19 February 2013 External T.I. 2012-0447471E5 - Principal Residence Designation

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: 1. Can two strata units be considered one residence for the purposes of the definition of a principal residence?

Position: 1. Probably not.

Reasons: 1. It is the responsibility of the local TSO to make a factual determination.

XXXXXXXXXX
2012-044747
Robert Dubis
February 19, 2013

Dear XXXXXXXXXX:

We are replying to your letter of May 11, 2012 regarding the designation of a property for the purposes of claiming the principal residence exemption.

The particular circumstances in your letter on which you have asked for a ruling involve a factual situation concerning a specific taxpayer. Based on the information provided, your clients owned two strata units for an overlapping period between XXXXXXXXXX and XXXXXXXXXX. You stated that the units were attached and occupied as a place of residence for your clients and their children. The units were acquired independently in XXXXXXXXXX and XXXXXXXXXX and subsequently sold at different times to different purchasers in XXXXXXXXXX. Pending clarification from the Canada Revenue Agency, you advised your client to designate one specific unit as their principal residence for the purposes of claiming the principal residence exemption when filing their XXXXXXXXXX Income Tax and Benefit Returns. Your request pertains to the application of the principal residence exemption in these circumstances in order that consideration could be given to amending your clients XXXXXXXXXX tax returns.

Written confirmation of the tax implications inherent in particular transactions may only be provided by this Directorate where the transactions are proposed and are the subject matter of an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the Internet at http://www.cra-arc.gc.ca/formspubs/menu-e.html. Where the particular transaction has already been completed, a review of the relevant facts and circumstances of the situation would be required. Such review would normally be conducted by the applicable Tax Services Office during the course of an income tax audit which, if undertaken, would be carried out after the particular taxpayer has prepared and filed its income tax return for the year. Since it is not this Directorate's practice to comment on transactions involving a specific taxpayer other than in the form of an advanced income tax ruling, we may only offer the following general comments, which may be of assistance.

The Canada Revenue Agency's position on the principal residence exemption is set out in Interpretation Bulletin IT-120R6, Principal Residence. If a property qualifies as a principal residence, an exemption can be claimed under paragraph 40(2)(b) of the Act to reduce or eliminate any capital gain otherwise realized on the disposition of the property. The term principal residence is defined in section 54 of the Act. Generally, in order for a property to qualify for a designation as a taxpayer's principal residence for a taxation year, it must be demonstrated, among other things, that he or she owns the property, and that it is ordinarily inhabited in the year by the taxpayer or the spouse or common-law partner, former spouse or common-law partner or child, of the taxpayer. A taxpayer can designate only one property as a principal residence for a particular taxation year and, for taxation years after 1981, only one property per family unit can be designated as a principal residence.

The principal residence exemption rules recognize that a taxpayer can have two residences in the same year, i.e., where one residence is sold and another acquired in the same year. The effect of the "one plus" in the formula used to calculate the exemption (as described paragraph 8 of IT-120R6, variable B) is to treat both properties as a principal residence in such a year, even though only one of them may be designated as such for that year. If each strata unit otherwise meets the requirements of a principal residence for any particular year, then either unit could be designated as the principal residence for that year.

Whether the two units owned by your clients were integrated in a manner such that they could constitute one housing unit is a question of fact that can only be determined after a review of all the relevant facts. However, the fact that the properties were sold separately in XXXXXXXXXX to different purchasers suggests that the properties were not integrated to function as one unit. We refer you to rulings document E2009-0311301E5 which discusses a number of factors which could be considered to make a complete determination in this regard.

Although the law contains no provision for the late-filing or amendment of a principal residence designation, taxpayers may submit an adjustment request to the appropriate Taxation Centre for its review. The request should include an explanation for the change in designation and any supporting documentation. In all cases, the decision to accept a late-filed or amended designation will be at the CRA's discretion, based upon the facts of the particular taxpayer's situation. Under no circumstances will the CRA accept a late-filed or amended principal residence designation if it involves retroactive tax planning, if it impacts the return of another individual (where property was jointly owned with another individual), or if it is necessary in order to give effect to the designation, to issue a notice of assessment or reassessment for a year that is statute-barred.

Alternatively, where the taxpayer is within the time limits for filing a Notice of Objection for the taxation year in which he or she disposed of the other property, the taxpayer may file a Notice of Objection by using the My Account feature on the CRA Internet site or by writing to the Chief of Appeals at your Appeals Intake Centre.

Please note the above comments in IT-120R6 have been made in respect of property that is capital in nature and not property that is held on account of income. It must therefore be determined whether any gain that would be realized on the disposition of your units would be on account of income or capital. Furthermore, we would note that we have not been provided with any information regarding the source of the funds used to purchase the strata units, in order to establish whether the attribution rules would apply in respect of any gain resulting from the disposition of these units. In general terms, the attribution rules provide that income and capital gains and losses realized on property transferred or loaned from an individual to the individual's spouse or common-law partner (and on property substituted for that property) are generally deemed to be the income, gains or losses of the individual and not the individual's spouse or common-law partner. These rules are explained in Interpretation Bulletin IT-511R, Interspousal and Certain Other Transfers and Loans of Property.

We trust that the information provided is helpful.

Yours truly,

Sharmini Ratnasingham
for Director
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch