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: We have been asked about a situation where one individual (the "Owner") purchased a property (land and building) (the "Property") a number of years ago. Since the purchase of the Property, the Owner has lived in one of the six apartments and rented the other five apartments. The Owner now intends to sell the Property in the near future. The sale will result in a substantial capital gain. We have been asked whether the Owner can claim the principal residence exemption in respect of the five rental units when the Property is sold.
Position: General comments were provided indicating that the Owner could not claim the principal residence exemption in respect of those units. We also provided some general comments on the application of section 44 of the Income Tax Act (the "Act").
Reasons: The "ordinarily inhabited" requirement within the definition of "principal residence" in section 54 of the Income Tax Act (the "Act") would not be satisfied. In addition, a "housing unit" within the definition of "principal residence" is only considered to include one apartment in respect of an apartment building.
XXXXXXXXXX 2002-014669
M. Eisner, CA
July 25, 2002
Dear XXXXXXXXXX:
Re: Principal Residence Exemption
This is in reply to your letter of May 27, 2002 concerning the above-noted subject.
You have outlined a situation where, a number of years ago, one individual (the "Owner") purchased a particular property, consisting of land and a building containing six separate apartments (the "Property"). Since the purchase of the Property, the Owner and his family has lived exclusively in one of the six apartments and rented the other five apartments. The Owner now intends to sell the Property in the near future. As it is anticipated that the sale will result in a substantial capital gain, you have asked us about the principal residence exemption with respect to the Property (i.e., the entire property). You have also asked about the possibility of deferring the gain in the event that the principal residence exemption cannot be claimed on the entire Property. We assume you are referring to the election in subsection 44(1) of the Income Tax Act (the "Act").
At the outset, we note that written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5 (copy enclosed). Where the particular transactions are completed the enquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following comments, which are general in nature.
As you are no doubt aware, a detailed discussion of the principal residence exemption is set out in Interpretation Bulletin IT-120R5 "Principal Residence" (copy enclosed for your convenience).
The definition of "principal residence' in section 54 of the Act refers to, inter alia, property that is "a housing unit". Paragraph 3 of IT-120R5 indicates that a housing unit can include an apartment or unit in a duplex, apartment building, or condominium. However, the definition provides that for a property to be a taxpayer's principal residence for a particular year, the taxpayer must designate it as such and no other property may have been so designated by the taxpayer for the year. Furthermore, no other property may have been designated as the principal residence of any member of the taxpayer's family unit for the year, as described in paragraph 6 of IT-120R5 (the Owner can only designate one housing unit as his or her principal residence). It is, accordingly, our view that only one apartment or unit in respect of the Property could qualify as the Owner's principal residence.
Another requirement of the definition of "principal residence" is that the housing unit must be ordinarily inhabited in the year by the taxpayer, by the taxpayer's spouse or common-law partner or former spouse or common-law partner, or by a child of the taxpayer. The issue of whether a particular housing unit is inhabited in the year by a person must be resolved on the basis of the facts in each case. Where an individual lives in one apartment of a residential building while the other apartments are rented to persons other than those described above, it is our general view that the "ordinarily inhabited" requirement in respect of the rented apartments would not be satisfied. Accordingly, based on the information set out above, it follows that none of the five rental units in respect of the Property may be considered the Owner's principal residence for any year.
You may also wish to refer to paragraph 19 of IT-120R5 which includes some comments on the situation when there is a disposition of property, but only part of it qualifies as a principal residence.
Where a capital gain occurs as a result of a voluntary disposition of a capital property by a taxpayer, the capital gain may be deferred in certain circumstances by virtue of section 44 of the Act. One of the requirements, as set out in paragraph 44(1)(b) of the Act, is that the capital property which is the subject of the disposition must be a former business property immediately before the disposition (see enclosed Interpretation Bulletin IT-491 "Former Business Property"). As stated in part of paragraph 2 of IT-491, subsection 248(1) of the Act defines "former business property" to mean capital property that was used by the taxpayer or a person related to the taxpayer primarily for the purpose of gaining or producing income from a business, and that was real property or an interest in real property, but does not include rental property of the taxpayer. Paragraph 3 of IT-491 states that "Rental property" is excluded from the definition of "former business property" and is further defined to mean real property owned by the taxpayer and used in the particular year principally for the purpose of gaining or producing gross revenue that is rent. As a result of these comments, it follows that the Property would not be regarded as being a "former business property" with the result that no portion of the gain on the sale of the Property can be deferred by virtue of section 44 of the Act.
We trust that the above comments will be of assistance. Should you require further assistance, you may contact your local tax services office.
Yours truly,
for Director
Business and Partnerships Division
Income Tax Rulings
Policy and Legislation Branch
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