Principal Residence Exemption- Vacation Properties

1. Personal Article Comprehensive Comprehensive
Personal Article
Principal Residence Exemption – Vacation Properties
Prepared by The Investors Group Advanced Financial Planning Team
The principal residence exemption Definition and Rules the first ½ hectare of land on which
allows you to exempt from taxation Tax legislation defines a “principal the property is situated, and in cer-
some or all of the capital gains that residence” as an accommodation tain cases can include surrounding
you realize when you sell a home that owned by a taxpayer (either solely or land in excess of ½ hectare.
qualifies as a “principal residence” – jointly), and ordinarily inhabited by You can only designate one property
a potentially significant tax savings. the taxpayer, the taxpayer’s spouse or as your “principal residence” for any
If during your lifetime, you and your common-law partner, former spouse given year, even if you own more
spouse together have only ever or common-law partner, or child. than one property that could qualify.
owned one personal-use home at a Whether a property was “ordinarily Also, you must share that designa-
time, you will usually be able to inhabited” in a given year is deter- tion with your spouse or common-
exempt all the capital gains on those mined based on the facts of each law partner and your children under
sequentially-owned homes. However, case, but generally a property need the age of 18. (Prior to 1982, spouses
if you and your spouse ever owned only be inhabited for a short period could “double up” on the principal
two personal-use homes during the of time in the year to meet the test. residence exemption.)
same period – e.g. your “city home” For example, you would be consid-
ered to ordinarily inhabit your vaca- You don’t have to designate any prop-
and your “vacation home”, then at
tion home even if you only used it erty as your principal residence until
least some of the capital gains on one
ED MADRO B.A. Econ., CPCA during your annual vacations, as long you sell a property and want to claim
of those homes will eventually be
Consultant as the vacation home was not prima- the exemption. In order to designate
subject to taxation. When you sell the
edward.madro@investorsgroup.com rily an income-producing (rental) the property as your principal resi-
(403) 220-9654
first home, you must decide whether
property to you. dence you should attach Form
you will designate it as your principal
T2091(IND), Designation of a Property
residence and exempt the capital There are many types of properties
1-866-424-6392 as a Principal Residence by an
gains on that first home, or whether that could qualify as a principal resi- Individual (Other Than a Personal
you will pay the capital gains taxes on dence including a house, an apart- Trust) to your income tax return for
that sale so that you will be able to ment, a cottage, a mobile home, a that year. In situations when you
fully exempt the gains on your sec- trailer, a houseboat, a farm, or a share were deemed to have disposed of the
ond home when you eventually sell in a co-operative housing corporation. residence because you died, your
it. This decision could be one of the For farms, the principal residence legal representative must complete a
most significant financial decisions generally will be deemed to include T1255, Designation of a Property as a
you will make.
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This is specifically written and published by Investors Group and intended as a general source of information only, and is not intended as a
solicitation to buy or sell specific investments, nor is it intended to provide legal advice. Clients should discuss their situation with their
Investors Group Consultant for advice based on their specific circumstances.
™Trademark owned by IGM Financial Inc. and licensed to its subsidiary corporations. Investors Group Financial Services Inc.
“Principal Residence Exemption – vacation properties” ©2008 Investors Group Inc. (01/2008) MP1392

2. Comprehensive Personal Article Personal Article Comprehensive
continued from previous page
Principal Residence by the Legal Figure 1. shows the principal resi- Choice #1 Choice #2 In this case, it makes sense to use the
Representative of a Deceased Individual dence exemption formula. principal residence exemption on the
They could designate the vacation They could designate the vacation
and attach it to your terminal tax vacation home for 4 years of owner-
Example home as their principal residence for home as their principal residence for
return. However, these forms must ship. But if they expected that they
Anne and Henry are married, and 4 of the 5 years they owned it, mean- 0 of the 5 years they owned it, mean-
only be attached to your tax returns might sell the city home sooner, or for
they own two homes that could qual- ing that when they sell the city ing that when they sell the city home,
when you have a taxable capital gain a higher capital gain, it might have
ify as “principal residences” for all home, they will at most be able to they will be able to designate it as
to report. In Quebec, you must attach made sense to “save” the exemption
years of ownership – i.e. their “city designate it as their principal resi- their principal residence for all 20 of
Form TP/274 even if the capital gain to use it against the city home.
home” and their “vacation home”. dence for 16 of the 20 years they will the years they will have owned it.
is entirely exempt.
They purchased the city home have owned it. Summary
If you own two homes during the On the vacation home sale, they will
10 years ago and the vacation home On the vacation home sale, the have a tax bill of $50,000 * 40% = As demonstrated, the principal
same period that could qualify for the 5 years ago. Their marginal tax rate, residence exemption can result in
exempt portion of the capital gain $20,000.
principal residence exemption, then now and in the future, is and will significant tax savings if applied
will = [$100,000 * (4 + 1)/5] =
at least some of the capital gains on be 40%. On the city home sale 10 years from appropriately. For further information
$100,000, meaning they will have a
one of those homes will be subject to now, the exempt portion of the capital and advice please contact your
Anne and Henry are selling the vaca- tax bill of $0.
taxation. When you decide to sell the gain will = [$250,000 * (19 + 1)/20] = Investors Group consultant.
first home, you must decide whether tion home today, and will realize a On the city home sale 10 years from $250,000, meaning they will have a
the principal residence exemption capital gain of $100,000. They will now, the exempt portion of the capital tax bill of $0.
should be used on that home. To not be buying a replacement vacation gain will = [$250,000 * (16 + 1)/20] =
make that decision, you will need to home, but will continue to own their $212,500, meaning they will have a In other words, it is a choice between
estimate: city home. They expect to continue to tax bill of ($250,000-$212,500) * 50% Pay $0 in taxes today and $7,500 in
live in the city home for a further 10 * 40% = $7,500. taxes 10 years from now,
3 the number of years you will con- years, and when they sell it in 10
tinue to own and occupy the second years time, they expect to realize a or
home, and capital gain of $250,000.
Pay $20,000 in taxes today and $0 in
3 the future capital gain on the They have two choices. taxes 10 years from now.
second home.
Figure 1.
Principal Residence Exemption Formula
To determine the amount of the capital gain that is exempt from taxation, use the following formula:
# of years as principal residence after 1971 + 1
Exempt portion of capital gain = Realized gain x
# of years of ownership after 1971
The taxable capital gain = (Realized gain – Exempt portion of capital gain) * 50%.