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What’s in a name? - Part II - Principal residence, matrimonial home and homestead

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printable copy: What’s in a name? - Part II - Principal residence, matrimonial home and homestead [PDF, 4 pages, 75 kb]

October 2009

What’s in a name? - Part II - Principal residence, matrimonial home and homestead

Principal residence, matrimonial home and homestead are technical terms applied to real estate for different reasons. The concepts behind these terms often affect inheritance planning and beneficiary designations, and are especially important for clients with more than one property.

Understanding the different terminology and how it is applied can help you better advise your clients.

Principal residence

Principal residence is a federal income tax concept that applies uniformly across Canada.1 Principal residences are exempt from Canadian capital gains tax, but the taxpayer doesn’t claim this exemption until there is a ‘disposition’ of that property. A disposition includes a sale or the deemed disposition arising on death. The tax-free status doesn’t depend on whether there are any actual proceeds from the disposition, e.g., the exemption can also eliminate capital gains tax triggered by a gift or bequest of the principal residence.

Two conditions must be met for the capital gains tax exemption to apply:

  • The residence must be one that can be 'ordinarily inhabited' (e.g., it may be a city home, a condominium, a cottage, etc.).
  • There must also be ownership. A taxpayer can only make use of the exemption for periods when he or she owned a property either personally or through a trust.2

The exemption can even be allocated to different properties in different years. The rules are complex, and are outlined in Interpretation Bulletins IT-120R6 and IT- 437R from the Canada Revenue Agency. While prior to 1982 both spouses could claim one principal residence each (so one spouse could claim the vacation home as his or her principal residence while the other claimed the city home), they are now limited to one exemption per couple. This tax rule applies to couples who are “tax spouses,” a term that includes not only those who are married, but also couples of opposite or same sex who have cohabited for at least one year (or for a lesser period of time if a child is born to or adopted by the couple).

For couples owning more than one property, the 1982 changes left all but one property exposed to capital gains tax liability. There is no issue when one spouse dies if the property goes to the surviving spouse or spousal trust. In that case, there will be no deemed disposition and no capital gains tax. However, when the second spouse dies there will be a deemed disposition of that spouse’s property for fair market value and potential capital gains tax exposure for that spouse’s estate.

If the family’s intention was to pass their property intact to their children, that intention could be frustrated by the capital gains tax liability if the estate lacks the cash needed to pay the taxes. In that case, the property would have to be sold (and sold in time to raise the cash needed to pay the tax) or the heirs receiving the property would have to pay the tax bill themselves. Even if the estate had enough cash to pay the tax, paying the tax could make other bequests impossible or difficult to accomplish, such as helping the children pay off their mortgages, or helping the grandchildren pay for their educations.

Life insurance can help by providing the money at death to pay for the taxes, or, if the estate is expected to have enough cash to pay the tax, to provide for the other types of bequests your clients would want to make but for the tax obligation.

Matrimonial home

The matrimonial home (also known as the marital home, family home or family residence) is a family law concept, and has nothing to do with income tax. The precise name and law vary from province to province. The matrimonial home is one particular part of the assets making up what is generally referred to as “matrimonial property,” or “family assets.” Even in Quebec, with a different legal heritage, there is a similar concept called “family patrimony,” which includes the family residence and personal property owned by either spouse among a list of predetermined assets.

Use of a residence by the spouses or their children can create matrimonial home status. One effect of this status is to limit the owner’s power to deal with the property. A matrimonial home’s owner cannot sell or mortgage it without the other spouse’s consent, even if that other spouse has no ownership rights to the property.3 Some provinces permit multiple homes or even rented homes to qualify as a matrimonial home.4

Matrimonial home status also affects who has the right to occupy the home. If the owner spouse dies, the surviving spouse may have special rights to live in the home, even if that spouse never had any ownership rights to the home and even if title to the home passes to someone other than the surviving spouse. These are important limitations when it comes to estate planning for the owner spouse.

If there is a marriage breakdown and the matrimonial home is sold, the non-owner spouse may have special rights to a portion of the proceeds of sale, even if the home was inherited during marriage or owned by the other spouse before marriage. In many provinces the couple’s family assets contain the assets they accumulated during their marriage. A matrimonial home is different in that the entire value of the matrimonial home may be included in the couple’s family assets even if one spouse owned it before marriage. In contrast, the division of the matrimonial home’s value at death or on marriage breakdown will not take into account that portion of the value in the home that was brought into the marriage, or was acquired by gift or inheritance during the marriage.5

Finally, at one spouse’s death, the surviving spouse has the same claim to an equalization payment from the deceased spouse’s estate that he or she would have had if the marriage had broken down. If the family’s major asset was the matrimonial home, it could be necessary to sell the home in order to satisfy the surviving spouse’s claim for an equalization payment. Importantly for planning purposes, spouses can usually agree by contract to alter or give up their rights attached to any particular property. The contract may be a pre-nuptial agreement, a marriage contract, or a separation agreement. In Quebec, a spouse may execute a renunciation (release) of interest in the property upon marriage breakdown or death.

In first marriages, few spouses would want to give up their rights to the matrimonial home or to any property division other than that provided by law in their province. However, the discussion often arises in second marriages, especially when each spouse has adult children. Each spouse usually wants to make sure that if they die the other spouse is taken care of, but will also want to make sure that any assets they brought into the marriage pass to their own children, and not to their spouse’s children. If the couple lived in a home that one spouse had brought into the marriage, and if the owner spouse died first, the surviving spouse could have rights to the home that could frustrate the deceased spouse’s plans to pass the property to his or her children.

One way to address these problems is to have the spouses sign a matrimonial agreement where they each give up their rights to the other spouse’s property in exchange for a life insurance policy death benefit payable at the other spouse’s death. During life, the non-owner spouse would have no right to oppose any dealings the owner spouse made with the matrimonial home, and at that spouse’s death would have no rights to an equalization payment. In exchange for giving up these rights, he or she would receive a life insurance policy death benefit when the other spouse died.6


This real estate concept exists in the four western provinces and many American states. Largely a by-product of an agricultural heritage and pattern of settlement, homestead refers to a home and a defined parcel of land that goes with it, most often a farm.

The concept predates modern matrimonial law, and arose at a time when spouses were considered a single legal entity that the husband governed. Homestead legislation was an attempt to protect widows from irresponsible dealings by their husbands. This legal protection has been modernized through other laws across Canada, and extended to both spouses.

In many homestead jurisdictions, especially in the United States, the homestead property enjoys special protection from seizure and sale by creditors in the event of insolvency or bankruptcy. The same concept, preventing forced sale and division, may apply on marriage breakdown.

Homestead status is also important to the rights of a surviving spouse. The survivor may have a statutory right to continued occupation of the homestead, protected from eviction by the new owners. Some of the same concerns in second marriages discussed in the matrimonial home section above may apply here.

Since modern agribusinesses may have thousands of acres under cultivation, traditional homesteads may be difficult to identify. But homestead rights are very important factors in planning for clients in provinces with homestead legislation.

Advising clients

  • Develop questions about your clients’ property. Whose name(s) is the property in? When was it acquired, and how? Who contributed what proportion of the funding? Who uses the property, and what for?
  • The proposed amendments do not provide any transition or grandfathering rules for existing HWTs. That deficiency may be addressed in the final amendments.
  • Knowing the differences between principal residence, matrimonial home and homestead helps you uncover information that may have a significant impact on a client’s estate plan.

This article is intended to provide general information only. Sun Life Assurance Company of Canada does not provide legal, accounting or taxation advice to advisors or clients. Before your client acts on any of the information contained in this article, or before you recommend any course of action, make sure that your client seeks advice from a qualified professional, including a thorough examination of his or her specific legal, accounting and tax situation. Any examples or illustrations used in this article have been included only to help clarify the information presented in this article, and should not be relied on by you or your client in any transaction.

1Hélène Marquis, “Principal Residence,” Advisor Notes (February 16, 2004).
2Owning a principal residence through a family trust even if the trust is fully discretionary can result in a loss of the principal residence tax exemption for the trust beneficiaries. Special attention must be paid to the beneficiaries’ situation before implementing this type of ownership.
3Although most married couples own their homes jointly, joint ownership of a home is not required or automatic. For example, as part of a creditor protection plan, a business owner may have his or her spouse own all their property, even to the extent of having the spouse own the house outright. If the business owner is successfully sued, his or her creditors could not take the house because the business owner would not own it. But under provincial matrimonial laws, the business owner would still have a right to possession (meaning that the owner spouse needs the business owner spouse’s consent to sell or mortgage the house), and a right to have the matrimonial home included in the family assets subject to equalization upon marriage break down.
4One reason for allowing a rented property to qualify as a matrimonial home is to allow a spouse to claim the right to exclusive possession of the home upon marriage breakdown. The right to exclusive possession has nothing to do with ownership of the matrimonial home.
5In Québec, the calculation of the value eligible to the partition of the family patrimony and the partnership of acquests recognizes the value of an inheritance or a gift and the fact that the matrimonial home was owned by one of the spouses before the marriage.
6Please note such a renunciation is not legal in the province of Québec.

© Sun Life du Canada, compagnie d'assurance-vie, 2009.

Sun Life Financial.


Published: 08/06/2010

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