27 March 1991 Ministerial Letter 903578 F - Principal Residences

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.

Dear Sirs:

This is in reply to your letter of December 18, 1990 asking for our views on two hypothetical situations involving principal residences.

The two hypothetical situations are set out below.

Situation I

(a)     Mr. A and Mrs. A are married;

(b)     In 1975, Mr. A purchased a house that was registered in his  name;

(c)     In 1975, Mrs. A purchased a cottage that was registered in   her name;

(d)     Mr. A and Mrs. A. ordinarily inhabited both dwellings from 1975 to 1990;

(e)     In 1986, the legal ownership of both the house and the cottage was switched to joint tenancy; and

(f)     Subsection 73(1) of the Income Tax Act (the Act) applied to  each of the property transfers.

Situation II

(a)     Mr. A and Mrs. A. are married;

(b)     In 1975, Mr. A and Mrs. A purchased a home and cottage with both properties being owned by them in joint tenancy;

(c)     Mr. A and Mrs. A ordinarily inhabited both dwellings from 1975 to 1990;

(d)     In 1986, legal ownership of the two properties was changed from joint tenancy to sole ownership.  The house was registered in Mr. A's name and the cottage was registered in Mrs. A's name;

(e)     In 1989, the ownership of the two properties was changed back to joint tenancy; and

(f)     Subsection 73(1) applied to each of the properties.

In the case of both of the above situations, the house and cottage were sold in 1990.

You have asked for confirmation that the changes in ownership in these two situations do not affect the principal residence protection of the properties in the pre-1982 period.

In the first situation, Mr. A designated the house to be his principal residence for the years 1975 to 1990 and Mrs. A designated the cottage to be her principal residence for the years 1975 to 1981.  We confirm that the pre-1982 gains on the sale of the cottage and the house would be exempt.  We would add that subsection 40(6) of the Act would apply to the gain on the disposition of the cottage.

With respect to the second, more complex situation, we are providing more detailed comments.  In this situation, the house would be Mr. A's principal residence from 1975 to 1989 under paragraph 54(g) of the Act provided that it has been designated as such by him for those years.  These comments are also consistent with the position in paragraph 6 of Interpretation Bulletin IT-366R, "Principal Residence-Transfer to Spouse, Spouse Trust or Certain Other Individuals".  On the transfer of an interest in the house to Mrs. A in 1989, she is deemed to have owned that interest from 1975 to 1989 pursuant to subsection 40(4) of the Act.  Also,under this provision, the interest is deemed to be her principal residence during those years for the purposes of paragraph 40(2)(b) of the Act.  With respect to Mr. A, he is likewise deemed to have owned the interest in the house acquired in 1986 from 1975 to the acquisition date and he has designated the house to be his principal residence for those years.  We confirm, therefore, that the pre-1982 gains on the sale of the house are tax exempt under paragraph 40(2)(b) of the Act.

In principal, the circumstances concerning the cottage are similar to the house except that Mrs. A has designated the cottage to be her principal residence for the years 1975 to 1981.  Accordingly, we agree that the pre-1982 gains are exempt.  It is also our view that subsection 40(6) of the Act is relevant to the gains.

In commenting on the above situations, we have assumed that Mr. and Mrs. A were residents of Canada for all the relevant years and that the land related to the cottage and the land related to the house are as described in paragraph 54(g) of the Act.

We trust our comments will be of assistance to you.

Yours truly,

for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch