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Principal Issues: [TaxInterpretations translation] How should the taxable capital gain of an individual who holds, as undivided co-owner, a 50% interest in a triplex of which he uses one of the units as a principal residence, be calculated?
Position: General comments.
Reasons: The capital gain of the individual depends on the value of the housing unit used by the individual as principal residence in relation to the value of his undivided interest in the triplex at the time of acquisition and at the time of disposition.
FEDERAL TAX ROUNDTABLE 5 OCTOBER 2012
2012 APFF CONFERENCE
Sale of a triplex owned jointly by an individual and his father
An individual held a triplex equally with his father in undivided co-ownership. The individual lived in the triplex building, while the father did not live in that building. The size of each unit was 1,200 square feet, for a total area of 3,600 square feet in the building.
In 2012, the individual and his father sold the building. The individual realized a taxable capital gain of $90,000 on his portion, or 50% of the triplex. He wants to make an election, for the years he lived in that building, to designate it as his principal residence.
The portion of the triplex that was used for personal purposes may qualify as a principal residence. Thus, nothing prevents the individual, since he lived in the triplex, from designating that housing unit as his principal residence.
Furthermore, Technical Interpretation 2010-0375501E5 specifies that a unit in a triplex may be designated as a principal residence, where each unit is an independent housing unit. Moreover, in the same Interpretation, it is stated that an individual who is an undivided co-owner of a triplex can designate the unit of the triplex in which he normally resides as his principal residence if all the conditions of the definition of principal residence provided for in section 54 are otherwise satisfied. The CRA also reached the same conclusions with respect to a duplex in Technical Interpretations 2011-0395001I7 and 2010-0354361E5.
In the scenario presented, it is our view that the son could exempt up to two-thirds of the realized capital gain, since he lived in a 1,200 square foot unit that he designated as his principal residence, out of a total of 1,800 square feet held in the building (1,200/1,800 = ?). As a result, the individual's taxable capital gain would be $30,000, since two-thirds of the taxable capital gain of $60,000 ($90,000 x ?) would be exempted following the designation of the unit inhabited by the individual as his principal residence. As for the father, we understand that 100% of the gain would be taxable.
Questions to the CRA
In the situation described above,
a) In light of our comments on the presented scenario, does the CRA agree with the result of our calculation of the taxable capital gain for that individual?
b) If the CRA does not agree with the result of our calculation, can the CRA specify how the individual’s taxable capital gain in the particular situation should be calculated based on the Interpretations published in 2010 and 2011?
The situation you described involved the disposition of property (the individual’s undivided interest in the triplex) by a taxpayer (the individual) of which only a portion (the unit he used as a principal residence) qualifies as a principal residence. In accordance with paragraph 19 of Interpretation Bulletin IT-120R6, Principal Residence, the question of how to calculate the individual's taxable capital gain in the particular situation depends on the value of the housing unit used by the individual as principal residence in relation to the value of the individual’s undivided interest in the triplex at the time of acquisition and at the time of disposition.
While a breakdown of the adjusted cost base and proceeds of disposition of the individual's undivided share as a function of the floor area of the unit used by the individual as a principal residence in relation to the total floor area of the building may, in some cases, be a reasonable allocation, the allocation does not necessarily have to be on the basis of floor area. Consideration should also be given to any factors which could have an effect on the relative value of any of the units in the building.
Assuming that the value of the three housing units is essentially the same and that the agreements between the individual and his father regarding the use of the building support such a conclusion, we could accept that the value of the individual’s undivided share of the triplex is attributable as to 2/3 for the housing unit of housing used by him as principal residence and as to 1/3 to the remainder of the triplex.
A definitive determination, however, would require a review of all the facts surrounding the acquisition and disposition of the triplex, the agreements made between the individual and his father and a valuation of the building and each of the three units.
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