An investor owns three properties: a principal residence, a cottage used personally 60% of the time and rented 40% of the time, and a pure rental property. For tax planning purposes, how should the cottage be treated?
Correct Answer
D) Deduct 40% of expenses and designate as principal residence for remaining years
For mixed-use properties, expenses must be allocated based on the proportion of rental use (40% in this case). The cottage can be designated as a principal residence for years when beneficial, but the investor can only claim one principal residence exemption per family per year.
Why This Is the Correct Answer
Option D correctly applies mixed-use property tax rules. When a property serves both personal and rental purposes, expenses must be allocated proportionally - here 40% for rental use can be deducted as rental expenses. Additionally, the cottage can be designated as the principal residence for specific years when tax-advantageous, though only one property per family can claim this exemption annually. This approach maximizes legitimate tax benefits while following CRA guidelines.
Why the Other Options Are Wrong
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