7 October 2016 APFF Roundtable Q. 3, 2016-0652851C6 F - Annulation d'une promesse d'achat sur une maison -- translation

Principal Issues: 1- What is the tax treatment of an amount received by a vendor following cancellation of promise to purchase his/her personal house? 2- If it's a capital gain, can the vendor claim principal residence exemption? 3- For the buyer, is the amount paid a capital loss?

Position: 1- The vendor would realize a capital gain of $50,000. 2- Paragraph 40(2)(b) would not apply. 3- There is no disposition of property, consequently there would be no capital loss within the meaning of paragraph 39(1)(b).

Reasons: 1- The amount received by the vendor could be considered a proceed of disposition for the right arising out of the promise and if this right is a capital property as defined under section 54, the proceed of disposition should be taken into account in calculation of the capital gain. 2- Because the right arising out of the promise is a separate property from the personal house, the right would not qualify as principal residence. 3- The buyer has paid a damage.

7 OCTOBER 2016 APFF Roundtable

Question 3

Compensation for the Cancellation of an Offer to Purchase a House

An individual put the individual's personal home up for sale. An offer to purchase made by a third party was accepted by the individual. Before the transaction was notarized, the purchaser did an about face and sought to withdraw the offer to purchase. The buyer offered $50,000 in compensation to the individual, which the individual accepted.

Questions to the CRA:

(a) What is the tax treatment of the amount received by the individual? Is it taxable as income, taxable as a capital gain or simply exempt?

(b) If it is a capital gain, is it possible for the individual to be exempted through making the principal residence designation? If so, would the principal residence exemption still be available for the residence in question at the time of the actual disposition of the residence?

(c) In light of Technical Interpretation 2003-0037977, which specifies that the right to purchase a building may constitute property whose disposition may result in a capital loss, does the CRA agree that the capital loss would be deemed to be nil if the buyer was acquiring the house for personal use but that there would be an allowable capital loss if the buyer was acquiring the house for rental to unrelated persons?

CRA response to Q.3(a)

The CRA takes it as given that the buyer and vendor signed a "promise" within the meaning of section 1396 of the Civil Code of Québec. Furthermore, the CRA understands that the sum of $50,000 was paid to the vendor before a deed of sale of the personal residence was concluded.

The promise gave the vendor the right to bind the buyer to that promise, in particular, to execute a deed of sale in conformity with that promise. The term "property" as defined in subsection 248(1) is a broad term which could extend to rights under a promise.

In the situation you described, the CRA is of the view that the sum of $50,000 that the vendor received could be considered as proceeds of disposition of the vendor's right under the promise. Accordingly, if this right qualified as capital property as defined in section 54 of the Act, the vendor realized a $50,000 capital gain.

CRA response to Q.3(b)

Paragraph 40(2)(b) of the Act generally permits the gain, otherwise determined for the taxpayer from the disposition of any property that was the taxpayer’s principal residence at any time after the date of acquisition, to be eliminated or reduced based on the number of years for which the property was the primary residence of the taxpayer.

"Principal residence" is defined in section 54. A personal residence can usually qualify as a principal residence. However, as the right under the promise is a property distinct from the personal residence, this right could not qualify as a principal residence and paragraph 40(2)(b) would not apply.

CRA response to Q.3(c)

In brief, under paragraph 39(1)(b) a taxpayer’s capital loss for a taxation year from the disposition of any property is the taxpayer’s loss for the year determined under subdivision c of Division B of Part I of the Act.

The CRA is of the view that the purchaser is not entitled to a capital loss from paying the compensation of $50,000, since the purchaser had not disposed of property as defined in subsection 248(1).

Response prepared by:
Danny Gagnon
613-670-9030
October 7, 2016
2016-065285