016 tax year. The difference between the fair market value of the property on the day you started renting it and the date you moved back in would be considered a gain (or loss) and may be taxable. You can elect to defer paying the tax on any gains from the change in use until the year you actually sell the property. In order to defer paying taxes an election must be made accordingly. Since PRE regulations apply differently to each taxpayer, always seek professional advice from a financial advisor.

KEEP THE CONVERSATION GOING

How do you feel about the added disclosure and rules surrounding change in use and principal residence exemptions? Are the increased disclosures a good idea for Canadian homeowners?  Post a comment below.

Disclaimer

The views and opinions expressed in this article are those of the author and do not necessarily reflect that of CPA Canada.

About the Author

Zara Kanji, CPA, CGA

Founder of Zara Kanji & Associates, a CPA firm in Vancouver, BC.
Zara is a founder of Zara Kanji & Associates, a CPA firm in Vancouver, BC. Zara is passionate about financial literacy and regularly provides presentations for entrepreneurs, start-ups, women’s groups and new Canadians.