Principal Residence Exemption on a Corporation-Owned Home in Canada

Some owners hold their home in a company, often for reasons that made sense at the time. When they later sell, they expect the principal residence exemption and are told it is unavailable. That can be a surprise, especially when the owner has lived in the home for years.

This article explains in general terms why the exemption is tied to who owns the home, and what other questions arise. It does not cover every corporate structure, so professional advice matters here.

This article covers Canadian federal tax law, which applies in every province.

How the exemption is built

The definition of principal residence in section 54 of the Income Tax Act requires a housing unit, or a leasehold interest or co-op share giving the right to inhabit one, owned by the taxpayer, alone or jointly with another person or otherwise. The unit must be ordinarily inhabited in the year by the taxpayer or a spouse, common-law partner, former spouse or partner, or child.

Those tests describe people and families. A company is not a person who lives in a home, which is why a corporate owner generally does not fit the framework. Whether a particular arrangement could qualify depends on the facts and should be confirmed with a tax professional.

The forms point the same way

Individuals other than personal trusts designate a property and calculate any gain on Form T2091(IND). On Schedule 3 of the T1 return, the designation is made in Part 1. These are individual tax return tools.

Even personal trusts face limits. A trust can claim the exemption only if it meets the section 54 conditions, and no corporation, other than a registered charity, or partnership may be beneficially interested in it. This shows how closely the exemption is tied to individuals.

Shareholder benefit questions

When a company owns a home and a shareholder or their family lives there, the tax authorities may ask whether the occupant received a personal benefit from the company. How that is measured, and what is reported, are questions for an accountant who can see the full corporate picture.

• Who owns the home on title, and who pays the costs?
• Does the shareholder pay rent or anything else to the company?
• Were the company's expenses on the home deducted?
• How and when did the company acquire the home?

Changing how the home is held

Some owners consider moving the home out of the company. A transfer can have its own tax consequences, and a change in use is a deemed disposition at fair market value in some cases. Because the consequences can be significant, get advice before transferring anything.

Once an individual owns the home personally, the usual rules apply. Only one property per family unit can be designated for each year from 1982 onward, and the sale must be reported on Schedule 3.

What to do next

• Gather the title, purchase documents and corporate records showing who owns the home.
• List who has lived in the home and for how long.
• Collect any records of payments between the owner and the company.
• Book a meeting with an accountant and a lawyer before any sale or transfer.

Frequently asked questions