Tax Tip:   Principal Residence

In an August 7, 2014 Technical Interpretation, CRA commented on a situation where an individual converted the basement of his principal residence into an office (including the addition of a separate entrance) to be used by his Corporation.

When a portion of a personal use property is converted into business use, a disposition is deemed to occur on the converted portion. This means that the principal residence exemption will no longer be available for that portion.

However, it is CRA’s practice to not deem changes as dispositions when:

  • the property retains its character as a primary residence;
  • no capital cost allowance has been requested on the building; and
  • no structural change has occurred.

CRA opined that the changes in this case, which included the opening of an exterior wall, could be considered a structural change. Therefore, a disposition may be deemed to occur.

It was also noted that the Corporation would pay for the improvements to the property. If the renovations increased the value of the residence, the Corporation may be deemed to confer a taxable advantage on the shareholder.

Action Item: Contact us before converting a portion of your house into an incoming earning asset or office.