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: Whether subsection 164(6) of the Act will apply to a situation in which a personal-use property that is a principal residence is transferred to a testamentary trust (estate) upon the death of its owner and then disposed of by the estate at a loss.
Position: Question of Fact
Reasons: Pursuant to subparagraph (a)(iii) of the definition of "personal-use property" in the case of a trust includes property that is used primarily for the personal use or enjoyment of a beneficiary under the trust or any person related to the beneficiary. A residence owned by an estate which has not been used by any of the estate's beneficiaries or any person related to the beneficiaries, would, in our view, not meet subparagraph (a)(iii) of the definition of personal-use property as found in section 54 of the Act and therefore a deductible capital loss (to which subsection 164(6) may apply) can be created on its disposition.
2002-014895
XXXXXXXXXX Karen Power, CA
( 613) 957-8953
September 10, 2002
Dear XXXXXXXXXX:
Re: Loss on Sale by an Estate of Former Principal Residence
This is in reply to your letter of June 21, 2002, requesting our comments regarding the application of subsection 164(6) of the Income Tax Act (the "Act") in the following scenario.
1. At the time of a taxpayer's death, the taxpayer owned a principal residence.
2. Any gain on the property realized as a result of the operation of subsection 70(5) on the taxpayer's death is excluded from income by reason of the principal residence exemption provided under paragraph 40(2)(b) of the Act.
3. Pursuant to the terms of the taxpayer's will, the above-mentioned property is put on the market and sold within the first taxation year of the estate. The property remains unoccupied from the date of death until its disposition (during the period of ownership by the estate). The property was never rented nor used in a business by the deceased or the estate.
4. The estate incurs selling expenses which, in computing the gain or loss from the disposition by the estate, results in a capital loss.
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, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. The following comments are, therefore, of a general nature only and are not binding on the Canada Customs and Revenue Agency.
As requested, we have assumed that the will provides for the sale of the property. The will or other relevant laws will generally determine whether the appointed representative of the estate has the right to sell the capital property of the estate and distribute the cash proceeds to the beneficiaries rather than simply distributing the property to the heirs of the deceased to deal with as they choose.
Depreciable property of a taxpayer is defined under the Act as property acquired by the taxpayer in respect of which the taxpayer has been allowed, or would be entitled to if the Act were read without reference to the available for use restriction, a deduction under paragraph 20(1)(a) of the Act in computing income for that year or a preceding taxation year. Paragraph 20(1)(a) allows a deduction in respect of the capital cost of the property as allowed by regulation. Paragraph 1102(1)(c) of the Income Tax Regulations provides that capital property will not be included in a prescribed class unless it was acquired by the taxpayer for the purpose of gaining or producing income. Where the capital property has not been acquired for the purpose of gaining or producing income, the taxpayer would not be entitled to a deduction under paragraph 20(1)(a) and consequently the property would not be considered depreciable property for purposes of the Act.
Whether a capital property is acquired for the purpose of gaining or producing income is a question of fact to be determined on a case-by-case basis, however, in the situation you describe, where the residence has been unoccupied since acquisition and has not been rented or otherwise used to earn income, in our view the property would not have been acquired for the purpose of gaining or producing income and consequently would be considered a non-depreciable capital property to the estate.
The question of whether a property is a "personal-use property" and therefore whether a loss on the disposition of the property is denied pursuant to subparagraph 40(2)(g)(iii) of the Act is also one of fact. Pursuant to subparagraph (a)(iii) of the definition of "personal-use property" in section 54 of the Act, the "personal-use property" in the case of a trust (estate) includes property that is used primarily for the personal use or enjoyment of a beneficiary under the trust (estate) or any person related to the beneficiary. Accordingly, where the estate disposes of the property, the question that must be answered is whether the property was used primarily for the personal use or enjoyment of the heirs of the deceased or persons related to them during the period following the death and before the sale.
A residence owned by an estate which has not been used by any of the estate's beneficiaries or any person related to the beneficiaries, would, in our view, not meet the requirements of subparagraph (a)(iii) of the definition of personal-use property as found in section 54 of the Act and therefore a deductible capital loss can be created on its disposition.
Where an estate realizes such a capital loss in its first taxation year and the legal representative of the deceased taxpayer makes an election under subsection 164(6) of the Act in a timely manner, the amount, if any, by which all capital losses realized by the estate exceed the amount of all capital gains realized by the estate in that taxation year may be deemed to be capital losses of the deceased taxpayer to the extent provided by subsection 164(6).
We trust that our comments are of assistance to you.
Yours truly,
Milled Azzi, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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