27 August 2004 External T.I. 2004-0071341E5 - Principal Residence Exemp-Non-resident

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 a taxpayer can claim the principal residence exemption for taxation years throughout which the taxpayer was a non-resident of Canada?

Position: No.

Reasons: Pursuant to paragraph 40(2)(b) the use of the principal residence exemption by a taxpayer is limited by reference to the number of taxation years ending after the acquisition date during which the taxpayer was resident in Canada.

2004-007134
XXXXXXXXXX Karen Power, CA
(613) 957-8953
August 27, 2004

Dear XXXXXXXXXX:

Re: Principal Residence

We are writing in reply to your letter of February 3, 2004, wherein you requested our general comments concerning the principal residence exemption pursuant to paragraph 40(2)(b) of the Income Tax Act (the "Act").

Our Comments

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 or deemed to be disposed.

As explained in paragraph 41 of IT-120R6, the use of the principal residence exemption by a taxpayer is limited by reference to the number of taxation years ending after the acquisition date during which the taxpayer was resident in Canada. That is, as a result of variable B of paragraph 40(2)(b) of the Act (see variable B in paragraph 8 of IT-120R6) a taxpayer cannot claim the principal residence exemption in respect of a property for a taxation year throughout which the individual was a non-resident of Canada. This "resident in Canada" requirement typically prevents the non-resident from using the principal residence exemption to entirely eliminate a gain on the disposition of the property.

When a taxpayer completely converts a principal residence to an income-producing use, for tax purposes there is a deemed disposition of the property at fair market value and reacquisition immediately thereafter at the same amount (in respect of a non-resident taxpayer, the income producing use must be from a source in Canada). However, 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. An election under subsection 45(2) could allow a non-resident owning a property in Canada to defer a taxable capital gain that would otherwise result from a deemed disposition of a property on a change in its use. This election is made by means of a letter to that effect signed by the taxpayer and filed with the income tax return for the year in which the change in use occurred. If the taxpayer rescinds the election in a subsequent taxation year, he or she is deemed to have disposed of and reacquired the property at fair market value on the first day of that subsequent year.

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, as explained above, 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. Even though the non-resident may not get the full benefit of the principal residence exemption, as explained in paragraph 42 of IT-120R6, the 45(2) election could still serve to defer a capital gain resulting from a change in use.

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 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.

As regards to your questions on the reporting of the capital gains as a non-resident of Canada, reference may be made to Interpretation Bulletin IT-420R3 Non-residents-income earned in Canada, Information Circular 72-17R4 Procedures concerning the disposition of taxable Canadian property by non-residents of Canada - section 116 and the Non-Residents and Income Tax Guide (T4058).

Copies of Interpretation Bulletins, Circulars and Guides are available on the Internet at http://www.cra-arc.gc.ca/formspubs/menu-e.html.

We trust that our comments are of assistance to you. Should you wish to discuss how these general provisions apply to the facts of your particular situation you may contact the International Tax Service Office, 2204 Walkley Road, Ottawa, ON K1A 1A8.

Yours truly,

Milled Azzi, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch

c.c. M. Decelles

Toronto West TSO
448-2-1