It can be stressful to help manage the needs and finances of aging parents. For example, when a parent moves from their home to a senior’s facility, they may be at risk of losing a major tax benefit: their principal residence exemption. Kim Parlee talks to Georgia Swan, a Tax and Estate Planner with TD Wealth, about what seniors and their families should know about this topic.
Georgia and our question today is this, "I just moved my mother into a senior's home. How does this affect her principal residence exemption?"
- Hi, Kim. Good to see you again. Well, that is a very stressful time for people. And so I think the best way to approach this question is to start a little bit with understanding what the principal residence exemption is. A lot of people think that it's basically just if your home qualifies as a principal residence, there's no capital gain. And in actual fact, that's not entirely true.
The exemption is actually dictated by a formula in the Income Tax Act, which qualifies how much of the exemption you can shelter. So the idea is first, that because of the way the formula works, the short answer to your question is, assuming that mom's house qualifies for the principal residence exemption for all the years that she lived in it, she can basically claim the exemption for all those years.
But a lot of times when people go into nursing homes, there's a little bit of a lag period, like for example, is this a permanent move? Did mom have some kind of an event and she needs some help but she might come back? And then, of course, sometimes families are like, what are we going to do with the house?
So in that particular case, as I said, for the most part, assuming that her home qualifies and that she qualifies, the years that she lived there can be sheltered. Because of the way the formula works, usually you have about one additional year, where maybe she's in the nursing home but doesn't live there, that you can still shelter the gain on. But after that, more than likely you're not going to be able to use the principal residence exemption for any increase in value after that one year.
So in this market, where prices are just going like gangbusters out of control, this could mean some real money for people.
- What if you decided, or the family decided or she decided, to rent out the property, what happens then?
- Well, when you rent out the property, that's considered a change in use under the principal residence definition. So principal residences, by the way, can be a house, a condo. They can even be a houseboat or a trailer. So there's all sorts of different types of things that would qualify for the principal residence. But the requirement is that you yourself, or a family member, such as a spouse or a child, rent-free, actually live in the house.
But if you decide to change the use and turn it into a rental property, and then you get rental income from it, that means it no longer qualifies as principal residence. So from that point on, any capital gain from the day you change the use and turn it into a rental property, that's going to be taxable. But on the good side, you get the rental income and you get the corresponding deductions from rental income that you're allowed.
- What about, I mean, you mentioned all sorts of different things to think about in terms of which home you choose. And there's a lot that goes into these calculations. Do you think this is something that someone can do on their own?
- No, it isn't something that you can do on your own. Really it's something that you should get qualified tax advice from a good accountant or a tax lawyer. But that's kind of the neat thing. Because the definition of what constitutes a principal residence doesn't require that you live there constantly. Sometimes even something you only visit two weeks out of the year can qualify as your principal residence.
So for people that have cottages and main homes, they should be looking at which one is increasing in value significantly. And the home doesn't even have to be located in Canada. So for example, if you're a snowbird and you have a condo down in the United States that is significantly appreciating in value beyond what your Canadian home is, you might want to declare that one as your principal residence and use the exemption to shelter the gain.
So there's a lot that goes into it that you need to consider. And it's also important that that exemption is a form that does have to be filed in the year that you sell the home. So it's important not to forget that.
- And I was just going to add-- and I know that you believe this as well too-- that also if you have a lot of life events going on at the same time, that's probably a time you really would benefit from talking to somebody because there's a lot going on.
- Absolutely. I mean that's the time to get really good advice from a tax accountant or a tax lawyer or at least your investment advisor, if they can give you some guidance. So don't neglect that. And it's really not something you should do on your own, like you say.
- Georgia, thanks so much.
- Thank you. Good to see you again.
- Nice to see you too.
And if you have any questions you'd like to ask MoneyTalk, you can send it to firstname.lastname@example.org. Put Ask MoneyTalk in the subject line. And you can ask your questions, we'll find the right person to answer them for you. And you can find those answers on MoneyTalkGo.com.