15 June 2010 External T.I. 2010-0369351E5 - Principal residence exemption-US property

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: Can property situated outside Canada be designated as a principal residence? Can an election under subsection 45(2) of the Act be made if depreciation has been taken on the property for US tax purposes?

Position: Property situated outside Canada can be designated as a principal residence provided it otherwise qualifies as a principal residence under section 54 of the Act. An election under subsection 45(2) of the Act can be made if CCA has not been claimed on the property for Canadian tax purposes.

Reasons: The definition of principal residence in section 54 of the Act does not limit the property to Canadian property, which is confirmed in IT-120R6. The subsection 45(2) election is available as long as CCA has not been claimed on the property for Canadian tax purposes. Depreciation taken for US tax purposes would have no impact for Canadian tax purposes.

XXXXXXXXXX
									2010-036935
									P. Waugh
June 15, 2009

Dear XXXXXXXXXX :

Re: Principal Residence Exemption

I am writing in reply to your letter of May 20, 2010 requesting a technical interpretation on whether a property located in the United States ("US") would qualify for the principal residence exemption and whether claiming depreciation on your US tax return would effect the subsection 45(2) election.

In the situation you described, you purchased a vacation property in XXXXXXXXXX in 2007 which is the only property that you own. During 2008 and 2009, you inhabited this property for 90 to 120 days each year, including January 1, 2009 to March 31, 2009. Due to the downturn in the economy, you found it necessary to rent out the property starting April 1, 2009. You filed an election under subsection 45(2) of the Income Tax Act (the "Act") with your 2009 Canadian income tax return to preserve the principal residence status and avoid the deemed disposition of the property on the change in use. You have not, and will not be taking any capital cost allowance ("CCA") on the property for Canadian income tax purposes as you fully intend to use it on a regular basis in the future. You have claimed a depreciation deduction on this property against rental income on your return filed for US tax purposes.

Our Comments

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 Ruling, 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. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. We are, however, prepared to provide the following general comments.

It is a question of fact whether or not a particular property is a principal residence of a taxpayer for income tax purposes. Your questions concerning whether the property can qualify as a principal residence are partially addressed in Interpretation Bulletin IT-120R6, Principal Residence which can be found on our website. In particular, paragraph 40 of IT-120R6 states that depending on the facts of each case, a property that is located outside Canada can qualify as a taxpayer's principal residence.

Where a taxpayer starts using a property that is a principal residence for an income earning purpose, the taxpayer would normally be deemed to have disposed of and reacquired the property at fair market value under paragraph 45(1)(a) of the Act, unless an election is filed under subsection 45(2) of the Act (the "Election"). The Election is discussed in detail in paragraphs 25 to 27 of IT-120R6. As noted in paragraph 25, if CCA is claimed on the property for Canadian income tax purposes, the Election is considered to be rescinded on the first day of the year in which that claim is made. The fact that a taxpayer has claimed a depreciation deduction against rental income on his/her US tax return for US tax purposes would not affect the Election for Canadian tax purposes.

We trust these comments will be of assistance.

Yours truly,

Randy Hewlett
Manager
for Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch