By 2026, it’s projected more than 610,000 Canadian seniors will live in collective dwellings; nursing homes, long-term care facilities and seniors’ residences. If you, or a loved one is considering moving into a collective dwelling, a decision must be made as to what to do with the current home.

Since the principal residence usually represents a significant portion of the estate value, it is important to understand the tax implications when contemplating a permanent move. From a tax perspective, the home must qualify as principle residence in order to be exempt from capital gains tax upon the sale of the property.

Many seniors and their families assume the home retains the principal residence exemption (PRE) after the move to a collective dwelling. However, once the taxpayer has moved he/she no longer meets the criteria for the principle residence tax exemption.

To avoid an unexpected tax bill, here are four options to consider:

Sell The Home. Most people will choose to sell the home once the senior has permanently moved into the collective dwelling. The proceeds can then be used to help fund their new residence or can be passed on to the beneficiaries as an early inheritance. Either way, if sold right away the PRE can be used to minimize or eliminate any capital gains tax on the property.

Have an Adult Child Move in. If the senior is unsure of their collective living arrangements and doesn’t want to sell the home immediately, they can take advantage of the “ordinarily inhabited” rule. This rule allows the home to still qualify for the PRE if an adult child occupies the home during this period.   Of course this option must be agreeable to the adult child; as it will impact their lifestyle as well.

Staying Put. Many seniors would prefer to stay in their home if a live-in caregiver can be retained. This option may require the home to be renovated to accommodate potential physical limitations. Both Federal and Provincial non-refundable tax credits are available to Canadians who choose this option. This scenario allows the senior to maintain their current lifestyle and still benefit from the PRE.

Rent out the Home. If the homeowner doesn’t want to sell the home but needs additional income to fund their collective living expenses, they can convert the principle residence into an income-producing property. The taxpayer would deem to dispose of the property and then immediately reacquire it at fair market value. Generally, an income producing property can not be designated as a taxpayer’s principle residence. However, an election can be made that ‘no change in use’ has occurred and allows the homeowner to designate the property as their principle residence for up to four years – during the time it is being rented out. This will shelter the capital gain under the PRE for an additional four years.

As a reminder, CRA now requires Canadians to report the actual or deemed sale of any property on their T1 tax return, including your principle residence.

Have a great weekend,

Tracey

 

 

Source: Original article posted on Advisor.ca 26-07-18 by Tim Brisibe, and co-written by Rebecca Cicco Director of Tax and Estate Planning at Mackenzie Financial.