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) Whether subsection 164(6) will apply to a situation in which a personal-use property that is a principal residence is transferred to a deceased's estate upon his death and then disposed of by the estate at loss?
(2) In those circumstances, how should a gain realized by the estate on disposition of the real property be characterised?
Position: (1) Generally yes.
(2) Generally capital gain.
Reasons: (1) and (2): Question of facts.
January 29, 2009
Re: Deceased taxpayer's principal residence sold by his estate
This is in reply to your letter of June 5th, 2008, requesting our comments regarding the application of subsection 164(6) of the Income Tax Act in the case where the principal residence of a deceased person is sold by his estate in the scenario described hereafter. We apologize for the delay in responding to your letter.
All statutory references in this memorandum are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended.
We understand the facts to be as follows:
1. At the time of taxpayer's death, the taxpayer owned a principal residence.
2. At that time, the fair market value ("FMV") of the principal residence is $200,000, as established by an independent expert evaluation.
3. Any gain on the property realized as a result of the operation of subsection 70(5) on the taxpayer's death is excluded from income by reason of the principal residence exemption provided under paragraph 40(2)(b).
4. Pursuant to the terms of the taxpayer's will, the above-mentioned property is put on the market and sold within the first taxation year of the estate.
5. The property remains unoccupied during the period of ownership by the estate i.e. from the date of death until its disposition.
6. The property has never been rented nor used in a business by the deceased or the estate.
7. The estate incurred selling expenses of $5,000 for the sale of the property.
More specifically, your questions are as follows:
(a) Whether subsection 164(6) will apply to a situation in which a personal-use property that is a principal residence is transferred to a deceased's estate upon his death and then disposed of by the estate for proceeds of $190,000?
(b) In those circumstances, how would a gain realized by the estate on a disposition of the real property for proceeds of $210,000 be characterised?
Position and comments
The particular circumstances outlined in your letter seem to relate to a factual situation involving specific taxpayers. As explained in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, the Income Tax Rulings Directorate of the Canadian Revenue Agency ("CRA") does not comment on transactions involving specific taxpayers except by way of an advance income tax ruling in respect of proposed transactions. When the situation involves a specific taxpayer and a completed transaction, the question should be directed to the appropriate Tax Services Office of the CRA for their review. This review is completed after you have submitted all the relevant facts and documentation. Nevertheless, we are prepared to offer the following general comments which may be of assistance. Our comments constitute technical interpretations. They are not income tax rulings and are not binding on the CRA.
The following comments are made on the assumption that the deceased taxpayer's will provides for the sale of the former principal residence by the estate instead of its direct distribution to the heirs of the deceased.
The deceased person and his estate are distinct taxpayers. Hence, the qualification of a property owned by an estate, generally as inventory, depreciable capital property or non-depreciable capital property, has to be made on its own merits and facts.
In the situation described above, we are of the view that the real property would generally qualify as a non-depreciable capital property to the estate. This position is based on the circumstances under which the estate acquired the real property, and on the facts that the property has been unoccupied since acquisition and has not been rented or otherwise used to earn income.
The question of whether a capital property is a personal-use property as defined in section 54 is also one of facts. As a result, the loss incurred on the sale of such property will be denied pursuant to subparagraph 40(2)(g)(iii). Pursuant to subparagraph (a)(iii) of the definition of personal-use property, the personal-use property in the case of a trust includes property owned by the taxpayer that is used primarily for the personal use or enjoyment of a beneficiary under the trust or any person related to the beneficiary.
Accordingly, where the estate disposes of the property in the situation described below, the question that must be answered is whether the property was used primarily for the personal use or enjoyment of the heirs of the deceased or persons related to them during the period following the death and before the sale. A residence owned by an estate which has not been used by any of the estate's beneficiaries or any person related to the beneficiaries, would, in our view, not meet the requirements of subparagraph (a)(iii) of the definition of personal-use property as found in section 54. Therefore, such a capital loss would not be deemed to be nil pursuant to subparagraph 40(2)g)(iii) and may be deductible against capital gains.
Where an estate realizes such capital loss in its first taxation year and the legal representative of the deceased taxpayer makes an election under subsection 164(6) in a timely manner, the amount, if any, by which all capital losses realized by the estate exceed the amount of all capital gains realized by the estate in that taxation year may be deemed to be capital losses of the deceased taxpayer to the extent provided by subsection 164(6).
Consequently, in response to question (a) exposed above, subsection 164(6) may apply to the capital loss of $15,000 incurred by the estate, provided that all the requirements of this provision are met, whereas concerning question (b), the estate should generally realize a capital gain of $5,000. However, the particular facts in specific circumstances may lead to different conclusions.
We trust the above comments will be of some assistance.
Alain Godin, Manager
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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