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: Can beneficial interest in a farmhouse used as a taxpayer's principal residence be severed from ownership of the balance of the farm property where ownership of the farmhouse cannot be legally severed from the balance of the farm property?
Reasons: The law.
June 21, 2017
Re: Principal Residence Exemption
This is in response to your correspondence dated February 10, 2017, in which you asked whether the principal residence exemption under paragraph 40(2)(b) of the Income Tax Act (“Act”) would be available to an individual in the following situation:
- An individual currently owns a single parcel of land used in the taxpayer’s farming business which also includes a property that is the taxpayer’s principal residence (the “farmhouse”).
- The farmhouse and the portion of land on which it is situated cannot legally be severed from the rest of the land that is used in the farming business.
- The individual would like to transfer the farm to a wholly-owned corporation that will carry on the individual’s farming business but also would like to retain beneficial ownership of the farmhouse.
You indicate that the individual wants to retain beneficial ownership of the farmhouse so the principal residence exemption can still be claimed when the entire property is ultimately sold by the corporation.
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 a particular transaction 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 70-6R7, Advance Income Tax Rulings and Technical Interpretations and the Directorate cannot confirm the tax treatment of completed transactions.
Nevertheless, we are prepared to offer the following general comments.
The availability of the principal residence exemption is primarily a question of fact, which cannot be determined without a complete understanding of all the relevant facts. Section 54 of the Act defines “principal residence.” Among other things, the definition requires that the property must be owned, whether jointly with another person or otherwise, in the year by the taxpayer. Only individuals or personal trusts meeting certain criteria can claim the principal residence exemption. Corporations and partnerships cannot claim the principal residence exemption.
Ownership can mean legal and/or beneficial ownership. It has been our longstanding view that in the described circumstances, the essential rights of ownership of a property used as an individual’s principal residence cannot be transferred or retained separate from the ownership of the rest of the property because the individual does not retain the right of alienation (that is, the ability to transfer the property). The right of alienation together with the right of possession, are the two essential elements of ownership in the context of a principal residence.
Therefore, in such circumstances it remains our view that the individual would not be able to claim the principal residence exemption on a subsequent disposition of the property by the corporation.
We trust these comments will be of assistance to you.
Michael Cooke, CPA, CA
Business Income and Capital Transactions Section
Business and Employment Division
Income Tax Rulings Directorate
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