Principle Residence Exemption

Sukhanoop Dhillon CPA Discusses the Mechanics of the Principal Residence Exemption.

12 February 2024

Requirements for Principal Residence Exemption

  • Must qualify as capital property.
  • Must be a housing unit (e.g. house, apartment, condo, etc.).
  • Must own the property (beneficial ownership is also considered).
  • Must be ordinarily inhabited (genuine intention of living there).

Factors to Consider

  • Intention: What was your intention for the property?
  • Feasibility: Was your intention for the property feasible?
  • Extent of carrying out intention: Did you follow through with your plans for the property?
  • Geographical location: Does the location align with your intention?
  • Nature of profession: Does your profession make it plausible for you to deal in real estate?
  • Length of ownership: How long did you own the property?
  • Surrounding individuals in real estate: Do people around you deal in real estate?
  • Factors motivating the sale: Consider external factors that influenced the decision to sell.
  • Previous Real Estate Dealings: How often have you sold real estate previously?

Change of Use

  • When a principal residence becomes a rental property, there is a deemed disposition (considered selling the property to yourself).
  • Can elect to keep treating the property as a principal residence for up to 4 years or show a disposition and claim the principal residence exemption against it.

Multiple Properties

  • If married or common-law, both spouses must share the exemption.
  • When choosing which property to claim the exemption on in a multiple-property situation, consider the gain per year rather than the total gain.

Principal Residence Exemption for Non-Canadian Properties

  • Non-Canadian properties can still be eligible for the principal residence exemption, such as for new immigrants or snowbirds.

Properties Exceeding 1.23 Acres

  • Properties exceeding 1.23 acres may not qualify for the full principal residence exemption, depending on usage and enjoyment factors.
  • Factors such as road access, municipal zoning laws, septic fields, and topography can qualify the property.

Case Law Examples

  • Paul Hansen case: Demonstrated that selling properties was not his primary source of income and his economic situation improved due to his job and personal life, not just real estate sales. Therefore he was able to claim the Principle residence exemption.
  • Unnamed case: The custom-built house was not intended for resale, and the sale was unsolicited, demonstrating a genuine intention to live there. Therefore he was able to claim the Principle residence exemption.

Planning Considerations

  • Determine if you qualify for the principal residence exemption based on requirements.
  • Consider whether to claim the exemption or pay taxes.
  • Individual situations may require additional planning and analysis.