Should you claim the principal residence exemption on a property you bought your child?


The definition of principal residence for tax purposes

According to the CRA, in order for a property to qualify as a principal residence, it must be:

  • A housing unit, which can include a house, a condo, a cottage, a mobile home, a trailer, a houseboat, a leasehold interest in a housing unit, or a share of the capital stock of a co-operative housing corporation;
  • Owned by the taxpayer, jointly or otherwise, legally or beneficially;
  • Ordinarily inhabited in the year by the taxpayer, their spouse or common-law partner, their former spouse or former common-law partner, or child.

There can be nuances in the principal residence guidelines that may impact your ability to qualify for the exemption. Some examples are if your home was rented out or used for business purposes, if the acreage is significant, or if you owned another property during the same years that you owned the property in question and claimed the principal residence exemption for it. 

Legal vs. beneficial ownership of a property

An important nuance for you, Bill, is whether your daughter beneficially owned the property. If she did—meaning you were on title, but it was technically hers—she may be able to claim the principal residence exemption herself. This could be the case if she paid all of the ongoing expenses, amongst other criteria. But then the question may be where did the down payment come from, and if the property was in fact beneficially your daughter’s, but legally in your name, why did the two of you not put it in her name in the first place? 

The CRA speaks about legal and beneficial ownership in a 2016 interpretation bulletin:

“In common law jurisdictions, two forms of property ownership are recognized – legal and beneficial. Normally ‘legal ownership’ exists when title is transferred to, recorded in, registered in, or otherwise carried in the name of a person. Legal owners are generally entitled to enforce their ownership rights against all other persons. In contrast, the term ‘beneficial ownership’ is used to describe the type of ownership of a person who is entitled to the use and benefit of the property whether or not that person has concurrent legal ownership.”

I am going to go out on a limb here and assume that the property was primarily yours, Bill, even if your daughter chipped in and paid some of the expenses. In this case, you could claim the principal residence exemption on its sale, given it was ordinarily inhabited by your child. But doing so would cause your own home to be taxable someday. This would not be as good of an outcome as having her claim the principal residence exemption herself.

Principal residence exemption guidelines 

To keep things simple, say you bought your house and her condo in the same year. You sell her condo after owning it for 10 years and claim the principal residence exemption. And then assume you sell your house after 20 years of ownership. You can only claim one property as your principal residence in a given year, so you would only be able to claim a tax-free capital gain on your house for 10 of the 20 years (half the period). For the other 10 years, the principal residence exemption was used on your daughter’s condo. 

If the property was purchased in your daughter’s name originally, she could have claimed the principal residence exemption. You could have loaned her the money for the down payment to protect your interest. But sometimes, banks will make kids sign a letter stating that the parent’s contribution is a gift to protect the bank’s own place as the primary lender on the property. And there may be other reasons you had the property in your name instead of hers. 

Should you claim the principal residence exemption on a property your child lives in? 

The point is you cannot have your cake and eat it too. You cannot claim a principal residence on a property in which your child lives if it is legally or beneficially yours without compromising your own ability to claim a principal residence exemption on your home for the same years.

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