6 October 2009 External T.I. 2008-0286721E5 - Principal residence exemption

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 a property can be designated as the taxpayer's principal residence for four years while the taxpayer is working overseas and the property is rented out to tenants and, 2) upon the taxpayer's return to Canada in 4 years, if in the fifth year the taxpayer continues to rent out the property to tenants but occupies a portion of the house for infrequent periods, whether the property can be designated as the taxpayer's principal residence in that fifth year.

Position: 1) Yes. 2) No.

Reasons: 1. ITA 45(2). 2. Paragraph 8, IT-120R6.

XXXXXXXXXX 								2008-028672
									Tim Fitzgerald, CGA
October 6, 2009

Dear XXXXXXXXXX :

We are responding to your letter of May 5, 2008, concerning the change in use of your principal residence and the principal residence exemption.

You mentioned in your letter that you and your spouse own a property in XXXXXXXXXX that is your principal residence and will be leaving Canada for approximately four years to work for your employer overseas. While you are working overseas, you plan to rent out the property in Canada. However, you will file an election under subsection 45(2) of the Income Tax Act (the "Act") to ensure that the deemed disposition of the property does not occur upon the change from non-income (i.e., personal) to income (i.e., rental) use and to permit you to designate the property as a principal residence during the four years you are working overseas. After four years overseas, you will return to work for the same employer in Canada during the fifth year. Then at the end of the fifth year, you expect to leave Canada to again work overseas.

In the fifth year during which you are in Canada, although your tenants will continue to rent your property in XXXXXXXXXX , you will live in part of your property "infrequently" when you are not traveling in Canada for your employer; alternatively, you will live in rental accommodation.

As we understand it, your question concerns how your living arrangements in the fifth year affect your election under subsection 45(2) of the Act and your designation of the property as a principal residence.

Our Comments

As explained in Information Circular 70-6R5, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. Where the situation involves specific taxpayers and completed transactions, all relevant facts and documentation should be submitted to the appropriate Tax Services Office for their views. However, we offer the following general comments, which may be of some assistance.

The income tax rules relating to a principal residence, including the conditions to be met for designating a property as a principal residence and the election under subsection 45(2) of the Act, are discussed in Interpretation Bulletin, IT-120R6, Principal Residence, which is available on the CRA website at http://www.cra-arc.gc.ca/E/pub/tp/it120r6/it120r6-e.html.

Generally, if a property qualifies as the taxpayer's principal residence, the taxpayer can use the principal residence exemption to reduce or eliminate any capital gain otherwise occurring, for income tax purposes, on the disposition (or deemed disposition) of the property. The term "principal residence" is defined in section 54 of the Act and generally includes a housing unit, together with the land where it is situated (generally not exceeding one-half hectare), that the taxpayer ordinarily inhabits and designates as a principal residence.

A property that otherwise meets the definition of a principal residence can qualify as a taxpayer's principal residence for up to four taxation years during which a subsection 45(2) election remains in force, even if the property is not ordinarily inhabited during those years by the taxpayer or a member of the taxpayer's family unit such as the taxpayer's spouse or common-law partner, former spouse or common-law partner or child. However, for the full benefit of the principal residence exemption under paragraph 40(2)(b) to apply the taxpayer must be resident in Canada in the year in respect of which the taxpayer designates a property as a principal residence.

Whether an individual is resident in Canada is a question of fact that generally revolves on the extent of personal and economic ties that the individual has with Canada. For more information concerning residence status, we refer you to the CRA's Interpretation Bulletin, IT-221R3 (Consolidated) - Determination of an Individual's Residence Status, which is available on the CRA website at http://www.cra-arc.gc.ca/E/pub/tp/it221r3-consolid/README.html.

Whether your house in XXXXXXXXXX will be capable of being designated as your principal residence in the fifth year for the purposes of claiming the principal residence exemption will depend, among other things, on whether you or a member of your family unit ordinarily inhabited the house in that year. 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. The expression "ordinarily inhabited" is discussed in paragraph 5 of IT-120R6.

If in the fifth year you continue to rent out the property to tenants and occupy only a portion of the house for infrequent periods, you would not generally be considered to have ordinarily inhabited the property in that year.

We trust our comments are of assistance.

Yours truly,

Sandy Parnanzone
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy & Regulatory Affairs Branch