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.
Principal Issues: Whether there was a change in use of a portion of a principal residence where that portion was used for rental purposes.
Position: No.
Reasons: Based on the facts that the income-producing use is ancillary to the main use of the property as a residence, there is no structural change to the property, and no capital cost allowance is claimed on the property and based on our position in paragraph 32 of IT-120R6.
2008-027414
XXXXXXXXXX Charles Rafuse
613-247-9237
November 10, 2008
Dear XXXXXXXXXX :
Re: Principal Residence
This is in reply to your email of March 31, 2008, concerning the availability of the principal residence exemption under the Income Tax Act (the "Act") in a situation where a residence is partially used for rental purposes.
You have indicated that in 2003 you purchased a half duplex for your principal residence. You initially rented out approximately 40% of the property and a few years later this rental portion increased to approximately 60%. The property had one main entrance and one mailing address, there were no structural changes made to the property, and rental income had been reported each year with no capital cost allowance (CCA) being claimed.
You sold the property in 2007 and are concerned about your ability to claim the principal residence exemption provided in paragraph 40(2)(b) of the Act in the above circumstances. You have indicated that you contacted the CRA call centre in Montreal and were advised that you did not have to report a capital gain in respect of the sale of your property. You have asked if we could confirm this decision.
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 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to offer the following general comments.
The principal residence exemption is discussed in detail in Interpretation Bulletin IT-120R6, Principal Residence, which is available on the CRA website www.cra-arc.gc.ca. Where a taxpayer has partially converted a principal residence to an income-producing use, paragraph 45(1)(c) of the Act provides for a deemed disposition of the portion of the property so converted for proceeds equal to its proportionate share of the property's fair market value. A taxable capital gain attributable to the period of use of such portion of the property for income-producing purposes can arise from an actual sale of the whole property subsequent to the original partial change in use. The deemed disposition rule applies where the partial change in use of the property is substantial and of a more permanent nature, i.e., where there is a structural change. It is the CRA practice to not apply the deemed disposition rule but rather to consider that the entire property retains its nature as a principal residence if the income-producing use is ancillary to the main use of the property as a residence, there is no structural change made to the property, and no CCA is claimed on the property. These conditions can be met, for example, where a taxpayer carries on a business of caring for children in his or her home, rents one or more rooms in the home, or has an office or other work space in the home which is used in connection with his or her business or employment.
There is no specific percentage which may be used in determining whether there has been any change in use in respect of a particular property. Such determinations are questions of fact, which require a review of all relevant facts of each particular case. However, it is our opinion, based solely on the facts provided in your email, that in your situation the deemed disposition rule mentioned above should not apply and your property should retain its principal residence status.
We trust this information is helpful.
Yours truly,
S. Parnanzone
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2008
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2008
Email this Content