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) whether a notification under subsection 116(3) is required when a non-resident person converts a seasonal vacation property from personal use to a rental property. B) whether a notification under subsection 116(3) will also be required when the property is converted back to personal use
Position: A) not if a valid election under subsection 45(2) is made; otherwise a notification would be required B) not if the subsection 45(2) election continues in force
Reasons: Where a valid subsection 45(2) election is made, there is deemed not to have been a change in use; consequently, there would not be a deemed disposition of the property
2005-011398
XXXXXXXXXX Ted Harris
(613) 957-2114
June 13, 2005
Dear XXXXXXXXXX:
Re: Notification Under Subsection 116(3)
We are writing in response to your email message of January 30, 2005, wherein you requested our opinion concerning the application of sections 45 and 116 of the Income Tax Act to the situation described below. Unless otherwise indicated, all statutory references herein are to the Income Tax Act (Canada).
An individual who is not resident in Canada (and has never been a resident of Canada) acquired Canadian real estate to be used as a seasonal vacation property. Sometime after the acquisition, the non-resident individual commenced to use the property exclusively to earn rental income. At a later date, the non-resident individual ceases to use the property to earn rental income and is considering either to commence to use it solely for personal use or to sell the property.
Your queries relating to the above situation are as follows:
If the non-resident individual makes an election under subsection 45(2) at the time that the property is converted from a personal-use property to a rental property, whether it would be necessary to file a notification under subsection 116(3) (i.e. form T2062).
Assuming that the subsection 45(2) election referred to above has not been rescinded and the individual decides to use the property solely for personal use, whether that election would still be valid once the individual ceases to use the property to earn rental income or would it be necessary to file an election under subsection 45(3) to defer recognition of any gain. You also enquire whether it would be necessary for the individual to file a notification under subsection 116(3) at this time.
If the individual decides to put the property up for sale, whether there would be a change in use. If so, whether the subsection 45(2) election would still be valid (on the assumption that it has not been revoked) or would it be necessary to file an election under subsection 45(3) to defer recognition of any gain. You have also enquired whether it would be necessary for the individual to file a notification under subsection 116(3) at this time or whether the length of time that it takes to sell the property would affect our response to this query.
The particular situation outlined above appears to relate to a factual one, involving a specific taxpayer. As explained in Information Circular 70-6R5, it is not the practice of this Directorate to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. Where the particular transactions have been completed, any enquiry should be addressed to the relevant tax services office. Although we cannot comment on a specific situation involving a particular taxpayer, the following comments may be of assistance.
As described in paragraph 25 of Interpretation Bulletin IT- 120R6 - Principal Residence, where a personal-use property has been completely converted to an income-producing use, subparagraph 45(1)(a)(i) deems the owner to have disposed of the property (both land and building) at fair market value (FMV) and to have reacquired it immediately thereafter at the same amount. The owner may, however, defer recognition of any gain to a later year by electing under subsection 45(2) which would then deem there not to be a change in use of the property. Where the owner is a non-resident person and a valid election is made under subsection 45(2), there will not be a deemed disposition or reacquisition of the property; consequently, notification under subsection 116(3) will not be required (i.e. the non-resident will not need to file a form T2062). The election under subsection 45(2) is explained in paragraphs 25 to 27 of IT-120R6.
If, at the time the property changes back to complete personal use after having been used solely for producing income, a valid subsection 45(2) election is still in effect, there would not be a change in use to which subsection 45(1) would apply as subsection 45(2) deems that the property did not begin to be used for the purpose of earning income. As there is no deemed disposition or reacquisition on this change in use, it will not be necessary for the owner to file a T2062 under subsection 116(3).
Paragraph 28 of IT 120R6 indicates, however, that where a property changes back to complete personal use after having been used solely for producing income and an election under subsection 45(2) is not in force, the owner is deemed by subparagraph 45(1)(a)(ii) to have disposed of the property (both land and building), and immediately thereafter to have reacquired the property, at FMV. Provided that the property is then used as the owner's principal residence, the owner may elect under subsection 45(3) to defer recognition of the gain to a later year. An election under subsection 45(3) is only available where the property in question does in fact become the principal residence of the person by virtue of being occupied as such. An intention to sell the property could influence whether the property will qualify as a principal residence. Also as indicated in paragraph 28 of IT-120R6, an election under subsection 45(3) is not possible if, for any taxation year ending after 1984 and on or before the change in use of the property from income producing to a principal residence, capital cost allowance has been claimed by the owner in respect of the property. Paragraph 41 of IT 120R6 discusses the circumstances where a non-resident person may be considered to have a principal residence in Canada. Where the owner is a non-resident and a valid subsection 45(3) election is made, there will not be a deemed disposition or reacquisition of the property and it will not be necessary for the owner to file a T2062 under subsection 116(3).
In the event that the non-resident owner continues to use the property during his or her vacations following the time that the property commences to be used to earn income, there would only be a partial change in use. As described in paragraph 30 of IT-120R6, where there is only a partial conversion of a personal use property to an income producing use, the deemed disposition and reacquisition at FMV will occur by virtue of paragraph 45(1)(c). A partial conversion may occur either where part of the property (for example, the basement or an office) has been converted to an income producing use or where the whole residence has been converted to an income producing use for part of the time. An election under subsection 45(2) or 45(3) cannot be made for a partial change in use. Consequently, it will be necessary for the owner to file a T2062 under subsection 116(3) for each of the deemed dispositions, being the change from personal use to include an income producing use and then the change back to only personal use.
Finally, a decision to sell a property will not generally, in and by itself, constitute a change in use for the purposes of subsection 45(1).
We trust that these comments will be of assistance. As stated in paragraph 22 of Information Circular 70-6R5, this opinion is not a ruling and, consequently, is not binding on the Canada Revenue Agency in respect of any particular situation.
Yours truly,
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Planning Branch
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