31 May 2000 External T.I. 2000-0004615 - PRINCIPAL RESIDENCE-NO DESIGN. MADE

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: Statutory authority for par 13 of IT 120R4. Does a taxpayer who seeks to claim a principal residence at a point in time subsequent to the disposition of another otherwise eligible property precluded from doing so ?

Position: YES,

Reasons: Although no designation was made, the earlier return satisfying the principal residence exemption was used for those years at that time.

XXXXXXXXXX 2000-000461
C. Tremblay
Attention: XXXXXXXXXX

May 31, 2000

Dear Sir:

Re: Designation as a Principal Residence

This is in reply to your letter of January 17, 2000, wherein you requested us to clarify whether or not a taxpayer would be denied the principal residence exemption in the situation described in your letter. You state that a taxpayer who had previously disposed of a property ("1st property") eligible for the principal residence exemption subsequently disposes of another property ("2nd property") that was owned during the same period (and subsequent) as the 1st property. Even though a gain (i.e. a gain computed without reference to paragraph 40(2)(b) of the Income Tax Act (the "Act")) was realized on the disposition of the 1st property, the transaction was not reported on the tax return and the taxpayer now wishes to claim the principal residence exemption on the disposition of the 2nd property. You specifically ask whether the Canada Customs and Revenue Agency (the "Agency") would take the position that since no tax was paid on the earlier gain that the principal residence exemption must have been used at that time even though no designation was made by the taxpayer. In this respect you ask us to clarify the statement made in paragraph 13 of Interpretation Bulletin IT-120R4 as you are concerned that the principal residence exemption would not be available on the disposition of the 2nd property.

Our Comments:

The particular circumstances in your letter on which you have asked for our views appears to be a factual situation involving a specific taxpayer. As explained in Information Circular 70-6R3, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate taxation services office for their views. However, we are prepared to offer the following general comments which may be of assistance.

Pursuant to subsection 2301(a) of the Income Tax Regulations (the "Regulations"), any designation of property as a principal residence for any taxation year shall be made in the taxpayer's income tax return for the taxation year in which he or she disposed of the property. However, our long-standing position and the one you referred to is now stated in paragraph 6 of Interpretation Bulletin IT-120R5, and is as follows:

"Form T2091 (IND) need not be completed and filed with the taxpayer's income tax return unless:

(a) a taxable capital gain on the disposition of the property remains after using the principal residence formula (as shown in paragraph 7 of IT-120R5), or

(b) the taxpayer, or his or her spouse, has filed Form T664 or T664(Seniors), Election to Report a Capital Gain on Property Owned at the End of February 22, 1994.

Note that if a taxpayer using the principal residence exemption formula (as shown in paragraph 7 of IT-120R5) to eliminate a gain on the disposition of property is not, because of the above-mentioned administrative position, required to complete and file Form T2091(IND), he or she is still considered to have designated the property as his or her principal residence (i.e., to have claimed the principal residence exemption for that property) for the years in question."

The position in paragraph 6 of IT-120R5 that a taxpayer will be considered to have made the designation only applies to those situations where a taxable capital gain would have been realized on the disposition of the property if not for paragraph 40(2)(b) of the Act. For example, it would be possible to make a principal residence designation for the 2nd property with respect to those taxation years during which the 1st property was owned if no gain was realized on the 1st property (i.e. proceeds of disposition did not exceed the adjusted cost base). However, in our opinion, where an individual ordinarily inhabits a residence, realizes a gain on the sale of that residence and does not report the transaction on his income tax return in the year of disposition, the taxpayer is considered to have made a designation in accordance with paragraph 2301(a) of the Regulations and to have simply followed the practise provided for in paragraph 6 of IT-120R5.

It should be noted that subsection 220(2.1) of the Act provides the Minister with the authority to waive prescribed forms.

If you have an actual transaction that involves a situation similar to the one described in your letter, you should contact your local tax services office (TSO). We would be glad to assist the TSO on this matter should they request our help.

We trust that these comments will be of assistance.

Yours truly,

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

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