Second property strategies

Canadians might be interested in owning a second property for a variety of reasons. For some, a place to vacation is top of the list. For others, a job might bring them to different places for much of the year, so owning homes in different locales is a necessity.

Whatever the reason, one thing is certain: Second properties can bring with them tax issues.

For most people who own a second property, whether it is a cottage up north, a villa in the Swiss Alps or a condo in Florida, the biggest concerns with regards to the property are: What happens when I sell it? Can I claim the principal residence exemption? And how do I pass it on to my children?

If you sell a property you may trigger a capital gain if it has gone up in value since you first acquired it. The first thing to consider is whether or not you want to shelter this gain using the principal residence exemption.

Since 1982, each family unit (which today includes you, your spouse or common-law partner, and any unmarried children under the age of 18) has been able to designate just one property as its principal residence for each year.

Even though you may have another property that you consider to be your principal residence – as that is where you live for the majority of the year – another property, such as a cottage, can be considered your principal residence for the purpose of this exemption.

This is because the definition of principal residence states that you, your spouse, or child must ordinarily inhabit the property during each year of ownership.

While there is no definition of “ordinarily inhabited” in our tax law, the Canada Revenue Agency (CRA) has said that even a “short period of time” should be sufficient, and where the main reason for owning the property is not to earn income, staying at the place during your vacation time alone should be good enough to meet this requirement.