Selling the family home when a parent moves into a retirement residence

When a parent sells the family home and moves into a retirement residence, the move itself usually does not create a tax bill. The important tax event is generally the sale of the home. For many senior Canadians, the sale will result in little or no income tax because of the principal residence exemption. However, the sale still needs to be reported on the parent's tax return.

When the sale is usually tax free. If the home was the parent's principal residence for all, or nearly all, of the years they owned it, the principal residence exemption will often eliminate the capital gain.

For example, suppose a parent bought the home for $300,000 and later sold it for $700,000. The gain would appear to be $400,000 before considering the exemption. If the parent owned and lived in the home as their principal residence throughout the ownership period, the exemption may reduce the taxable gain to nil.

A home can generally qualify as a principal residence if it was ordinarily inhabited by the parent, their spouse or common law partner, former spouse or common law partner, or child at some time during the year. It does not necessarily have to be the person's full time home for every day of the year. The exemption can also apply where the home was jointly owned, although the details should be reviewed if more than one person owned the property.

The sale still has to be reported. Even when no tax is expected, the sale cannot simply be left off the tax return. The parent will generally report the sale on Schedule 3 and complete Form T2091(IND), Designation of a Property as a Principal Residence by an Individual. This is done for the tax year in which the sale takes place.

The form identifies the property, the years it was owned, and the years for which the parent is claiming the principal residence exemption. If the home was the parent's only principal residence for the entire ownership period, the calculation may be relatively straightforward. If the parent owned another home, rented out part of the property, or used part of it for a business, the calculation may be more complicated.

Reporting the sale promptly is important. A late designation may sometimes be accepted, but penalties can apply.

What about the retirement residence? Moving into a retirement residence does not, by itself, create a capital gain. If the parent is renting a room or suite in a retirement residence, there is generally no property for the parent to designate as a principal residence because they do not own it.

If the parent buys another property, such as a condominium, that property may qualify as a principal residence for future years. Generally, only one property can be designated as the family's principal residence for a particular year. Special rules can often prevent a problem when one home is sold and another is purchased in the same year.

Situations requiring extra care. The tax result may be different if the home was rented out, if part of it was used for business, or if the parent owned another property that was designated as the family's principal residence. The parent needs to be careful that the CRA does not treat the property as having had a change of use and take away the exemption. We at Capex help seniors find their way through these rules.

There is also a special rule for homes owned for less than 365 consecutive days before being sold. In some circumstances, the gain may be treated as business income rather than a capital gain. The principal residence exemption may then be unavailable. Exceptions can apply where the sale resulted from a listed life event, such as serious illness, involuntary job loss, insolvency, or death.

In short. For a long held family home that was genuinely the parent's principal residence, the tax bill on sale is often zero. The sale must nevertheless be reported, and the paperwork should accurately reflect the years the property qualified as the principal residence.

The most important facts are how long the parent owned the home, whether they or a qualifying family member lived there, whether another property was owned, and whether any part of the home was rented or used for business.

This article is general information, not advice for a particular sale. For your own situation, speak with an accountant.