The definition of principal residence for tax functions
In keeping with the CRA, to ensure that a property to qualify as a principal residence, it have to be:
A housing unit, which might embrace a home, a rental, a cottage, a cell house, a trailer, a houseboat, a leasehold curiosity in a housing unit, or a share of the capital inventory of a co-operative housing company;
Owned by the taxpayer, collectively or in any other case, legally or beneficially;
Ordinarily inhabited within the yr by the taxpayer, their partner or common-law accomplice, their former partner or former common-law accomplice, or little one.
There might be nuances within the principal residence tips which will influence your skill to qualify for the exemption. Some examples are if your private home was rented out or used for enterprise functions, if the acreage is critical, or in case you owned one other property throughout the identical years that you simply owned the property in query and claimed the principal residence exemption for it.
Authorized vs. useful possession of a property
An necessary nuance for you, Invoice, is whether or not your daughter beneficially owned the property. If she did—that means you had been on title, but it surely was technically hers—she could possibly declare the principal residence exemption herself. This could possibly be the case if she paid the entire ongoing bills, amongst different standards. However then the query could also be the place did the down cost come from, and if the property was the truth is beneficially your daughter’s, however legally in your identify, why did the 2 of you not put it in her identify within the first place?
The CRA speaks about authorized and useful possession in a 2016 interpretation bulletin:
“In frequent regulation jurisdictions, two types of property possession are acknowledged – authorized and useful. Usually ‘authorized possession’ exists when title is transferred to, recorded in, registered in, or in any other case carried within the identify of an individual. Authorized house owners are typically entitled to implement their possession rights in opposition to all different individuals. In distinction, the time period ‘useful possession’ is used to explain the kind of possession of an individual who’s entitled to the use and advantage of the property whether or not or not that particular person has concurrent authorized possession.”
I’m going to exit on a limb right here and assume that the property was primarily yours, Invoice, even when your daughter chipped in and paid a number of the bills. On this case, you possibly can declare the principal residence exemption on its sale, given it was ordinarily inhabited by your little one. However doing so would trigger your individual house to be taxable sometime. This is able to not be nearly as good of an end result as having her declare the principal residence exemption herself.
Principal residence exemption tips
To maintain issues easy, say you purchased your home and her rental in the identical yr. You promote her rental after proudly owning it for 10 years and declare the principal residence exemption. After which assume you promote your home after 20 years of possession. You’ll be able to solely declare one property as your principal residence in a given yr, so you’ll solely have the ability to declare a tax-free capital achieve on your home for 10 of the 20 years (half the interval). For the opposite 10 years, the principal residence exemption was used in your daughter’s rental.
If the property was bought in your daughter’s identify initially, she may have claimed the principal residence exemption. You possibly can have loaned her the cash for the down cost to guard your curiosity. However generally, banks will make youngsters signal a letter stating that the mother or father’s contribution is a present to guard the financial institution’s personal place as the first lender on the property. And there could also be different causes you had the property in your identify as a substitute of hers.
Must you declare the principal residence exemption on a property your little one lives in?
The purpose is you can not have your cake and eat it too. You can not declare a principal residence on a property wherein your little one lives whether it is legally or beneficially yours with out compromising your individual skill to assert a principal residence exemption on your private home for a similar years.