What to do

1. If your client has more than one property and is planning to sell one, check if it’s tax-efficient to designate the home as the principal residence.

Ensure it meets CRA’s principal residence criteria (see Principal residence exemption criteria, below).

If your client hasn’t lived in the property the entire time she’s owned it, the capital gains from the years when the property wasn’t her principal residence will be taxed. CRA’s formula for determining tax is:

If your client also uses her home to earn income, the income-earning portion isn’t tax-exempt. Split the sale price and the adjusted cost base between the two areas, says CRA. Calculate this using square metres or by room.

Read: 4 tax tips for clients who own U.S. property

2. Complete T2091(IND) Designation of a Property as a Principal Residence by an Individual.

If there’s a capital gain, use this form in the year your client:

a sells, or is deemed to have disposed of, all or part of her personal residence; or

b grants someone an option to buy all or part of her principal residence.

3. Use the Principal Residence Worksheet to make calculations for form T2091.

Enter the amount from Line 66 of the worksheet on Line 55 of T2091. Attach a copy of the worksheet to the form.

Read: Top tips from portfolio managers in 2014

4. Enter the total on Line 56 of T2091 on Line 158 of Schedule 3, Capital Gains (or Losses).

Enter the result of Line 199 of Schedule 3 on Line 127 of your client’s return. Attach a copy of Schedule 3 to the return.

Owners and their immediate family members cannot claim different primary residences, unless they’re separated or living apart.

Sources: CRA; Mark Goodfield, CPA, CA, LPA, tax partner with Cunningham LLP in Toronto; Sindy Wong, CA, senior manager, tax, at Smythe Ratcliffe LLP in Vancouver.

PROBLEM: Prior to working with you, your client transferred ownership of all or part of her home to her adult child to avoid probate upon death, forfeiting the principal residence exemption. Upon sale, her child will pay capital gains tax if the home’s value has increased.
“Often they create a bigger tax issue than the savings they’ve [created for] probate,” says Mark Goodfield, tax partner with Cunningham LLP.

SOLUTION: You can’t lessen the child’s future tax without changing the house’s legal title, says Sindy Wong, senior manager, tax, at Smythe Ratcliffe LLP.
If the property’s value hasn’t increased, consider transferring ownership back to your client, suggests Wong. The drawback is the child may have to pay land transfer tax, depending on the province where the house is located.

Read: How to tax-loss harvest

IN FUTURE: In certain situations, transferring legal title without transferring beneficial ownership may help avoid probate. Where there is no change in beneficial ownership, there’s no disposition for tax purposes. However, careful planning and proper legal documentation are required to ensure your client doesn’t suffer any unintended tax implications, says Wong.

Principal residence exemption criteria:

  1. It must be an eligible property type (check out “Types of property that can qualify as a principal residence,” which is iPad-exclusive content).
  2. It must be an eligible property type (check out “Types of property that can qualify as a principal residence,” which is iPad-exclusive content).
  3. The person claiming the exemption must own or co-own the property for the tax year.
  4. The home must be ordinarily inhabited by the owner, her current or former spouse or common-law partner, or her child.
  5. Even properties that are only occupied for part of the year, like a cottage, may be considered a primary residence “provided the main reason for owning the property is not to gain or produce income,” says CRA.
  6. Even if you get some rental income from a property you’re not at that often, that doesn’t mean it can’t count, notes CRA.
  7. Ultimately, CRA says, “the question of whether a housing unit is ordinarily inhabited in the year by a person must be resolved on the basis of the facts in each particular case.”

TIP: If none of the above apply, the taxpayer can elect to have it considered a principal residence under subsection 45(2) or (3) of the Income Tax Act.

Read more on the iPad!

More information on ‘Types of property that can qualify as a principal residence’

by Jessica Bruno, content editor of Advisor Group.

Originally published in Advisor's Edge Report

Read this article and full issues on the iPad - click here.

Add a comment

You must be logged in to comment.

Register on Advisor.ca