The Principal Residence Exemption is a Canadian statute meant to protect Canadian tax-payers and families from accruing tax on the capital gains of a sold property, provided it is deemed the primary residence. Basically, a legal family unit can designate one residence as the primary family residence per year. However, the designated property must be used for living in and not for any commercial purpose. There is leeway for homeowners that live in their primary residence, yet rent out a portion. Assuming that the ratio of income-generating space to personal homeowner usage still favors the homeowner and no structural changes were made on the property, nor were Capital Costs Allowance assessed, then the PRE umbrella can still shelter the property. Even homeowners that use there entire property for rental purposes can claim PRE by a special election which more or less nullifies the event and allows the family of residence or the individual homeowner to go on treating the property as a primary residence, provided that the owner(s) sells it in five years and never declares any other residence as a primary residence during that time period.

“When a property changes use from principal residence to income-producing, the PRE should shelter the entire capital gain provided the property is designated the taxpayer’s principal residence for each tax year owned. The concern is that when the converted income property is sold in future, a higher taxable capital gain may result.”

Read more: http://www.advisor.ca/tax/tax-news/tax-traps-when-converting-a-home-to-an-income-property-262359