Own more than one home? Making the right choices about the Principal Residence Exemption (PRE) may save you thousands in taxes.
Under the Income Tax Act, a family (defined as spouses and any children under the age of 18) can designate one property per year as its principal residence. The PRE lets them claim a capital gain exemption for some or all of the years they lived in the home.
The PRE applies to the building and up to one-half hectare (1.2 acres) of subjacent and adjacent land. If there’s more land, you have to prove it’s necessary for the use and enjoyment of the property.
And, the exemption can apply to any property you or your family inhabit during the year, provided it’s not primarily used to earn income.
Give careful consideration to which home you use for the PRE. In certain circumstances the PRE can apply to property held in a trust.
Here’s an example of how the PRE can trim your tax bill.
Mr. Black owned a home in the city, purchased in 2004 for $300,000, along with a cottage, purchased in 2009 for $240,000. He sold both properties in 2013—the city home for $600,000 and the cottage for $400,000.
Since the city home was his only property from 2004 to 2008, he uses the exemption on that property for these years. For 2009 to 2013, when Black owns two properties, he must determine which property to use the PRE on.
Let’s look at the capital gain he would trigger for each property over the years he owned them.
|Home in the city||Cottage|
|Proceeds of disposition||$600,000||$400,000|
|Gain per year||$300,000 / 10 years = $30,000||$160,000 / 5 years = $32,000|
The cottage has a larger capital gain on a per-year basis, so it may make sense to designate it as the principal residence for 2010 to 2013, inclusive.
This lets Black eliminate capital gains tax on the sale of the cottage. He can then designate his city home his principal residence for the years 2004 through 2009, which would allow him to shelter $210,000 of the capital gain.
This result is a capital gain of $90,000 and a taxable capital gain of $45,000. This strategy provides bigger tax savings than only designating his city home as his principal residence for all years. That option would have meant paying a capital gain on his cottage of $160,000 — $80,000 of which would have been taxable. By splitting his principal residence exemption, he’s reduced his taxable capital gains by $35,000.
PRE and Trusts
A personal trust can designate a property held within it as a personal residence and still be eligible for the PRE.
For that to happen, the person must be one of the trust’s beneficiaries. And, either he, his spouse or common-law partner, his former spouse or common-law partner, or child must ordinarily inhabit the property. And, no corporation or partnership could have been beneficially interested in the trust at any time during the year.
When the PRE’s used by a trust, no beneficiary or member of his family can designate another property as a personal residence at any time during the calendar year the exemption is used.
For example, Mr. Black is a beneficiary of Trust A that holds the property Mr. and Mrs. Black live in. Mrs. Black is a beneficiary of Trust B that holds the family cottage.
Trust A designates the PRE to the property in Trust A, since Mr. and Mrs. Black live there. As a result, Trust B cannot designate the cottage as a personal residence and be entitled to the PRE. A family unit cannot designate more than one property as a principal residence, even if the properties are held in separate trusts.