Principal residence exemption (PRE)

Question 1

Principal residence exemption (PRE) (Taxation)

Answer 1

The PRE enables the capital gains arising on the disposition of a principal residence to be received tax-free.
* The formula for determining the PRE is (A x (1 + B) /C), where A = the capital gain on the disposition of the property, B = number of years the property is being designated as the principal residence, and C = number of the years the property was owned by the taxpayer.
* Only 1 property can be designated as a principal residence for a taxpayer and his/her family in any given year
* A principal residence is an accommodation that is ordinarily inhabited by the taxpayer/taxpayer’s family in the year
o To be ordinarily inhabited, the property needs to have been lived in at some point during the year by the taxpayer/taxpayer’s family
* If more a taxpayer/taxpayer’s family own more than 1 principal residence in a year, they will have to choose 1 to designate as the principal residence
* To minimize taxes, it is most advantageous to designate the residence with the highest average capital gain per year as the principal residence

Reference: ITA 54; 40(2)(b)