Posted by: Daryl & Wendy Ashby | April 9, 2010

Principal Residence Exemption

During the past several years, an increasing number of home owners have had to consider whether or not to utilize their personal residence exemptions with respect to their lakeside cottage or their urban residence.

Often such land owners are seniors who have owned a vacation property for a long period of time and have improved the same substantially. They are at that point in their lives when they no longer wish to own two homes and the proposition of continuously residing in the recreational property becomes attractive, particularly, if they travel extensively.

Any capital gain on the disposition of the recreational property, whether transferred to a family member, transferred to a third-party or a deemed disposition on death, will be subject to tax unless the owner chooses to use the principal residence exemption.

Many people in such circumstances do not realize that they can use their principal residence exemption on either their main residence or their vacation property, provided that both properties are ordinarily inhabited by the owner.

From Canada Revenue Agencies’ (CRA) perspective, the term “ordinarily inhabited” is applied to an individual who resides in either their recreational property or their main residence for intermittent periods of time during the year.

In order to be eligible for the principal residence exemption, such properties must not lose their residential nature; however, if such properties are used regularly on a seasonal basis by the owner then CRA will allow the owner to earn income without tainting their principal residence exemption.

The decision whether to use the principal residence exemption on either a main residence or a vacation property, or partly on each, will depend upon several factors. Such factors include the home owners lifestyle choices, the amount of the capital gain on each property upon disposition, and the duration of ownership of each property.

If you own both a recreational property and a primary residence and are in a quandary as to which property you will want to reside in, talk to your accountant so as to gain the maximum exemption from your principal residence while having regard for your lifestyle.

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