18 October 1989 Income Tax Severed Letter 7-4304 - [Principal Residence Rules]

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

This is in reply to your memorandum of September 1, 1989 wherein you requested our opinion on the applicability of the principal residence rules pursuant to paragraphs 54(g) and 40(2)(b) of the Income Tax Act (the "Act") in the following situation.

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You have requested our opinion on whether the individual, in this case, is entitled to claim the principal residence exemption pursuant to paragraph 40(2)(b) of the Act or, if not, whether the taxpayer is entitled to claim a capital gains deduction pursuant to subsection 110.6(3) of the Act.

We would comment at the outset that from the limited information submitted we are unable to determine with any certainty whether the taxpayer sojourned in Canada in the year for a period of, or periods the aggregate of which is 183 days, or more in order to be considered a deemed resident in Canada pursuant to paragraph 250(1)(a) of the Act. We are also unable to determine with any certainty if the cottage property was ordinarily inhabited by the taxpayer in the year of disposition or any previous year for the purposes of the principal residence exemption. Nevertheless, it appears to us that the taxpayer is a non-resident of Canada for tax purposes and on this basis we offer the following comments.

By virtue of subparagraph 69(1)(b)(ii) of the Act, the taxpayer will be deemed to have received proceeds of disposition equal to the fair market value of her interest in the property which is disposed of by way of a gift. Real property or an interest in real property situated in Canada is considered to be "taxable Canadian property" as that term is defined in subsection 248(1) of the Act. In accordance with subsections 2(3) and 115(1) of the Act, taxable capital gains realized by a non-resident on the disposition of taxable Canadian property are subject to tax in Canada.

Paragraph 9 of Article XIII of the Canada-U.S Income Tax Convention (1980) may apply to provide some relief from Canadian tax in respect of a gain realized on the disposition of capital property In Canada by a U.S. resident. The effect of this provision is to reduce the amount of the capital gain liable to tax in Canada by the proportion of the gain attributable to the period ending on December 31, 1984. In effect, the gain would be calculated as the amount by which the proceeds of disposition, or deemed proceeds of disposition in the case of a non-arm's length gift, exceed the fair market value of the property on December 31, 1984.

It is our view that, in the above situation, the taxpayer is not entitled to claim the principal residence exemption pursuant to paragraph 40(2)(b) of the Act as the taxpayer is not a resident of Canada as required by subparagraph 40(2)(b)(i) of the Act. Additionally, as the taxpayer is not considered a resident of Canada, the capital gains deduction is not available to the taxpayer as subsection 110.6(3) of the Act states, in part, "In computing the taxable income for a taxation year of an individual (other than a trust) who was resident in Canada throughout the year...".

We trust our comments will enable you to respond to the taxpayer.