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: Calculation of principal residence exemption where subsection 40(4) applies.
Position: In general terms, the effect of subsection 40(4) of the Act is to make it possible for the individual/transferee to claim the principal residence exemption under paragraph 40(2)(b) of the Act for taxation years when the property would have been the transferor's principal residence. For the property to have been the spouse/transferor's principal residence, the spouse/transferor must have been eligible to so designate it, i.e., the property must have otherwise met the definition of a principal residence of the spouse/transferor for the years in question.
Reasons: Review of the law, previous position in particular E950769
2004-007505
XXXXXXXXXX Karen Power, CA
(613) 957-8953
November 3, 2004
Dear XXXXXXXXXX:
Re: Principal Residence
We are writing in reply to your letter of May 4, 2004 requesting our views on the application of the principal residence exemption under paragraph 40(2)(b) of the Income Tax Act (the "Act") to a particular fact scenario.
You describe the following situation:
1. Mr. A has been the sole owner of a residence ("city home") throughout the period from 1972 to 1996.
2. Mr. A's spouse Mrs. A has been the sole owner of a residence ("cottage") throughout the period from 1972 to 1996.
3. Mr. A and Mrs. A ordinarily inhabited both dwellings from 1972 to 1996.
4. Mr. A died in 1996. Upon death, the city home was transferred to Mrs. A on a rollover basis pursuant to subsection 70(6) of the Act. Mr. A has not designated any property as his principal residence for the years 1972 to 1996.
5. Mrs. A sold the cottage in 1996. Mrs. A designated her cottage as her principal residence for the years 1972 through to 1995.
6. Mrs. A has continued to own and ordinarily inhabit the city home since 1996.
Your enquiry relates to the principal residence exemption, as it would apply to a future sale of the city home by Mrs. A.
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 the Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an Advance Income Tax Ruling. However, we are prepared to offer the following general comments, which may be of assistance. We would also caution that these comments are based on the laws as currently enacted such that on a future disposition of the city home you should ensure that these comments still apply.
The Canada Revenue Agency's position on the "principal residence exemption" is set out in Interpretation Bulletin IT-120R6. If a property qualifies as a "principal residence", an exemption can be claimed under paragraph 40(2)(b) of the Act to reduce or eliminate any capital gain otherwise realized on the disposition of the property.
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, where the designation is for a year after 1981, 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-120R6.
As you are aware, when subsection 70(6) of the Act applies to the transfer of property to an individual upon the death of a spouse, subsection 40(4) of the Act deems certain conditions to have been met for the purpose of determining the amount of capital gain realized, if any, under paragraph 40(2)(b) of the Act on the subsequent disposition of the property by the individual. Pursuant to paragraph 40(4)(a) of the Act, the individual is deemed to have owned the property throughout the period during which the individual's spouse owned it. In addition, pursuant to subparagraph 40(4)(b)(i) of the Act, the property is deemed to have been the individual's principal residence for any year for which it would have been the spouse's principal residence, if the spouse had designated it to be his or her principal residence for that year.
In our view, in general terms, the effect of subsection 40(4) of the Act is to make it possible for the individual/transferee to claim the principal residence exemption under paragraph 40(2)(b) of the Act for taxation years when the property would have been the spouse/transferor's principal residence. For the property to have been the spouse/transferor's principal residence, the spouse/transferor must have been eligible to so designate it, i.e., the property must have otherwise met the definition of a principal residence of the spouse/transferor for the years in question.
In the circumstances described above, it is our view, that on the eventual disposition of the city home by Mrs. A subsection 40(4) of the Act will apply and pursuant to paragraph (a) thereof she will be deemed to have owned the city home throughout the time Mr. A owned it. In addition, subparagraph 40(4)(b)(i) of the Act will deem the city home to be Mrs. A's principal residence for the purposes of the principal residence exemption calculation under paragraph 40(2)(b) of the Act for the years 1972 to 1981, provided the city home would have been Mr. A's principal residence for those years if he would have designated it as such. Mr. A would have been unable to designate the years 1982 to 1995 because Mrs. A designated the cottage as her principal residence upon its disposition in 1996 and, for taxation years after 1981, only one property can be designated as a principal residence for a particular year per family unit. Finally Mrs. A will be entitled to designate the city home as her principal residence for the years from 1996 until the year of disposition assuming it meets all the requirements of the definition of principal residence for each of those years.
As noted in your letter, the provisions of subsection 40(6) of the Act will also be relevant in calculating the gain on Mrs. A's disposition of the city home. In that respect, you may wish to refer to Appendix A of IT-120R6, which provides examples on how to calculate the principal residence exemption in situations where a property has been owned continuously since before 1982.
Copies of Interpretation Bulletins and Information Circulars are available from your local tax services office or on the Internet at the following site - http://www.cra-arc.gc.ca/formspubs/type/menu-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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