Tax Lesson 15 YOURLOGO Start Lecture Note: This screen has no script. Static page. YOURLOGO Start Lecture

Principal Residence A principal residence is a home lived in (for at least part of the year) by a taxpayer or his/her immediate family. Each family unit (i.e. a taxpayer and his/her spouse and any minor children) can only claim one home as a principal residence for any tax year A gain on the disposition of a principal residence is tax-free. (Note: a taxpayer cannot have claimed CCA on the home and claim the principal residence exemption) If a taxpayer has more than 1 residence (for example a home and a cottage) then he/she should designate at least 1 year of ownership to each residence (otherwise you lose the benefit of the “1 +…”). There is a formula for computing the principal residence exemption equal to: (1 + Number of years designated) / Total years of ownership x Capital gain on sale The fraction in the formula, “(1 + …) /Total years of ownership” cannot be greater than 1

Example Problem Principal Residence Ted owned a house and a cottage which he and his family lived in over the years. Ted sold both in 2016 and bought a condo in 2016. The house was owned from 2012 to 2016 and was sold for a capital gain of $100,000. The cottage was owned from 2015 to 2016 and was sold for a capital gain of $10,000. Required: compute Ted's maximum principal residence exemption and any capital gains for 2016.

Change in Use and Personal Use Property If an asset is purchased for personal use and then changed to business use (or if an asset is purchased for business use and then changed to personal use) there will typically be a deemed disposition and re-acquisition at FMV for tax purposes If there is a change in use for a principal residence then the individual can elect to not have had a change in use (to avoid triggering income) and he/she can elect to claim the principal residence exemption for up to 4 additional years (when the principal residence is rented out) Any capital loss on personal use property (other than listed personal property) is denied (but capital gains will be ½ taxable) Listed personal property (LPP) includes art, jewelry, rare books, stamps and coins and any losses on these properties are allowed (i.e., ½ allowable like other capital losses) but they can only be used to offset taxable capital gains on listed personal property. (LPP losses can be carried back 3 years and carried forward 7 years) For personal use property (including listed personal property) the minimum P of D and ACB is deemed to be $1,000. Hence if actual P of D or ACB is less than $1,000 it will be deemed to be $1,000