The principal residence exemption is important to consider when structuring one’s estate plan.

This exemption allows a taxpayer and their immediate family to own and live in a property that is considered capital property, without having to pay taxes on any capital gains when the property is sold or deemed disposed of.

However, it’s important to note that only one residence per family per year can be designated as the principal residence. Given that both a city residence and a cottage property can qualify as a principal residence, it is crucial to strategically utilize the exemption to maximize the amount of gain that can be sheltered. For instance, if a cottage property has experienced greater appreciation than a city home in recent years, it may be more advantageous to designate the cottage property as the principal residence and shield a higher gain.

When there is a change in the use of a principal residence, such as converting it from personal use to rental, it may trigger a deemed disposition for tax purposes. However, taxpayers have the option to defer this deemed disposition for up to four years by making an election. In situations where the change in use is due to an employer-required relocation and the taxpayer eventually returns to occupy the property, the four-year period can be extended indefinitely.

A principal residence generally consists of a building and up to one-half hectare of land. However, if the taxpayer can demonstrate that additional land is necessary for the use and enjoyment of the residence (for example, the excess land cannot be separated), it is possible to include more than one-half hectare as part of the principal residence.

When a taxpayer dies, there may be a deemed disposition of the principal residence at fair market value. This may result in a capital gain at the date of death, which could potentially be partially or fully eliminated with the principal residence exemption.

Thank you for reading and have a great day!
Ian Hull and Geoffrey Sculthorpe