7 October 2016 APFF Roundtable Q. 2, 2016-0652841C6 F - Changement partiel d’usage - immeuble locatif et résidentiel -- translation

Principal Issues:

Through an example, the CRA essentially was asked:

1-What is the CRA’s interpretation when a taxpayer sells a building where a change has occurred during a previous year regarding the relative use of the building by the taxpayer and the taxpyer's child but without any resulting change in the total rental and personal use of the property?

2-Must the taxpayer in this situation file a form T2091 in the year of the sale of the building for each eligible housing unit during the period of total detention of the property?

3-What will be the capital gain eligible to the principal residence exemption on each housing unit?

Position:

1-There is no change in use of the building for the purposes of paragraph 45(1)(c) when the proportion between the use that the taxpayer usually makes of the building to gain or produce income and the use for some other purpose did not change in the year.

2-Where several housing units of a building can be designated as principal residence for different years, the taxpayer must file a form T2091 for the year of the sale of the building for each housing unit being designated.

3-General comments.

7 October 2016 APFF Roundtable

Question 2

Partial change of use of a rental and residential building

According to the definition of principal residence under section 54, each unit of a triplex unit owned by a taxpayer may qualify as the principal residence of that taxpayer, provided that the dwelling so designated was normally inhabited at any time in the year by the taxpayer, the taxpayer’s spouse or children, and no other dwelling has been designated by the taxpayer or the taxpayer’s spouse for the same period.

For purposes of the change-of-use rules for the deemed disposition of a property, a child’s occupation of a dwelling is considered as personal use if a below-market rent is paid.

Paragraph 2.7 of the Income Tax Folio S1-F3-C2 "Principal Residence", dated March 28, 2013, indicates that for the purposes of the definition of "principal residence" in section 54, a housing unit could include a house, an apartment or unit in a duplex, apartment building or condominium, a cottage (…).

Consequently, each unit of the taxpayer's triplex unit is a separate housing unit for the purposes of sections 45 and 54. However, this housing unit concept is relevant only for the purpose of determining whether the capital gain realized as a result of the disposition of the housing unit may qualify for the principal residence exemption.

A real property owned by a taxpayer is nevertheless a single property for the other purposes of the Income Tax Act even if it includes several distinct housing units. To the extent that each such unit constitutes a self-contained residential property, the capital gains exemption for principal residence may be claimed in respect of only one of those housing units as a result of the disposition of the real property.

In Technical Interpretation 2011-0417471E5, dated February 21, 2012, the CRA indicated that:

"A property is normally considered to be only one property unless the property is legally subdivided into two or more separate properties. Therefore, we generally consider that a duplex, which has not been the subject of a legal subdivision, is a single property for the purposes of subsection 45(1). (Our underlining)

Questions to the CRA

(a) Having said that, what is the CRA's interpretation of the application of subparagraphs 40(2)(b) (principal residence exemption) and 45(1)(c) (partial change of use) where a building (triplex) is sold by a taxpayer where a change has already occurred in a preceding year in the degree of occupation of the housing units by the taxpayer and taxpayer's child without there being a change in the total use of the property for rental and personal use?

For illustrative purposes, consider the following situation:

(b) In this example, can the CRA confirm that the change-of-use rules do not apply in year 11 to the extent that the overall percentage use of the triplex for personal purposes remains at 50% despite the change in the specific occupation of each dwelling?

(c) If applicable, will the taxpayer have to file two T2091 forms in the year of sale of the triplex in order to designate the gain for each eligible unit during the total holding period of the triplex?

(d) In ​​the case of Unit #1, will the capital gain qualifying for the principal residence exemption for the first 10 years be $200,000 or $1,200,000?

(e) For either Unit #2 or #3, will the gain qualifying for the principal residence exemption for the last six years be $1,000,000 or $1,200,000?

CRA response

The CRA is of the view that a building is normally considered to be a single property unless it was legally subdivided into two or more separate properties.

Paragraph 45(1)(c) of the Act governs situations where, at any time after a taxpayer has acquired a property, there has been a change in the relation between the use regularly made by the taxpayer of the property for gaining or producing income and the use regularly made of the property for other purposes.

In the described situation, although each of the building's units was subject to a change of use in Year 11, the relation between the use regularly made by the taxpayer of the property for gaining or producing income and the use regularly made of the property for other purposes did not change during the year. Accordingly, there was no change of use of the building for the purposes of paragraph 45(1)(c) in Year 11.

Where multiple units in a building are designated as a principal residence for different years, the taxpayer must file, within one year of the building’s sale, a Form T2091(IND) - Designation of a Property as a Principal Residence by an Individual (Other Than a Personal Trust), for each of the units in the building covered by the designation. In the described situation, the taxpayer must file two T2091 forms in the year of the sale of the property if he is designating two units.

In calculating the capital gain, an allocation of the adjusted cost base ("ACB") and of the proceeds of disposition of a building made according to the area of each unit would, in some instances, be reasonable. However, the allocation must not necessarily be based on area. It must also take into account all factors that may affect the value of any of the units in the building.

Assuming that the value of Unit 1 in the described situation represented 50% of the value of the building, the proceeds of disposition of the unit would be $750,000. Assume also that the ACB attributable to this unit was $150,000. In such a case, the taxpayer would realize a capital gain of $600,000, of which part could be designated for purposes of the principal residence exemption.

Isabelle Landry
(450) 623-0193
October 7, 2016
2016-065284