4 August 1998 External T.I. E9812595 - PRINCIPAL RESIDENCE, CAPITAL GAINS DEDUCTION

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 Department.

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

Principal Issues: principal residence exemption and capital gains exemption

Position: must recalculate gain if principal residence exemption is claimed on property that was the subject of 110.6(19) capital gains exemption

Reasons: B in "D" of formula in 40(2)(b)- comma after “designated” therefore “in a return of income for the taxation year that includes Februsry 22, 1994” and “for a preceding taxation year modify the word “designated”; the words “return of income” do not appear in the legislation after the word “or”, and they cannot be read;

XXXXXXXXXX 981259
Denise Dalphy

Attention: XXXXXXXXXX

August 4, 1998

Dear Sirs:

Re: Principal Residence

This is in reply to your letter dated May 11, 1998 concerning the computation in paragraph 40(2)(b) of the Income Tax Act (the “Act”) of the deemed gain on the disposition of a principal residence.

The hypothetical scenario that you described in your letter of September 23, 1997 concerns a taxpayer who filed an election under subsection 110.6(19) of the Act with his/her 1994 income tax return. The property that was the subject of the 1994 deemed disposition was not designated as the taxpayer’s principal residence in his/her 1994 income tax return or in any earlier income tax return. In a subsequent year, the taxpayer disposes of the property and, in his/her return of income for the year of its disposition, the taxpayer designates the property as his/her principal residence for several taxation years, including taxation years prior to 1994.

You have referred us to clause B in “D” in the formula in paragraph 40(2)(b):

“(B) the total of all amounts each of which is the taxable capital gain of the taxpayer or of a spouse of the taxpayer that would have resulted from an election that was made under subsection 110.6(19) in respect of the property or interest if the property were the principal residence of neither the taxpayer nor the spouse for each particular taxation year unless the property is designated, in a return of income for the taxation year that includes February 22, 1994 OR for a preceding taxation year, to be the principal residence of either of them for the particular taxation year,...(emphasis added)”

You are of the view that “(d)esignations made in a tax return or subsequent taxation years are ignored in this particular definition, even though they are for 1994 or earlier taxation years”. We do not share your interpretation.

In our view, the clauses “in a return of income for the taxation year that includes February 22, 1994” and “for a preceding taxation year” both modify the verb “designated”. (...property is designated in a return of income for the taxation year that includes February 22, 1994 to be the principal residence or property is designated for a preceding taxation year to be the principal residence...) Therefore, in general terms, a taxpayer who claimed the capital gains exemption on the deemed disposition of a particular property in 1994 and subsequently disposed of that property and designated it as his/her principal residence for years before 1994, must recalculate the 110.6(19) amount per clause B of “D” in the formula in paragraph 40(2)(b) of the Act. The fact that the property was not designated as the principal residence in a return for 1994 or earlier does not eliminate the requirement to recalculate his/her taxable capital gain.

The foregoing comments represent our general views with respect to the subject matter. As indicated in paragraph 22 of Information Circular 70-6R3, the above comments do not constitute an income tax ruling and accordingly are not binding on the Department. Our practice is to make this specific disclaimer in all instances in which we provide an opinion.

Yours truly,

Director
Resources, Partnerships and
Trusts Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
- 2 -