The article “Power of Attorney and Taxes: What You Need to Know” was originally published on MoneySense on October 13, 3015.
Ownership and other technicalities are factors
Q: If we have a client in Nova Scotia that has power of attorney for their mother who is in a nursing home and both children with POA own a home, will they be responsible for any capital gains on the sale of their mother’s home?
A: People who are acting as power of attorney have a fiduciary responsibility to manage the grantor’s financial affairs. This includes the responsibility to file income tax returns as well as to pay the associated income tax liabilities using the grantor’s assets.
An attorney can be personally liable for any damages that result from their negligence, so it’s important to act with care, but also to consult with professionals in the management of someone else’s financial affairs.
Every Canadian is eligible to claim a principal residence exemption on the sale of their principal residence. Your concern, David, relates to whether or not the attorneys are deemed to own a second home while acting as attorney for their mother. Presumably they stand to inherit their mother’s home on her death, so someday the home will in fact be theirs.
If someone owns more than one home, at least one of them will result in a taxable capital gain on sale, with tax payable accordingly. This decision doesn’t need to be made until one of the properties is sold. If you ordinarily inhabit a home, it can be considered your principal residence. This can include a cottage, mobile home or even a houseboat. The concept of “ordinarily inhabiting” a home can include a vacation property, as long as the primary use is that of personal enjoyment as opposed to rental income.
In this case, David, one important distinction relates to the concept of ownership. The home ownership always resides with their mother until her death, regardless of the power of attorney and regardless of the beneficiary designations in her will.
If their mother dies and they keep the property and sell it at some point in the future, they may have a taxable capital gain if they both own other family homes.
There may still be a taxable capital gain in this case if the home is sold prior to their mother’s death, but it has nothing to do with the fact that the children have their own homes. It has to do with the concept of “ordinarily inhabiting” a principal residence. If their mother is permanently in a nursing home, David, she isn’t living in her home at all. This may open up the home to a taxable capital gain on sale from the point where she stopped living in the home. There may then be a prorated capital gain on the increase in the value of the home from its original purchase price based on the number of years of ownership and the number of years she lives in a nursing home.
While the children would be liable for the tax payable indirectly as powers of attorney, the tax would be payable by and on behalf of their mother using her assets.
All that said, given that their mother is in a nursing home, if she is unlikely to return to the home in the future, the children may want to consider their fiduciary responsibilities with the home. Perhaps the home should be sold so that the proceeds can be invested and prudently managed for their mother? Or perhaps it should be rented out so as to generate a rental income from the property?
The children have a responsibility to manage their mother’s financial affairs in the most prudent manner and act like the money is hers and only hers, even if it will be theirs when their mother dies.
So often these days, children acting under a power of attorney who stand to inherit the assets of the grantor act like the money is theirs, even taking money while their parents are still alive. The assets held for a parent remain theirs until their death and in this case, the principal residence exemption remains that of the parent as well. The potential tax liability has more to do with technicalities than ownership.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.