20 September 2005 External T.I. 2005-0128711E5 - Change in Use of Property

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: Can a non-resident taxpayer make the election under subsection 45(3) of the Act?

Position: Where there has been a change in use of a property from gaining or producing income in Canada to some other use and CCA has been taken on the property, the election under subsection 45(3) is deemed not to have been made by virtue of subsection 45(4) of the Act.

Reasons: Wording in the Act.

2005-012871
XXXXXXXXXX Luisa A. Majerus, CA
(613) 832-3488
September 20, 2005

Dear XXXXXXXXXX:

Re: Change in Use of Property

This is in reply to your letter dated May 3, 2005, requesting confirmation on the tax consequences of a change in the use of property owned by a non-resident individual.

Specifically, a property that is a condominium situated in Canada is owned and has been rented by a non-resident taxpayer from 1994 to 2004. The non-resident taxpayer has filed income tax returns under section 216 of the Income Tax Act (the "Act") reporting the annual rental income for the 1994 to 2004 taxation years. The non-resident deducted capital cost allowance in computing the income from property in 2001. In 2004, the non-resident's child began living in the condominium and rental income is no longer being earned. The condominium's use has changed from income earning to personal use. It is your view that the rules under subsection 45(1) of the Act apply to the non-resident taxpayer resulting in a deemed disposition of the property upon the change in use. You are inquiring whether the property becomes the principal residence of the non-resident taxpayer upon the change in use of the property and whether or not the election under subsection 45(3) of the Act can be made.

Our Comments

Generally, where a taxpayer has acquired property for the purpose of gaining or producing income and has commenced at a later time to use if for some other purpose (such as for the personal use of a non-arm's length person), as provided in subparagraph 45(1)(a)(ii) of the Act, subparagraph 45(1)(a)(iii) of the Act provides that the taxpayer is deemed to have disposed of the property at that later time for proceeds equal to its fair market value and subparagraph 45(1)(a)(iv) of the Act provides that the taxpayer is deemed to have immediately thereafter reacquired it at a cost equal to that fair market value. Paragraph 45(1)(d) of the Act provides that where the rules in subsection 45(1) are being applied to a non-resident taxpayer, the reference to "gaining or producing income" is read as "gaining or producing income in Canada".

Accordingly, in your situation, the non-resident taxpayer had acquired the condominium for the purpose of gaining or producing income in Canada and had commenced, in 2004 to use it for another purpose (i.e. to have his child reside there rent-free). Therefore, the non-resident taxpayer will have a deemed disposition of the property at the time of the change in use.

The deemed disposition under subsection 45(1) of the Act will not apply where an election is made under subsection 45(3) of the Act. The election can only be made where a property that was acquired for the purpose of gaining or producing income ceases to be used for that purpose and becomes the principal residence of the taxpayer. Principal residence is defined in section 54 of the Act to mean

...a particular property that is a housing unit...that is owned, whether jointly with another person or otherwise, in the year by the taxpayer, if

(a) where the taxpayer is an individual other than a personal trust, the housing unit was ordinarily inhabited in the year by the taxpayer, by the taxpayer's spouse or common-law partner or former spouse or common-law partner or by a child of the taxpayer...

It is a question of fact whether or not a particular property becomes the principal residence of the taxpayer. Based on the limited information provided, the condominium may be considered the principal residence of the taxpayer.

However, where a deduction in respect of the property has been allowed for any taxation year after 1984 and on or before the change in use under regulations made under paragraph 20(1)(a) of the Act (i.e. capital cost allowance "CCA") an election under 45(3) is deemed not to have been made.

Accordingly, since CCA has been taken on the property before the change in use, the election under subsection 45(3) of the Act cannot be made. Please note that any taxable capital gain arising from the deemed disposition in 2004 will need to be reported as provided under subsection 115(1) of the Act.

We trust this information is helpful.

Yours truly,

Phil Jolie
Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch