Wednesday, October 14, 2015

Canadian Tax Primer 13: The Family Home

For many Canadians, the family home is a major asset.

In tax parlance, the family home is called the “principal residence”.  In general, any increase in value on a principal residence is not subject to capital gains tax.  This rule applies whether the capital gain arises as a result of an actual or a deemed disposition.

As with any tax exemption, some rules have to be kept in mind.  In general, a family unit can have only one principal residence at a time.  A family unit consists of a mother, a father and their unmarried children under the age of 18.

If you and your spouse have a house and a cottage, only one of the properties can qualify as a principal residence.  You can choose which of the properties to claim as your principal residence.  In most cases, you will want to select the property with the largest increase in value.  However, the capital gain on the property you do not select as your principal residence will be subject to tax. 

The one-principal-residence-per-family restriction creates a significant tax disadvantage if you place title to your home in the joint names of yourself and your adult child (assuming that the child also owns a home).  In that case, the child will have two residences:  an interest in the child’s own home and a 1/2 interest in your home.  Only one of those properties will qualify as the principal residence of the child.  The likely result is that 1/2 of any increase in value on your home will become subject to capital gains tax at some point down the road.  If you had retained sole ownership of your home, the entire capital gain would be immune from tax up to the date of your death.

The above discussion assumes that the principal residence has always been used as a personal home.  A part of the capital gain may be subject to tax if the house has been used for other purposes.  For example, you may have rented the house to tenants at some point in the past.  In this case, a pro-rata portion of the increase in value may be subject to tax.  However, the rules on this point are fairly complex.

The principal residence exemption applies only for income tax purposes.  The value of the house may still be subject to probate taxes on death.  As well, various provinces impose transfer taxes on the transfer of real estate.  Whether a transfer tax applies on the transfer of a principal residence to a related person depends on the province in question.

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The above article provides general commentary of an educational nature. It does not constitute advice for any specific person or any specific set of circumstances. Because circumstances vary, readers should consult professional advisers in order to obtain advice that is applicable to their specific circumstances.