26 March 1998 External T.I. 1998-9801995 - principal residence

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 CCRA.

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

Principal Issues:

The taxpayer's cottage was occupied by her daughter who bears the cost of carrying the property. The amount paid by the daughter for rent was far below the FMV of the rent that could be earned. Will the Department accept a principal residence designation in respect of the cottage while it was rented to the daughter?

Position: Yes. The cottage qualifies.

Reasons:

The cottage meets the "ordinarily inhabited' test by virtue of the child of the taxpayer residing therein on a year-round basis. Whether the cottage was an "income producing property" or a "personal-use property" is not relevant with respect to the issue of whether it is eligible to be designated as a principal residence in circumstances where the tenant was the child of the taxpayer.

XXXXXXXXXX 980199
A. M. Brake
Attention: XXXXXXXXXX

March 26, 1998

Dear Sirs:

Re: Principal Residence

This is in reply to your letter of December 10, 1997 relating to whether a taxpayer would be entitled to claim a principal residence exemption on a cottage property, in the situation which can be described as follows:

1. The taxpayer acquired a house in 1986 which the family occupied on and off, since that time.

2. In 1989 the taxpayer acquired land upon which a cottage was constructed in 1990.

3. In the fall of 1991, the taxpayer's daughter and her family moved into the cottage. It was the intention at the time to stay there until they could find suitable housing in the area. They did not leave until the summer of 1997 when they relocated to another city.

4. The daughter paid the taxpayer an amount to cover the expenses of the cottage that included property taxes, hydro, as well as repairs and maintenance. The amount of the reimbursement was far below the fair market value of the rent that could have been earned. Possibly only 50% of what the market would bring.

Your concern with respect to the principal residence exemption relates to the fact that rent was charged the daughter, albeit, that it was intended to only cover expenses.

Our Comments

Paragraph 5 of Interpretation Bulletin 1T-120R4, Principal Residence, states "The housing unit must be ordinarily inhabited in the taxation year by the taxpayer or by the spouse, former spouse or a child of the taxpayer." Hence, the fact that the taxpayer's daughter resided all year round in the cottage, under the circumstances described above, from the fall of 1991 to the summer of 1997, the cottage will have met the "ordinarily inhabited" test for these years. In our view, based on the foregoing, the cottage could be designated as a principal residence by the taxpayer for the years in which it was occupied by the child of the taxpayer.

The foregoing comments represent our general views with respect to the subject matter of your letter. As indicated in paragraph 22 of Information Circular 70-6R3 dated December 30, 1996, this is not an advance tax ruling and is therefore not binding on Revenue Canada.

We trust our comments will be of assistance to you.

Yours truly,

Jim Wilson
for Director
Business and Publications Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch