According to 2016 census data, 6.8% of Canadians 65 or older live in nursing homes or residences for seniors. The proportion jumps to 30% among Canadians 85 and older.
Clients who must leave their principal residence and move to a long-term care facility may want to know whether the principal residence exemption will shelter their home from tax on a future sale or at death. Consider the following hypothetical example.
Tracy, 72, recently moved to a nursing home after the death of her spouse, Kent, who was her primary caregiver. Because of a recent illness, Tracy has restricted mobility and requires consistent, ongoing care to meet her immediate day-to-day needs. It’s not known if she’ll be able to return to her home in the future.
For 40 years, Tracy and Kent jointly owned and lived in their home, and Tracy doesn’t want to sell it right away. After discussions with her children, she decides to rent the home to a non-related third party, which creates additional income for her increased healthcare costs.
If she’s not able to return to her home, Tracy wonders if the principal residence exemption would shelter the house from tax on a future sale.
Will Tracy qualify for the exemption?
The principal residence exemption is available for a given year when the owner (or a spouse, common-law partner, former spouse or partner, or child) “ordinarily inhabits” the home and no other property is claimed as a principal residence. When the owner (or spouse, etc.) ceases to occupy the home, access to the exemption normally ceases, resulting in taxes payable in respect of future growth.
Whether Tracy will be considered to “ordinarily inhabit” her home while in the nursing home is a question of fact.
If, in a given year, her stay in the nursing home can be regarded as temporary in nature, it’s likely that the “ordinarily inhabited” requirement will be met for that year — provided no significant changes to the home are made to convert it to an income-producing property and capital cost allowance isn’t claimed in respect of the property.
If, on the other hand, her stay in the nursing home is considered permanent, the “ordinarily inhabited” requirement would likely not be met, meaning taxation of gains going forward.
Details to consider in determining whether the stay is temporary or permanent include Tracy’s intentions when she moves into the nursing home, her diagnosis and potential for recovery, her ability to care for herself independently and the terms of the agreement with her third-party renter.
Given that Tracy and Kent jointly owned and occupied their home until Kent’s death,1 Tracy became the sole owner of the property on Kent’s death. Because assets can transfer to a spouse without tax at the time of transfer, the adjusted cost base for the home isn’t impacted by Kent’s death, and carries forward to Tracy.
If the facts of the case indicate that Tracy’s move is temporary, the principal residence exemption would likely continue to be available, as she’d still be considered to inhabit her home even if she earns incidental rental income.
If her stay in the nursing home is permanent, a “change in use” of the property would be deemed to occur for the year in which the property became a rental property, resulting in a deemed sale and repurchase of the property at that time.
Because Tracy and, before his death, Kent occupied the property as their principal residence for each year of ownership until the change in use, the principal residence exemption would shelter the property from tax until that time. Thereafter, if the property appreciates in value, future gains would normally be subject to tax upon sale (or Tracy’s death).
When thinking about the above as it relates to your clients, please note the following:
- Rental income must be reported for tax purposes regardless of whether the principal residence exemption is available in respect of the property.
- Where there’s a change in use of a property from principal residence to income-producing, a special election can be filed to allow the principal residence exemption to be available for an additional four years after the change.2 The election, governed by Section 45(2) of the federal Income Tax Act (ITA), provides flexibility and can be claimed by including a letter with the taxpayer’s income tax return for the year the change in use occurred. Find more information on the provision here.
When Canadians and their advisors need to make decisions regarding long-term care, understanding the rules can impact decision-making and bring peace of mind — especially during periods of increasing healthcare costs.
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.
1 Assumes joint ownership with a right of survivorship. This status isn’t available in Quebec, where Kent’s interest would flow through his estate and be governed by his will.
2 Provided capital cost allowance isn’t claimed on the property.