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: Will the principal residence exemption provided under paragraph 40(2)(b) of the Act be available to a recent immigrant to Canada with respect to a home owned in Korea?
Position: The principal residence exemption may be available in certain situations.
Reasons: Where the taxpayer begins to lease out his Korean home after becoming resident in Canada, it is our view that the change in use rules contained in subsection 45(1) of the Act would apply. Where subparagraph 45(1)(a)(i) of the Act would otherwise apply, the taxpayer would be entitled to make a subsection 45(2) election. The definition of "principal residence" in section 54 of the Act provides in paragraphs (b) and (d) that a property can qualify as a taxpayer's principal residence for up to four taxation years during which a subsection 45(2) election remains in force, even if the housing unit is not ordinarily inhabited during those years by the taxpayer, the taxpayer's spouse or common-law partner, or former spouse or common-law partner or a child of the taxpayer.
May 14, 2003
Robert Thomson HEADQUARTERS
International Tax Division Karen Power, CA
Burnaby-Fraser Tax Services Office (613) 957-8953
2003-001490
Principal Residence Exemption - Subsection 45(2) Election
We are writing in reply to your email of April 22, 2003 regarding the above-noted subject matter. You enquire whether the principal residence exemption provided under paragraph 40(2)(b) of the Income Tax Act (the "Act") would be available to an individual who recently became a resident of Canada (the "Taxpayer") with respect to a home owned in Korea and which was ordinarily inhabited by the Taxpayer prior to migration. It is our understanding that the real estate market in Korea is very volatile, consequently it is unusual for a taxpayer to sell their home in Korea prior to becoming resident of Canada. Generally upon migration the Korean home is leased out on a year-to-year basis to arm's length individuals until the real estate market improves, at which time the Korean home will be sold. You have indicated that in a typical situation, the Taxpayer, the Taxpayer's spouse or common-law partner or former spouse or common-law partner or a child of the Taxpayer will no longer ordinarily inhabit the Korean home after immigration to Canada.
We have assumed for purposes of our reply, that the requirements of subsection 54.1(1) of the Act will not be met.
As you know, pursuant to paragraph 128.1(1)(c) of the Act, at the time the Taxpayer becomes resident in Canada, he will be deemed to have acquired his Korean home at a cost equal to the fair market value of the home.
Where the Taxpayer begins to lease out his Korean home only after becoming resident in Canada, it is our view that the change in use rules contained in subsection 45(1) of the Act would apply. Subparagraph 45(1)(a)(i) of the Act provides that, where there is a change in use of property acquired for some other purpose to a use that is for the purpose of gaining or producing income, a taxpayer will be deemed to have disposed of the property for proceeds of disposition equal to the fair market value of the property at the time of change in use and to have reacquired it immediately thereafter at a cost equal to that fair market value. Where subparagraph 45(1)(a)(i) of the Act would otherwise apply, a taxpayer may, pursuant to subsection 45(2) of the Act, elect in his or her return of income for the year of change in use not to have begun to use the property for the purpose of gaining or producing income. Where the Taxpayer begins to lease out his Korean home only after becoming resident in Canada, it is our position that the Taxpayer in the above situation would be entitled to make a subsection 45(2) election.
The definition of "principal residence" in section 54 of the Act provides in paragraphs (b) and (d) that a property can qualify as a taxpayer's principal residence for up to four taxation years during which a subsection 45(2) election remains in force, even if the housing unit is not ordinarily inhabited during those years by the taxpayer, the taxpayer's spouse or common-law partner, or former spouse or common-law partner or a child of the taxpayer. Consequently, where the Taxpayer began to lease out the home after becoming resident in Canada and has filed a valid subsection 45(2) election, upon the subsequent sale of the Korean home, the Taxpayer may be entitled to shelter all or a portion of the capital gain which has accrued during the Taxpayer's residency period, pursuant to paragraph 40(2)(b) of the Act. This assumes that all of the other requirements for claiming the principal residence exemption have been met such as no other property is designated as a principal residence by a person described in subparagraph (c)(ii) of the "principal residence" definition in section 54 of the Act, and the land subjacent to the residence and any portion of the adjoining land is not in excess of 1/2 hectare unless the taxpayer establishes that the excess was necessary for the use and enjoyment of the housing unit as a residence.
The above analysis will not apply where a taxpayer commences to lease/rent his Korean home prior to becoming resident in Canada. As discussed above, a subsection 45(2) election is only available where subparagraph 45(1)(a)(i) of the Act would otherwise apply. In our view, where the change in use of the Korean home occurred during the period that the Taxpayer was non-resident, the requirements of subparagraph 45(1)(a)(i), read in conjunction with paragraph 45(1)(d) of the Act, cannot be met. As the subsection 45(2) election is not available, the Korean home cannot meet the requirement of paragraph 40(2)(b) of the Act that it be the Taxpayer's principal residence "after...the day on which the taxpayer last acquired or reacquired it" (i.e., after it was acquired under paragraph 128.1(1)(c) of the Act).
We trust our comments will be of assistance.
Milled Azzi, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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