Through the principal residence exemption, your home is just about the only investment you can profit from without paying a cent in taxes.
The Income Tax Act allows this exemption on any housing unit that you, your spouse or common law partner or your children lived in during the year – and that can include a unit in a condo or apartment building, or even a cottage, mobile home or houseboat.
If you own both a home and a cottage, you can designate one or the other as your principal residence even if you only take short vacations at your cottage. And you might want to do that for sound financial planning reasons.
Let’s take a closer look at the principal residence exemption:
Your family is allowed only one principal residence each year.
If you own a multiplex and rent out the other units, you can claim the exemption only for the portion of the building you inhabit.
It can make sense to designate your cottage for the exemption when, for example, your family has owned both a house and cottage for a number of years and you decide to sell your house, which has appreciated by $20,000 while your cottage has risen in value by much more. If you believe cottage prices will continue to be stable or rise, it can be a better tax-saving strategy to place your exemption on your cottage.
If you own a house on a few hectares of land, you can generally claim the exemption only for the house and up to a half hectare of land and the rest will be subject to capital gains. The exemption may be available for all or part of the excess land under certain circumstances.
You will probably not lose your exemption if you take in a boarder or renter who shares your kitchen and your house. You will likely lose the exemption for any portion of your home to which you make structural changes to create a self-contained apartment.
If you move out of your house to rent it, you will be deemed to have sold it at fair market value. Because it was your principal residence, the immediate gain may be eliminated or reduced but any future gain will usually be taxable.
There are however some planning opportunities that may allow you to extend the exemption into the years after the conversion.
The best tax-saving principal residence exemption strategy for you depends on many factors, including your overall financial and retirement goals. Your professional adviser can help you make the right choices for you and your family.
J. Kevin Dobbelsteyn is a certified financial planner with Investors Group Financial Services Inc. His column appears every Wednesday.