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: Various questions relating to the principal residence exemption and change in use from income-producing to principal residence.
Position: General information provided.
2005-012695
XXXXXXXXXX Renée Shields
(613) 948-5273
March 1, 2006
Dear XXXXXXXXXX:
Re: Principal Residence Exemption
This is in response to your electronic correspondence of April 20, 2005 inquiring about the application of the principal residence exemption to various scenarios. We apologize for our delayed reply.
The situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. It is this Directorate's practice only to review proposed transactions involving specific taxpayers in the context of an advance income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular 70-6R5, "Advance Income Tax Rulings, dated May 17, 2002. This Information Circular and other CRA publications can be accessed on the internet at http://www.cra-arc.gc.ca. Your situation appears to involve a specific taxpayer and a completed transaction, and, if that is the case, you should submit all relevant facts and documentation to the appropriate Tax Services Office ("TSO") for their views. A list of TSOs is available on the "Contact Us" page of the CRA website.
You have described a situation in which an individual acquired a property and occupied it as his/her principal residence for a number of years. Subsequently, the property was rented to tenants for several years. The tenants vacated and the following year the taxpayer resumed occupation of the premises as a principal residence. Although we cannot answer your specific questions because of the multitude of factual contingencies, we can draw your attention to several factors that should be considered.
To qualify as an individual's principal residence, a particular property must satisfy various conditions, which are described in ¶3 - 6 of Interpretation Bulletin IT-120R6, "Principal Residence". In particular, we note that the individual or his/her spouse or common law partner must ordinarily inhabit the property in the year. Furthermore, the individual may not have designated another property as his/her principal residence. In a situation in which tenants vacate in one year, but the owner does not move into the premises until the following year, the property would not qualify as a principal residence until the year in which owner occupancy occurs.
When an individual starts to use a formerly income-producing property as his/her principal residence, a change of use occurs. As discussed in ¶28 of IT-120R6, "Principal Residence," a change of use generally triggers a deemed disposition of the property at its fair market value and an immediate reacquisition at the same value. The deemed disposition can result in a capital gain or loss. However, provided no capital cost allowance has previously been claimed with respect to the property, a taxpayer can elect under subsection 45(3) of the Income Tax Act to postpone reporting the disposition of the property until it is actually sold. This means an individual can defer recognition of a capital gain by electing that the deemed disposition and re-acquisition does not apply.
In your letter, you have referenced the use of the property's municipal assessment value as its value. This Directorate cannot comment on matters of valuation, as such determinations are always a question of fact. To discuss whether this is an appropriate measure of the property's fair market value, we recommend that you contact the Valuations Unit of your local TSO.
You have also asked about the deductibility of certain expenses incurred by a taxpayer to repair damage caused by the former tenants of the Property. If repairs are made to an individual's principal residence, these expenditures (i.e. repairs and maintenance) are not deductible under the Act as they are personal in nature.
If repairs are made to an income-producing property, it would have to be ascertained whether the work done constituted a capital expenditure which would be added to the cost of the property, or an expense deductible in the year. Whether an expenditure is capital in nature, because depreciable property was acquired or improved, or whether it is currently deductible, is largely a question of fact. Generally, an expenditure is considered to be of a capital nature when an enduring benefit ensues. The determination cannot be made by the application of any rigid test or definition. Rather, it is derived from an appreciation of the whole set of circumstances, some of which may point to the conclusion that the expenditure is capital in nature and others which indicate that it is an expense. While no single definition or test exists, the Courts have established a number of criteria. We can refer you to ¶4 of Interpretation Bulletin IT-128R, "Capital Cost Allowance - Depreciable Property" for a discussion of these criteria.
With respect to your questions regarding the length of time during which a person must reside in a property in order to designate it as his/her principal residence, we refer you to ¶5 of IT-120R6 wherein it states:
The question of whether a housing unit is ordinarily inhabited in the year by a person must be resolved on the basis of the facts in each particular case. Even if a person inhabits a housing unit only for a short period of time in the year, this is sufficient for the housing unit to be considered "ordinarily inhabited in the year" by that person. For example, even if a person disposes of his or her residence early in the year or acquires it late in the year, the housing unit can be considered to be ordinarily inhabited in the year by that person by virtue of his or her living in it in the year before such sale or after such acquisition, as the case may be.
Demolition of a principal residence would likely have no taxation effect because of the personal nature of the asset. If the property demolished is a property used for an income-producing purpose, whether demolition constitutes a disposition is a question of fact that would necessitate a review of the particular situation.
We trust that these comments will be of assistance.
Yours truly,
John Oulton, CA
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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