All About Estates

Principal residence and the change in use

It is not unusual for find the value of a deceased’s home makes up a significant part of their net worth and estate value on death. Often there is an automatic reliance on the principal residence exemption to tax exempt the gain on the deemed sale triggered on death.  What if during the person’s life the property was used for other purposes such as a home office, or day care space or rental – could this affect the access to the principal residence exemption?

The Canada Revenue Agency was recently asked to for clarification on the factors used to determine if their administrative policy for not having the change-in-use rules apply.   Generally speaking, a partial change in use of the taxpayer’s principal residence technically occurs for income tax purposes under paragraph unless the administrative position applies.

The questioner asked the CRA if a housing unit owned by an individual will qualify as the individual’s principal residence for the purposes of the principal residence exemption where a portion of that housing unit is used to earn rental income and what is the CRA interpretation of “ancillary” and “structural change” in the context of the partial change-in-use rules.

Where a taxpayer has converted a part of his or her principal residence to an income-producing use, a disposition (and reacquisition) of that part of the property to have taken place (such portion is usually calculated on the basis of the area involved) for proceeds equal to its proportionate share of the property’s fair market value. However, it is the CRA”s practice not to apply the change-in-use rules in these circumstances where all of the following conditions are met:

  1. the income-producing use is ancillary to the main use of the property as a residence;
  2. there is no structural change to the property to make it more suitable for rental or business purposes; and
  3. no capital cost allowance (CCA) is claimed on the property.

These conditions could be met, for example, where a taxpayer carries on a business of caring for children in the home, rents one or more rooms in the home, or has an office or other work space in the home which is used in connection with business or employment.

The CRA generally interprets ancillary as being subordinate or secondary to a more important or primary purpose. There is no specific percentage or threshold which may be used in determining whether the particular change in use of a particular property is ancillary to the use of the property as the taxpayer’s principal residence.  This can only be determined by a review of the particular facts and circumstances in each case.

The CRA will also look at whether there have been any structural change to make the property more suitable for rental or business purposes. Generally speaking, such changes must be of a more permanent nature, such as the installation of a separate entry or kitchen, or an addition or reconfiguration of space by adding, moving or removing walls. Determining whether there has been a structural change to the property to make it more suitable for rental or business purposes requires a review of all the particular facts and circumstances in each case. However, the conversion of a portion of a taxpayer’s principal residence into a separate, self-contained domestic establishment (housing unit) to be used for earning rental income will generally result in the application of the change-in-use rules (i.e., the CRA’s administrative policy described above would likely not apply).

The message is for executor’s to spend some time thinking about whether or not one can safely rely on the principal residence exemption to shelter a real estate gain.

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About Derek de Gannes
Derek A. de Gannes: Senior Director, Private Client Services of RSM Canada. RSM Canada is committed to the highest level of integrity, quality and professionalism and provides clients with solutions in the area of Audit, Tax and Transaction Services. Email:


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