The first is that one can only claim a principal residence exemption for the time one has resided in the property. If the client leaves the home, then any appreciation on that property subsequent to the move out date will involve capital gains which would be taxable. There is an election that needs to be filed in the year that they move out, should they wish to keep it and use it for rental income purposes. Filing such an election would add their right to continue to claim the residence as a principal residence and be exempt from capital gains tax for up to four years subsequent to the year of move out; but no more than that. The way real estate has moved with prices close to tripling over the last 15 years, this is not an exemption that should be trifled with without specific professional advice. On a $1.5 Million dollar gain, the loss of the exemption would put $750,000 into income in the year of disposition or deemed disposition. That would cost you hundreds of thousands in taxes that could otherwise be avoided.
The second issue is that properties purchased for investment purposes can have the financing and interest charges deducted from income of that property. However, taking out a mortgage with a view to moving into the new property would be viewed as personal as opposed to investment financing and the mortage interest would not be deductible. So, as you can see, arranging mortgage financing for a house you already own but don't want to sell is problematic from the point of view of interest deductibility.
As a general rule, personal real estate such as a home should be purchased with as much cash as possible, while investment real estate should, if the borrower can support the payments, be leveraged so as to enable interest deductibility.
For a more complete guide from the Canada Revenue Agency on Principal Residence Exemption issues and changes of use, please consult their publication at: http://www.cra-arc.gc.ca/tx/