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: A taxpayer owned a home for his son's use while in attendance at university. The son and his four roommates all paid rent, which was reported annually and offset by the related expenses. Whether or not the gain on the proposed sale of the home will be taxable.
Reasons: The home was used principally for the purpose of gaining or producing rental income and therefore does not qualify as a principal residence. The disposition of the home will result in a taxable capital gain.
Kathryn McCarthy, CA
March 10, 2005
Re: Sale of a Rental Property
We are writing in response to your letter of January 12, 2005, concerning the above noted subject.
You described a home you own for your son's use while in attendance at university. Your son and his four roommates all paid rent which you reported annually, offset by the related expenses. You enquired as to whether or not the gain on the proposed sale of the home will be taxable under the Income Tax Act (the Act). Further, you enquired whether the purchase of a principal residence immediately, or at some future time, could shelter the gain.
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 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. We are, however, prepared to provide the following comments.
Generally, the principal residence exemption can eliminate or reduce a capital gain on the disposition of a taxpayer's principal residence. In order for a home to qualify for designation as the taxpayer's principal residence, he or she must own the home. Joint ownership with another person qualifies for this purpose. The home generally must be inhabited by the taxpayer or by his or her spouse or child. A taxpayer can designate only one home as principal residence for a particular taxation year and, in that regard, only one home per family unit can be so designated.
To qualify as a principal residence, the main reason for owning the home must not be for the purpose of gaining or producing income. In our view, the entire home retains its nature as a principal residence where the income-producing use is ancillary to the main use of the home as a residence, and no CCA is claimed on the home. These conditions can be met, for example, where a taxpayer carries on a business of caring for children in his or her home, rents one or more rooms in the home, or has an office or other work space in the home which is used in connection with his or her business or employment. In these and similar cases, the taxpayer reports the income and may claim the expenses (other than CCA) pertaining to the portion of the home used for income-producing purposes.
In our opinion, the home you describe was used principally for the purpose of gaining or producing rental income and therefore does not qualify as a principal residence. The disposition of the home will result in a taxable capital gain. For more information see Interpretation Bulletin IT-120R6, Principal Residence, which is available on our website at http://www.cra-arc.gc.ca/E/pub/tp/it120r6/it120r6-e.html and the T4037, Capital Gains Guide, at http://www.cra-arc.gc.ca/E/pub/tg/t4037/t4037-e.html.
We trust our comments will be of assistance to you.
John Oulton, CA
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch
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