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 variable B in the formula in par. 40(2)(b) can be equal to at least 1 in this situation. 2. Discussion of deemed disposition rules concerning a change in use of a principal residence located in Canada and what happens to such property when the taxpayer becomes a resident or a non-resident of Canada.
Position: 1. Yes 2. General comments.
XXXXXXXXXX 2011-041573
Michael Cooke, C.A.
August 30, 2011
Dear XXXXXXXXXX :
Re: Principal Residence - Election where change-in-use
We are writing in reply to your e-mail correspondence of August 2, 2011, wherein you requested our views on the income tax consequences under the Income Tax Act (the "Act") concerning the sale of a real property situated in Canada (the "Property") in the following situation.
Briefly, we understand that an individual (the "Taxpayer") purchased and used the Property as his personal residence until the Taxpayer emigrated from Canada. The Property was converted to a rental property at that time and the Taxpayer filed an election under subsection 45(2) of the Act for the taxation year during which the Property's use changed. No capital cost allowance has ever been claimed on the Property. The Taxpayer has recently returned to Canada and now wants to sell the Property. The Property continues to be rented.
You have asked for our assistance concerning the computation of the capital gain and the claiming of the principal residence exemption.
Our Comments
Written confirmation of the tax implications inherent in particular transactions may only be provided by this Directorate where the transactions are proposed and are the subject matter of an advance income tax ruling submitted in the manner set out in Information Circular (IC) 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office ("TSO"). Copies of the Canada Revenue Agency's ("CRA") publications and a listing of TSOs are available on the CRA's website. We are however, prepared to provide the following general comments, which may be of assistance.
A detailed discussion of the tax consequences where an individual ceases to be resident in Canada or becomes resident in Canada is beyond the scope of this response. However, in very general terms, an individual owning real property situated in Canada and emigrating from Canada, or immigrating to Canada, will not have a deemed disposition and deemed reacquisition of such property under the rules in section 128.1 of the Act in respect of such property (unless an individual emigrating from Canada makes a voluntary election under paragraph 128.1(4)(d) of the Act). For more information on these deemed disposition and reacquisition rules please refer to http://www.cra-arc.gc.ca/tx/nnrsdnts/ndvdls/dspstn-eng.html. For information on whether an individual is considered resident in Canada please refer to Interpretation Bulletin, IT-221R3 (Consolidated) - Determination of an Individual's Residence Status.
If a property qualifies as a taxpayer's principal residence, an exemption can be claimed under paragraph 40(2)(b) of the Act to reduce or eliminate any capital gain otherwise realized on the disposition of the property (the "principal residence exemption"). The CRA's comments on the principal residence exemption are set out in Interpretation Bulletin IT-120R6 Principal Residence. Under variable "B" in the formula found in paragraph 40(2)(b) of the Act, a property can only be designated as a taxpayer's principal residence for a taxation year that ends after its acquisition date and during which the taxpayer was resident in Canada and for which the property was the taxpayer's principal residence. For this purpose, the taxpayer does not have to be resident in Canada throughout the entire taxation in order to make a designation for that year. Paragraph 8 of IT-120R6 discusses the formula applicable for calculating the capital gain on the disposition of a principal residence. The period during which a residence can qualify as a taxpayer's principal residence can be extended by one year (even when the taxpayer was never resident in Canada) by adding one to the number of taxation years for which the property was otherwise so designated.
When a taxpayer completely converts a principal residence to an income-producing use, generally there is a deemed disposition of that property for deemed proceeds of disposition equal to its fair market value at that time and a deemed reacquisition of such property immediately thereafter for those same deemed proceeds pursuant to the rules in subsection 45(1) of the Act. However, any capital gain that may otherwise result from this deemed disposition may be eliminated or reduced by claiming the principal residence exemption. Alternatively, and as more fully explained in Paragraphs 25 to 27 of IT-120R6, it may be possible for a taxpayer to make an election under subsection 45(2) of the Act to defer the application of the deemed disposition and reacquisition rules in subsection 45(1) of the Act. As also explained in paragraph 26 of IT-120R6, while a property can qualify as a taxpayer's principal residence for up to four taxation years during which a subsection 45(2) election remains in force, the taxpayer must also be resident, or deemed to be resident, in Canada during those taxation years in order to be able to designate the property as a principal residence for those additional years.
We trust that our comments are of assistance to you.
Yours truly,
Sandy Parnanzone
Manager
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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