6 March 2001 External T.I. 2001-0068875 - PRINCIPAL RESIDENCE-CAPITAL OR INCOME

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:

1) Whether real property could be considered the taxpayer's principal residence under paragraph 40(2)(b) of the Act;

2) Whether the sale of such property can be considered on income or capital account.

Position:

1) Question of fact;

2) Question of fact.

Reasons:

1) In the event a gain resulting from the proposed transactions would be on account of capital, for a property to qualify as a taxpayer's principal residence, it must be demonstrated inter alia that the property was ordinarily inhabited by the taxpayer or his or her spouse, former spouse or child. Both issues involve questions of fact for which insufficient information was provided;

2) From the facts submitted, the taxpayer has not established that, on a balance of probabilities, when the property was purchased he did not have either a primary or secondary intention of selling it at a profit. Moreover, the taxpayer is an experienced realtor and the property was heavily financed. The facts submitted cannot allow us to conclude definitely as to the nature of any gain resulting from the proposed transactions.

XXXXXXXXXX 	2000-006887
		Patrick Massicotte
March 6, 2001

Dear XXXXXXXXXX:

Re: Principal residence - Capital or Income

We are writing in response to your letter of inquiry of December 27, 2000 and your further correspondence of February 16, 2001 in which you requested our views on whether certain property could be considered your "principal residence" for the purposes of the Income Tax Act (the "Act"). You also question whether a gain on the proposed disposition of real property would be on account of income or capital.

Our Comments

As explained in Information Circular 70-6R4 dated January 29, 2001, 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. Where the particular transactions are completed, all relevant facts and documentation should be submitted to the appropriate taxation services office for their views. Although we are unable to provide any opinion in respect of the specific transactions you propose to carry out, we have set out some general comments that may be of assistance.

If a property qualifies as a principal residence, an exemption can be claimed under paragraph 40(2)(b) of the Act to reduce or eliminate any capital gain otherwise occurring on the disposition of the property. The term "principal residence" is defined in section 54 of the Act. In order for a property to qualify for designation as a taxpayer's principal residence for a taxation year, it must be demonstrated inter alia that he or she owns the property, and that it is ordinarily inhabited in the year by the taxpayer or his or her spouse, former spouse or child.

A taxpayer can designate only one property as his or her principal residence for a particular taxation year. Furthermore, for a taxation year that is after the 1981 year, only one property per family unit can be designated as a principal residence (see paragraph 6 of enclosed interpretation bulletin IT-120R5, Principal Residence).

If the land on which the housing unit is situated is not in excess of one-half hectare, it usually qualifies as part of the taxpayer's principal residence. Land in excess of one-half hectare may also qualify, but only to the extent that the taxpayer establishes that it was necessary for the use and enjoyment of the housing unit as a residence. As mentioned in paragraph 15 of IT-120R5, the excess land must clearly be necessary for the housing unit to properly fulfill its function as a residence and not simply be desirable. Land in excess of one-half hectare could be so necessary where the size or character of a housing unit together with its location on the lot make such excess land essential to its use and enjoyment as a residence, or where the location of a housing unit requires such excess land in order to provide its occupants with access to and from public roads. Other factors are discussed in the interpretation bulletin.

A gain arising on the sale of real estate may usually be considered to be business income or a capital gain. The word "business" is defined in subsection 248(1) so as to include, inter alia, an adventure or concern in the nature of trade. This definition can cause an isolated transaction involving real estate to be considered a business transaction. As a business, any gain or loss that arises therefrom is, by virtue of section 9 of the Act, required to be included in computing income or loss, as the case may be.

As mentioned in interpretation bulletin IT-218R, Profit, Capital Gains and Losses from the Sale of Real Estate, Including Farmland and Inherited Land and Conversion of Real Estate from Capital Property to Inventory and Vice Versa (copy enclosed), there is no provision in the Act which describes the circumstances in which gains from the sale of real estate are to be determined as being on account of income or capital. However, in making such determinations, the courts have considered different factors. The issue generally involves a determination of the facts of each case. No one factor is conclusive, however the taxpayer's motivation in purchasing the property is usually significant (see Doody. v. The Queen, 2000 DTC 2086; Schlamp v. The Queen, 82 DTC 6274; Welton v. MNR, 78 DTC 1848). A taxpayer has to establish, on a balance of probabilities, that when the property was purchased, he or she did not have either a primary or secondary intention of selling it at a profit. Other factors involve inter alia the taxpayer's knowledge, experience and the extent to which borrowed money was used to finance the acquisition and the terms of such financing.

The facts you submitted cannot allow us to draw definitive conclusions as to the nature of the different alternative transactions you are considering. However, in the event they are considered as being on account of income, no exemption could be claimed under paragraph 40(2)(b) of the Act.

We regret that we cannot be of further assistance. We trust however that our comments are of assistance.

Yours truly,

Milled Azzi, CA
For Director
Business and Partnerships Division
Income Tax Rulings Directorate

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