4 October 2013 External T.I. 2013-0504531E5 - Capital loss on personal cottage

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 the taxpayer can claim a capital loss on a cottage destroyed by flood.

Position: No.

Reasons: No loss may be claimed on personal-use property.

XXXXXXXXXX
2013-050453
Whitney Dunn

October 4, 2013

Dear XXXXXXXXXX:

Re: Property destroyed by flood

This is in response to your email of September 12, 2013, where you asked for our views on whether you can claim a capital loss for your cottage that was totally destroyed by a flood. You indicated that the cottage was situated on rented land, and from the limited facts provided, it appears that the cottage was used for your personal enjoyment.

Our comments

Written confirmation of the tax consequences that apply to a proposed fact situation is given by this Directorate only in the context of an advanced income tax ruling request submitted in the manner set out in Information Circular 70-6R5, "Advanced Income Tax Rulings", dated May 17, 2002. This Information Circular and other Canada Revenue Agency publications can be accessed on the internet at http://www.cra-arc.gc.ca/formspubs/menu-e.html. Where a particular transaction has already been completed, a review of the relevant facts and circumstances surrounding the situation would be required. Such review would normally be conducted by the applicable Tax Services Office during the course of an income tax audit, which, if undertaken, would be carried out after the particular taxpayer has prepared and filed its income tax return for the year.

Notwithstanding the foregoing, we are prepared to provide the following general comments that may be of assistance.

Generally speaking, under the rules in the Income Tax Act (Act), the amount of a taxpayer's capital gain or capital loss arising from the disposition of a capital property is determined by subtracting from the proceeds of disposition, if any, the taxpayer's adjusted cost base of the property and any outlays or expenses incurred to dispose of the property, if any. A property is considered to have been disposed of where it is destroyed, even if there is no entitlement or right to compensation (such as insurance proceeds). However, to the extent a taxpayer receives government assistance as compensation for a property that has been destroyed, such assistance is generally considered to be proceeds of disposition for that property and treated in the same manner as insurance proceeds.

In addition, the Act prevents a taxpayer from deducting any capital loss arising from a disposition of a "personal-use property" (i.e., a property owned by a taxpayer that is used primarily for the personal use or enjoyment of the taxpayer or a person related to the taxpayer) by deeming the loss to be nil. However, capital gains arising from the disposition of a personal-use property are taxable, subject to the existence of a specific exception in the Act, such as where a property is designated as a taxpayer's principal residence.

Since your cottage appears to be a personal-use property, to the extent that you have realized a capital loss from its destruction, unfortunately you would not be able to deduct such loss.

We trust that these comments are of assistance.

Michael Cooke, C.P.A., C.A.
Manager
Business Income and Capital Transaction Section
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch