Nursing Home vs. Principal Residence

by Tax Guy - Burlington Accountant on December 15, 2008 Print This Post Print This Post

Question: “My mother has always owned her own home and lived there until a disabling fall caused her to require 24 hour nursing care at a long-term facility. If she dies in a nursing home is her house which she still owns and has never rented out deemed to be her principal residence for tax purposes?”

In order for a property to be considered as the principal residence it must be owned by the taxpayer and be “ordinarily inhabited” by the taxpayer, the taxpayers spouse or common-law partner, former spouse or common-law partner, or child.

The question of whether the property is “ordinarily inhabited” must be considered given the facts of the situation.   Normally, if the property were occupied, even for a short period during the year, this would qualify the property as the principal residence.  The problem is that your mother would not neatly fit into this definition.

A CRA Income Tax Ruling from 1996 was released by the CRA indicating that if a person were to enter a nursing home on a temporary basis, it would be likely that she would be considered to “ordinarily inhabit” her residence.  If the stay was permanent, she would not meet the test.

It would appear that if your mother’s stay is going to be a permanent stay that her home would no longer qualify as her principal residence.  Note that the principal residence exclusion would apply up to the point where it no longer qualified as the principal residence because she would be able to claim the exemption for each year the property was ordinarily inhabited.

Depending on your mothers’ wishes, there are a few options available:

1.         If you or another family member occupied the home for a period of time, the property may still qualify as the principal residence.

2.         If under the terms of her will, she intend to leave the home to another family member, she may consider transferring ownership now.  Bear in mind, that should she exhaust her assets to pay for the nursing home, the property may not then be sold.

3.         Sell the property and invest the proceeds to earn income.

The choice made would depend on whether her stay would be temporary.  If the stay is considered not to be temporary, then from a purely financial point of view, a sale of the home would probably be the best choice.

The CRA has a document that addresses the tax treatment of the principal residence.  Although it does not consider your situation directly. it may clarify some of your concerns.  http://www.cra-arc.gc.ca/E/pub/tp/it120r6/it120r6-e.html

About The Tax Guy...

Dean Paley CGA CFP is a Burlington accountant and financial planner who services individuals and business owners locally, nationally and internationally. Dean has appeared in the National Post, Toronto Star and Metro News.

To find out more, visit Dean's website Dean Paley CGA CFP or connect via Twitter @DeanPaleyCGACFP.

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