This is an interesting question and answer column from the Globeandmail.com regarding the designation of a principle residence and, more importantly, how the Canada Revenue Agency determines a "principle residence" for tax purposes.
The question:
Right now I'm renting the condo that I live in. I don't have any desire to be a homeowner just yet, due to the higher maintenance associated with it but I was thinking of buying a condo as an investment property - buying it early pre-sale and then selling after. My question is: Which condo should I list as my principal residence? In other words, if my investment condo is the only property that I own, is it possible to list it as my principal residence, even though I actually live in another condo that I rent? I would like to see if I can avoid capital gains when I sell.
The answer:
This issue can be complex. Let me try to break it down for you: First, you should know that designating a property as your principal residence (to shelter the sale from tax) doesn't require that you live in the property for any particular period of time. Some people think that one year is the magic number. Not so. There is really no prescribed time frame. I've seen some people call a second property their principal residence even though they live in the property for a week or two a year.
Here's the bigger issue: You can only designate a property as your principal residence if it is a “capital property.” That is, if CRA looks at your situation and considers the condo (the one you hope to flip for a profit) to be more akin to business inventory (that is, the CRA doesn't believe your intention was to ever hold the property for any length of time to either live there or rent it out; rather that your intention was always to flip it for a profit), then the condo won't be considered “capital property” and any profit will be taxed as business income. This is called an “adventure in the nature of trade.”
In order to be successful at designating the condo as your principal residence you'd have to live there for some period of time, but more importantly, you'd have to convince CRA that it was your intention to hold the property and live there rather than flip it. So, the longer you can own the property and live there, the better your argument that you should be able to call it your principal residence. If you choose to rent out the condo rather than live in it, you may be able to argue that any profit should be taxed as a capital gain (not as business income), but this won't entitle you to designate the property as your principal residence.
Globe Investor columnist Tim Cestnick has been answering one reader question online each week in the runup to the filing deadline. Mr. Cestnick is president and CEO of WaterStreet Family Offices and author of 101 Tax Secrets for Canadians.
The question:
Right now I'm renting the condo that I live in. I don't have any desire to be a homeowner just yet, due to the higher maintenance associated with it but I was thinking of buying a condo as an investment property - buying it early pre-sale and then selling after. My question is: Which condo should I list as my principal residence? In other words, if my investment condo is the only property that I own, is it possible to list it as my principal residence, even though I actually live in another condo that I rent? I would like to see if I can avoid capital gains when I sell.
The answer:
This issue can be complex. Let me try to break it down for you: First, you should know that designating a property as your principal residence (to shelter the sale from tax) doesn't require that you live in the property for any particular period of time. Some people think that one year is the magic number. Not so. There is really no prescribed time frame. I've seen some people call a second property their principal residence even though they live in the property for a week or two a year.
Here's the bigger issue: You can only designate a property as your principal residence if it is a “capital property.” That is, if CRA looks at your situation and considers the condo (the one you hope to flip for a profit) to be more akin to business inventory (that is, the CRA doesn't believe your intention was to ever hold the property for any length of time to either live there or rent it out; rather that your intention was always to flip it for a profit), then the condo won't be considered “capital property” and any profit will be taxed as business income. This is called an “adventure in the nature of trade.”
In order to be successful at designating the condo as your principal residence you'd have to live there for some period of time, but more importantly, you'd have to convince CRA that it was your intention to hold the property and live there rather than flip it. So, the longer you can own the property and live there, the better your argument that you should be able to call it your principal residence. If you choose to rent out the condo rather than live in it, you may be able to argue that any profit should be taxed as a capital gain (not as business income), but this won't entitle you to designate the property as your principal residence.
Globe Investor columnist Tim Cestnick has been answering one reader question online each week in the runup to the filing deadline. Mr. Cestnick is president and CEO of WaterStreet Family Offices and author of 101 Tax Secrets for Canadians.
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