15 January 2002 External T.I. 2001-0104085 - GAINS-SALES OF RESIDENCES

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: An individual has asked whether the principal residence exemption can be claimed in respect of gains on the sales of residences that were renovated by the individual and his son.

Position: No (the gains would presumably be on account of income). General comments were also provided since, in an actual situation, it is a question of fact whether a gain is on account of capital or income.

Reasons: See Position

XXXXXXXXXX 2001-010408
M. Eisner, CA

January 15, 2002

Dear XXXXXXXXXX:

Re: Gains - Sales of Residences

This is in reply to your letter of September 25, 2001 concerning the principal residence exemption and whether gains on the dispositions of residences would be on account of income or capital.

You have indicated that you and your son may commence a business of renovating homes. In connection with this activity, you have asked about the principal residence exemption in respect of the purchase and sale of residences in a year.

Our Comments

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R4 (enclosed). Where the particular transactions are completed, the enquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following comments, which are general in nature.

You are aware that Interpretation Bulletin IT-120R5, "Principal Residence", discusses the requirements in respect of the principal residence exemption. We also note that, if the land on which the housing unit is situated is one-half hectare or less, it will usually qualify as part of the taxpayer's principal residence. Land in excess of one-half hectare may also qualify, but only to the extent that it is established by the taxpayer to be necessary for the use and enjoyment of the housing unit as a residence. Paragraphs 14 to 16 of IT-120R5 provide additional information on this issue.

In connection with your enquiry, you have referred to paragraphs 5, 6 and 9 of Interpretation Bulletin IT-120R5. In particular, you note that (i) paragraph 5 states that "Even if a person inhabits a housing unit only for a short period of time in the year, this is sufficient for the housing unit to be considered "ordinarily inhabited in the year""; (ii) paragraph 6 states that "For a property to be a taxpayer's principal residence for a particular year, he or she must designate it as such for the year and no other property may have been so designated by the taxpayer for the year"; and (iii) paragraph 9 states that "the taxpayer can have two residences in the same year".

The first point that we wish to make is that the above comments in IT-120R5 have been made in respect of property that is capital in nature and not property that is held on account of income. Comments on the determination of whether a gain is on account of income or capital are set out below. The second point is that the comments in paragraph 9 of IT-120R5 must be read in conjunction with the comments in paragraph 7 of the bulletin and, in particular, with the formula explained in paragraph 7. That is, the "1+" in variable B of the formula in paragraph 7 generally has the effect of allowing the principal residence exemption to be claimed in respect of two properties for the same year, although only one of them may be designated as a principal residence for that year.

As mentioned in paragraph 3 of Interpretation Bulletin IT-218R, "Profit, Capital Gains and Losses from the Sale of Real Estate, Including Farmland and Inherited Land and Conversion of Real Estate from Capital Property to Inventory and Vice Versa" (copy enclosed), there is no provision in the Income Tax Act which describes the circumstances in which gains from the sale of real estate are to be determined as being on account of income or capital. However, in making such determinations, the courts have considered different factors such as those explained in IT-218R. The issue generally involves a determination of the facts of each case. No one factor is conclusive, however the taxpayer's motivation in purchasing the property is usually significant. A taxpayer has to establish, on a balance of probabilities, that when the property was purchased, he or she did not have either a primary or secondary intention of selling it at a profit. In our view, if an individual involved in the home renovation business acquired residences with the intention of renovating them, living in them and then selling them (as described in your letter), the related gain (or loss) would be on account of income (i.e., business income). In the event that a gain on the sale of a residence is considered as being on account of income, the principal residence exemption cannot be claimed, and 100% of the gain would be taxable.

If you require further assistance, you may contact your local Tax Services Office.

We trust that our comments are of assistance to you.

Yours truly,

Milled Azzi, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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