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: Whether there is a deemed disposition as a result of the change in use.
Position: General comments.
Reasons: Subject to subsection 45(3), where a taxpayer has acquired capital property for the purpose of gaining or producing income and has commenced at a later time to use it for some other purpose, pursuant to subparagraph 45(1)(a)(iii) of the Act, the taxpayer is deemed to have disposed of the property at that later time for proceeds equal to its fair market value and, pursuant to subparagraph 45(1)(a)(iv) of the Act, to have immediately thereafter reacquired it at a cost equal to that fair market value. Subsection 45(3) provides for an election to defer the deemed disposition if the property becomes the taxpayer's principal residence (e.g., another property is not designated as a principal residence by the taxpayer or a member of the taxpayer's family unit) and CCA was not previously claimed in respect of the rental property.
2007-023734
XXXXXXXXXX Joy Bertram, B.Comm,
CGA, CPA(vt)
957-8954
August 9, 2007
Dear XXXXXXXXXX:
This is in response to your facsimile of May 24, 2007 and is further to our telephone conversation of July 16, 2007 concerning the change in use of real property. We apologize for the delay in responding.
You indicated that you acquired a real property and used it for the purpose of earning rental income for several years and recently ceased renting it and began using it for personal use, permitting your adult son to reside there rent-free. You are unsure whether you are required to obtain a property valuation, as at the date the change in use occurred, in order to report any related capital gain in the 2007 taxation year.
As a result of our telephone conversation (Bertram/XXXXXXXXXX), it is our understanding that you own another separate property, which is your principal residence, and that you are unsure whether capital cost allowance (CCA) in respect of the rental property has ever been deducted.
Your question is whether there is a deemed disposition of the rental property for tax purposes as a result of the change in use.
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. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the internet at http://www.cra-arc.gc.ca. 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 general comments for your guidance.
As a general rule, when a rental property ceases to be such and starts to be used for personal purposes the property is deemed to be disposed of at fair market value. If the property appreciated in value, a capital gain will arise from the deemed disposition. The deemed disposition may also give rise to a recapture of CCA previously claimed. More specifically, where a taxpayer has acquired capital property for the purpose of gaining or producing income and has commenced at a later time to use it for some other purpose, pursuant to subparagraph 45(1)(a)(iii) of the Act, the taxpayer is deemed to have disposed of the property at that later time for proceeds equal to its fair market value and, pursuant to subparagraph 45(1)(a)(iv) of the Act, to have immediately thereafter reacquired it at a cost equal to that fair market value. This rule would apply for the purpose of computing capital gains. Another tax provision, paragraph 13(7)(a) of the Act, contains a similar deemed disposition rule on a change in use of depreciable property that may result in the recapture of CCA, if it had been deducted in previous taxation years in respect to the property. If these provisions are applicable in the case of a particular property, a valuation of the property would be required since the property is deemed to have been disposed of at fair market value at the time of change in use.
However, there is an exception to the above general rule regarding capital gains that would allow a taxpayer to elect to defer the recognition of a disposition until the property is actually disposed of, provided certain conditions are met. Pursuant to subsection 45(3), an election may be made which will nullify the deemed disposition under subsection 45(1) mentioned above. The election can only be made where a capital property that was acquired by a taxpayer for the purpose of gaining or producing income ceases to be used for that purpose and becomes the "principal residence" of the taxpayer and, as well, where no CCA was previously claimed and allowed in respect of the property. If the conditions for making this election in the case of a particular property are satisfied and in fact the owner of the property makes such election, a valuation of the property when it changes use would not be required.
It is a question of fact whether or not a particular property is a "principal residence" of a taxpayer for income tax purposes. "Principal residence" is defined in section 54 of the Act and is discussed in Interpretation Bulletin IT-120R6, which is available on the Canada Revenue Agency's website at http://www.cra-arc.gc.ca. A property can be a taxpayer's principal residence if it meets certain conditions. One of the conditions to be met is that the property must ordinarily be inhabited by the taxpayer, the taxpayer's spouse or common-law partner, or the taxpayer's child (of any age), and must be designated as a principal residence. However, we would mention that, as more fully explained in paragraph 6 of IT-120R6, after 1981 only one property can be designated as a principal residence by a taxpayer for a particular year and that no other property can be so designated for the year by the taxpayer or a member of the taxpayer's family unit. For the purpose of the designation, a taxpayer's family unit would generally include the taxpayer, the taxpayer's spouse or common-law partner, and the taxpayer's children (unmarried and not living in a common-law partnership) less than 18 years of age. Accordingly, assuming no CCA was claimed on your rental property prior to its change in use, an election under subsection 45(3) of the Act is only available to you where the property in question does in fact become your "principal residence" by virtue of being ordinarily inhabited as such and where no other property has been designated as a principal residence in the years in question by you or a member of your family unit.
We trust the above will be of assistance to you.
Yours truly,
S. Parnanzone
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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