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: 1) To determine if the rental property can be reclassified to Class 6 for CCA purposes.
2) To determine if the capital gain accrued to the time the property's use changes from rental to a principal residence can be deferred for tax purposes.
Position: 1) Request should be made to the local Tax Services Office.
2) Yes.
Reasons: 1) Where the rental property is a building of frame construction and has no footings or any other base support below ground level, it can be reclassified into Class 6 for CCA purposes. The Minister may make any reassessment pursuant to subsection 13(6).
2) Where the taxpayer makes an election under subsection 45(3), the capital gain accrued during the period the property was used for rental purposes can be deferred for tax purposes.
2005-011767
XXXXXXXXXX Luisa A. Majerus, CA
(613) 832-3488
May 17, 2005
Dear XXXXXXXXXX:
Re: Rental Property
This is in reply to your facsimile dated February 21, 2005, with respect to the above-noted subject matter.
Together you own a rental property consisting of a bungalow (the "house") with a detached garage (the "garage"). The garage does not have a foundation. The house and the garage are rented to separate tenants. Capital cost allowance ("CCA") has been taken on the garage from 1998 to 2004. The capital cost of the garage was included in Class 1 of Schedule II of the Income Tax Regulations (the "Regulations"). The house is going to be occupied by both of you, as your principal residence beginning in 2005 and will no longer be rented. The garage will continue to be rented. You have asked us to confirm that the garage can be reclassified into Class 6 of Schedule II of the Regulations for CCA purposes instead of Class 1. You have also asked us to confirm that any accrued capital gain on the house, at the time it is to become a principal residence, can be deferred for tax purposes until the final disposition of the property.
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 income tax 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. However, we offer the following general comments.
Generally, the appropriate CCA classification of depreciable property for purposes of Schedule II of the Regulations is determined by reference to the particular property and all of the relevant facts applicable to a specific situation. A request for reclassification and revisions to CCA schedules should be addressed to your local tax services office.
Please refer to paragraph 7 of our Information Circular IC 84-1, " Revision of Capital Cost Allowance Claims and Other Permissive Deductions" (" IC 84-1") which outlines the circumstances under which requests for reclassifications and revisions to CCA schedules will be accepted by the Canada Revenue Agency.
Where a taxpayer has completely changed the use of a property from income-producing to a principal residence, he or she is deemed by paragraph 45(1)(a) of the Income Tax Act (the "Act") to have disposed of the property (both land and building) and immediately thereafter reacquired it, at fair market value. This deemed disposition can result in a taxable capital gain. However, in response to your second query, under certain conditions an accrued capital gain may be deferred for tax purposes if the taxpayer elects under subsection 45(3) of the Act so that the above-mentioned deemed disposition and reacquisition rule under paragraph 45(1)(a) does not apply. 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 property is ultimately disposed of. It should be noted, however, that an election under subsection 45(3) of the Act cannot be made 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, CCA has been allowed in respect of the property to the taxpayer, the taxpayer's spouse or common-law partner. CCA so allowed would cause subsection 45(4) of the Act to nullify the subsection 45(3) election. For more information please refer to paragraphs 28 and 29 of our Interpretation Bulletin IT-120R6, "Principal Residence".
Our publications can be found on our website at www.cra-arc.gc.ca. We trust this information meets your needs at the current time.
Yours truly,
John Oulton, CA
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch
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