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.
Principal Issues: Whether section 54.1 applies to extend the principal residence exemption beyond the 4-year period if the taxpayer does not resume to ordinarily inhabit the original residence?
Position: No.
Reasons: Section 54.1 requires that the taxpayer resume ordinary habitation of the housing unit during the term of employment by that same employer or before the end of the taxation year immediately following the taxation year in which such employment terminates.
2004-005685
XXXXXXXXXX Karen Power, CA
(613) 957-8953
June 3, 2004
Dear XXXXXXXXXX:
Re: Principal Residence
We are writing in reply to your letter of January 16, 2004, requesting our views on whether a particular residence, which is located in XXXXXXXXXX and which you and your family previously ordinarily inhabited, can qualify as a "principal residence" under the Income Tax Act (the "Act"). We understand that both you and your spouse have been either residents or deemed residents of Canada throughout the period of ownership of your property, that you and your family relocated as a result of a relocation of your place of employment with your employer (who is not related to you or your spouse), and that both you and your spouse filed valid elections under subsection 45(2) of the Act and have never claimed capital cost allowance on the property.
The particular circumstances in your letter on which you have asked for our views involve a factual situation concerning a specific taxpayer. As explained in Information Circular 70-6R5, 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. If your situation involves a completed transaction, you should submit all relevant facts and documentation to the appropriate tax services office for their views. However, we are prepared to offer the following general comments, which may be of assistance. For purposes of this reply, we have assumed that the attribution rules would not apply with respect to any capital gain on the disposition of the above property. These rules are explained in Interpretation Bulletin IT-511R entitled "Interspousal and Certain Other Transfers and Loans of Property".
Generally, a housing unit owned by a taxpayer may be designated as the taxpayer's principal residence for each year that it is ordinarily inhabited by the taxpayer or by his or her spouse or child. There are, however, a number of other requirements which must be met for a property to qualify as a taxpayer's principal residence, and these requirements are explained in Interpretation Bulletin IT-120R6 entitled "Principal Residence". Where a property qualifies as an individual's principal residence, the principal residence exemption may be used by that individual to reduce or eliminate any capital gain otherwise occurring either when the property is disposed of or deemed to be disposed of.
When a taxpayer completely converts a principal residence to an income-producing use, there is a deemed disposition of the property at fair market value and reacquisition immediately thereafter at the same amount. Any gain otherwise determined on this deemed disposition may be eliminated or reduced by the principal residence exemption. However, as you are aware, the taxpayer may choose to defer recognition of any gain to a later year by electing under subsection 45(2) of the Act to be deemed not to have made the change in use of the property.
As explained in paragraph 26 of IT-120R6, 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 or by his or her spouse or common-law partner, former spouse or common-law partner, or child. However, the taxpayer must be resident, or deemed to be resident, in Canada during those years for the full benefit of the principal residence exemption to apply.
Section 54.1 of the Act removes the above-mentioned four-year limitation for taxation years covered by a subsection 45(2) election if all of the following conditions are met:
(a) the taxpayer does not ordinarily inhabit the housing unit during the period covered by the election because the taxpayer's or his or her spouse's or common-law partner's place of employment has been relocated;
(b) the employer is not related to the taxpayer or his or her spouse or common-law partner;
(c) the housing unit is at least 40 kilometers farther from such new place of employment than is the taxpayer's subsequent place or places of residence; and
(d) either
? the taxpayer subsequently resumes ordinary habitation of the housing unit during the term of employment by that same employer or before the end of the taxation year immediately following the taxation year in which such employment terminates; or
? the taxpayer dies during the term of such employment.
If, as you have suggested, you sell your residence in XXXXXXXXXX, such that you will not resume to ordinarily inhabit this residence, following the termination of your employment, the conditions of section 54.1 of the Act will not have been met. Consequently, since you and your family have not ordinarily inhabited your XXXXXXXXXX residence since XXXXXXXXXX , the residence can only qualify as a principal residence for four taxation years during the period of XXXXXXXXXX to present. As a result, when the XXXXXXXXXX property is disposed of, only part of the gain otherwise determined can be eliminated by the principal residence exemption.
However, based on the limited information provided, if you and your wife resume to ordinarily inhabit the XXXXXXXXXX residence, before the end of the taxation year immediately following the taxation year in which you terminate your employment, the requirements of section 54.1 will likely have been met. The question of whether a housing unit is ordinarily inhabited in the year by a person must be resolved on the basis of the facts in each particular case. However, it is our view that should a person move into their original home for a few days before moving to a new house, he or she would likely not be considered to have resumed "ordinary habitation" in the original home. The term "ordinarily inhabited" is explained in detail in paragraph 5 of Interpretation Bulletin IT-120R6. As noted above, the other requirements for claiming the principal residence exemption are also explained in IT-120R6, such as the restrictions on having only one property per family unit designated as a principal residence for a taxation year (see paragraph 6 of IT-120R6) and the restrictions on lot size (see paragraphs 14 to 16 of IT-120R6). Copies of Interpretation bulletins are available on the Internet at http://www.cra-arc.gc.ca/tax/technical/incometax/current-e.html.
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 Planning Branch
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