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 CRA has the authority/discretion to accept from an executer of the estate of a deceased taxpayer, a late-filed subsection 45(2) election so that, for purposes of completing the final tax return of the deceased, the deceased taxpayer can claim the principal residence exemption for up to 4 years during which the election, if accepted, is in force.
Reasons: See 2008-026574
Tim Fitzgerald, CPA, CGA
August 22, 2014
This is in reply to your correspondence of June 12, 2014, which was forwarded to us from the XXXXXXXXXX Tax Centre, concerning subsection 45(2) of the Income Tax Act (Canada) ("Act").
You described a situation where a taxpayer, Mr. A" (an elderly widower), moved from his home (the "Property") to a nursing home where he remained until he died some XXXXXXXXXX years later. During the period that he was living in the nursing home, Mr. A rented out the Property to unrelated tenants. Mr. A did not elect under subsection 45(2) of the Act with respect to the change in use of the Property. You mentioned that for purposes of reporting his rental income, Mr. A never claimed capital cost allowance ("CCA") in respect of the Property.
Your concern relates to the change in use of the Property, in the last XXXXXXXXXX years of Mr. A's life during which he lived in the nursing home, and whether the Property can be designated as Mr. A's principal residence for those years. Specifically, as it relates to Mr. A's final income tax return, you would like to know whether the Canada Revenue Agency ("CRA") can accept from the executor, a late-filed subsection 45(2) election in respect of the Property, which generally operates to deem there to be no change in use for up to four taxation years.
This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular, IC 70-6R5, "Advance Income Tax Rulings".
Whether for a year a particular property of a taxpayer is the taxpayer's "principal residence", as defined in section 54 of the Act, is a question of fact. For further information concerning principal residences, please see Income Tax Folio, S1-F3-C2 "Principal Residence", on the CRA website.
Also discussed in Income Tax Folio, S1-F3-C2, are the rules relating to a change in use of a property from principal residence to income-producing. Generally, if a taxpayer has completely converted their principal residence to an income-producing use, the taxpayer is deemed by paragraph 45(1)(a) of the Act to have disposed of the property at fair market value and to have reacquired it immediately thereafter at the same amount. Any gain otherwise determined on this deemed disposition may be reduced or eliminated by the principal residence exemption. However, the taxpayer may, instead, defer recognition of any gain to a later year by electing under subsection 45(2) to be deemed not to have made the change in use of the property. This election is made by means of a letter to that effect, signed by the taxpayer, and filed with the income tax return for the year in which the change in use occurred. A property can qualify as a taxpayer's principal residence for up to four taxation years during which the subsection 45(2) election remains in force, even if during those years the housing unit was not ordinarily inhabited by the taxpayer or by their spouse or common-law partner, former spouse or common-law partner, or child. However, among other things, the taxpayer must be resident, or deemed to be resident, in Canada during those years for the full benefit of the principal residence exemption to apply.
Generally, subsection 220(3.2) of the Act, together with section 600 of the Income Tax Regulations, provides the authority for the CRA to accept a late-filed subsection 45(2) election. A late-filed election may be accepted under certain circumstances, one of which is that no CCA has been claimed on the property since the change in use has occurred and during the period in which the election is to remain in force. For further information concerning late-filed elections, please see Information Circular, IC 07-1 "Taxpayer Relief Provisions" on the CRA website.
With respect to the conditions for accepting a late-filed election as set out in Information Circular, IC 07-1, generally, the fact that an executer late-filed the subsection 45(2) election on behalf of a deceased taxpayer, would not, in and of itself, prevent the CRA from accepting the election. However, a late-filed election accepted by virtue of subsection 220(3.2) of the Act is subject to penalty as set out in subsection 220(3.5).
We trust that these comments will be of assistance.
Michael Cooke, C.P.A, C.A.
Business Income and Capital Transaction Section
Business and Employment Division
Income Tax Rulings Directorate
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