Principle Residence

Aug 10, 2019 | Mark Ryan


Better than Don Cherry and all his funky suits.

I had a business client in another time and place who ripped us off for something like $200,000 by drawing his inventory loan to its maximum, but instead of rotating the daily proceeds of his business through his company, he funneled as much of it as possible in to the renovation of his home. The property was in an expensive neighbourhood, but had fallen in to disrepair by its previous owner. When my client bought it at a substantial discount, he knew he could make a tidy profit if he could bring it up to neighbourhood standards. So he sucked the life out of his business, and polished up his home on Ritz Road.

Not to be swindled without a fight, we sued him and easily won, but since we didn’t have his wife’s name backing the loan, we ended up with a judgment registered on his undivided one-half interest in the family home. No judge was likely throw a young mother with small children out of her home, so we were stymied. Under the circumstances, a bankruptcy specialist advised that we consider criminal charges, but I got transferred and missed the gripping finale. Crime drama for finance geeks is like abacus races. It’s curious, but only moderately compelling.


Bring the Tax Break Home – Part 2


As benign as you might feel your principal residence is, its tax advantages are notable. Selling any personal-use property at a profit requires that we pay tax on the gains, unless exempted. The principal residence exemption is a substantial benefit to Canadian families, (and one not available in the USA, where mortgage interest is a tax deduction Canadians don’t enjoy).

Conversely, in what feels like the logic only someone who had a big brother could appreciate, if you sell a personal-use property at a loss, there is no corresponding tax deduction, nor can you use the loss to offset capital gains. So treasure the principal residence exemption. It’s a Canadian beauty, better than Don Cherry and all his funky suits.


How it works


The capital gain or loss on the sale of your principal residence will be equal to the difference between the proceeds of sale and the adjusted cost base (ACB) of the property. The ACB is normally the purchase price plus any expenses to acquire it, such as commissions and legal fees, plus capital expenditures, such as the cost of additions and improvements to the property (not to be confused with routine maintenance and repair.)

Did you know?

Prior to 1972, capital gains were not taxed in Canada. That ended as a result of Trudeau #1’s legislation at the time. But if you’ve owned your home since before 1972, only the increase in value since December 31, 1971, is used to calculate the gain.

Party like it’s 1994

If the sale of your principal residence results in a capital gain, the gain can be reduced if you made a capital gains election with respect to the property on your 1994 tax return. On February 22, 1994, the Chretien/Martin Liberal government removed the $100,000 capital gains exemption, but allowed you to file a special one-time election on your 1994 tax return to claim any remaining unused exemption against capital gains accrued on your property to that date. This allowed you to shelter gains in respect of a property that may not be exempt from tax under the principal residence rules. If you still own the property for which a capital gains election was made, the one-time benefit is still live for you.

Contingent on you being a resident of Canada during the relevant period, the capital gain on the sale of your home can then be further reduced by claiming the principal residence exemption, applying the following formula:


After 1981, the principal residence exemption rules forbade us to designate more than one property per year as a principal residence, curtailing the tax benefit to one property per family unit.

Owning just one home simplifies this whole thing — any capital gain arising from the subsequent sale of that home will be reduced to nil based on this formula.

In the case where you disposed of a principal residence in one year and acquired a replacement residence in the same year, you are not allowed to designate both properties as a principal residence for the year. To ensure you are not denied an exemption in respect of both properties for that year, the formula provides for the inclusion of one additional taxation year of exemption room (known as the “one-plus” rule).

If you owned more than one home for any period after 1981 and each home qualifies, there is latitude in applying the principal residence exemption:

Determine which property has the greatest average annual increase in value. Consider designating this property as the family’s principal residence for the maximum number of years.

The maximum number of years that a property needs to be designated as the principal residence is the number of years of ownership minus one (due to the one-plus rule) to fully exempt the gain.



Mark Ryan is an Investment Advisor with RBC Dominion Securities Inc. (Member–Canadian Investor Protection Fund), and these are Mark’s views, and not those of RBC Dominion Securities. This article is for information purposes only. Please consult with a professional advisor before taking any action based on information in this article.

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