If your client moves to a long-term care residence and subsequently rents their home, they’ll want to consider whether the principal residence exemption will still shelter the home from tax on a sale or at death.
A previous article explains whether a hypothetical client, Tracy, 72, can claim the exemption for a period during which she resides in a long-term care facility and rents the home to a non-related third party.
To claim the exemption for a given year, a taxpayer must “ordinarily inhabit” the home, and no other property can be claimed by the taxpayer or their family unit (normally a spouse, common-law partner or minor child) for the year.
Where the taxpayer doesn’t inhabit the home, the exemption is still available if a spouse, partner (or former spouse or partner), or child of any age occupies the home.
If Tracy’s stay in the nursing home is regarded as temporary, she would likely be considered to “ordinarily inhabit” her home, in which case the principal residence exemption would be available to fully shelter the property from tax on sale or death, even if incidental rental income is earned.
On the other hand, if Tracy’s stay in the nursing home is viewed as permanent, the “ordinarily inhabited” requirement would likely not be met, meaning taxation on disposition of the property for the period during which Tracy resides in the care facility.
If the home were rented to a child, would the exemption be available for the same period?
Tracy moved to the nursing home after her spouse, Kent, died, and she doesn’t expect she’ll return to her home. For 40 years, Tracy and Kent jointly owned and lived in their home until Kent’s passing. Not wishing to immediately sell the home, Tracy rents it to her daughter, Keri, charging fair market value (FMV) rent. Keri’s rent helps cover Tracy’s nursing home expenses.
There is flexibility to claim the principal residence exemption when a child inhabits a home owned by the parent, regardless of rent charged (FMV or otherwise) as indicated by CRA technical interpretation #2016-0625161C6.
Provided Keri occupies the home until sale or Tracy’s death, Tracy can claim the property as her principal residence for each year of ownership, fully sheltering it from income tax, provided she’s not also claiming another property.
Any rent Keri pays must be reported each year as taxable income on Tracy’s income tax return, offset by eligible rental expenses for the year.
What if Keri invited roommates to live with her in Tracy’s home, each paying FMV rent?
While the outcome normally depends on the facts of the case, the CRA generally considers a property can retain principal residence exemption status when the following conditions are met:
- the property is primarily used as a principal residence and is used only incidentally to produce income,
- no structural changes are made to the property, and
- no capital cost allowance (CCA) is claimed for the property.
Where one or more of the above criteria aren’t met, only the portion used for personal use will be allowed as a principal residence.
Given that Keri now occupies the property jointly with non-related roommates and each pays FMV rent, an argument can be made that the property is no longer used primarily as a principal residence.
As per CRA technical interpretation #2014-0527591E5, if income-producing activity is significant, only the part of the home used for personal purposes by the child (Keri in this case) qualifies for the principal residence exemption.
The portion used for income-producing purposes would be subject to tax, requiring a determination of the eligible portion based on reasonable criteria such as rooms used or some other basis as is applicable.
Understanding these rules — and where potential challenges may arise — can help when planning and managing tax implications.
Wilmot George, CFP, TEP, CLU, CHS, is vice-president, Tax, Retirement and Estate Planning at CI Investments. Wilmot can be contacted at email@example.com.