The principal residence exemption (PRE) is a valuable tax benefit that allows residents to avoid paying capital gains tax when they sell their primary residence. To qualify for the PRE, the property being sold must have been the individual's primary residence, and only one property can be designated as the individual's primary residence for a given tax year. If an individual owns multiple properties, they must designate which one will be considered their primary residence for each tax year. In addition to claiming the PRE for years that an individual lived in their home, they may be able to claim an additional 4 years under the principal residence exemption (Plus Four Rule) under 45(2) of the Income Tax Act if all of the following rules apply.
Income earned on the property would need to be reported on the individual’s return and Capital Cost Allowance can’t be claimed against a principal residence that has been converted to a rental property.
To claim the Plus Four Rule, the individual must file Form T2091(IND), Designation of a Property as a Principal Residence by an Individual (Other Than a Personal Trust) with their tax return. The form must be filed in the year that the individual sells their property or in the year the individual passes away.
Another way for a senior to extend the PRE on their home would be to allow a child or spouse to stay in their home after they move to a retirement residence. A principal residence exemption can be claimed if the taxpayer, their spouse, or their children inhabit the home on a regular basis. In this case, the child must ordinarily inhabit the home every year. Only one principal residence exemption is allowed per family unit. Under the right circumstances, the principal residence exemption could be extended for the senior’s entire stay in a retirement home.
These rules to extend the principal residence exemption are not exclusive to seniors moving to retirement homes, however, these are the two exemptions we’ve found most commonly used by seniors moving to a retirement home.
Of course, tax planning should always be done under the direct supervision of a qualified professional.