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.
XXXXXXXXXX
Attention: XXXXXXXXXX
Dear Sirs:
RE: Capital Gains Exemption on Real Estate disposed of after February 1992
We are replying to your letter of January 20, 1993 concerning the effect of a transfer of property between spouses on the transferee's ability to claim a capital gains exemption on any subsequent disposition thereof. We apologize for the delay in providing a response.
Section 110.6 of the Income Tax Act (the Act) was amended by Chapter 24 of the 1993 Statutes (Bill C-92) which received Royal Assent on June 10, 1993 to limit the capital gains exemption claimed in respect of real estate gains. In general terms, this limitation is accomplished by first distinguishing "non-qualifying real property" (as that term is now defined in subsection 110.6(1) of the Act) from other types of capital property. Where non-qualifying real property was acquired after February 1992, no capital gain exemption will be permitted in respect of the disposition thereof. For non-qualifying real property owned prior to February 1992, a capital gain exemption will be available only to the extent of the "eligible real property gain" as defined in subsection 110.6(1) of the Act. You ask whether an individual who has acquired property from a spouse after February 1992 will be able to claim a capital gains exemption on the subsequent disposition of that property.
The proposed legislation includes two paragraphs, 110.6(18)(b) and (c) of the Act respectively, which deal with the situation where non-qualifying real property has been transferred between spouses.
Paragraph 110.6(18)(b) of the Act applies in the situation where a particular gain is subject to attribution. The individual required to report the capital gain will be deemed to have last acquired the property at the time at which the other person last acquired it and to have disposed of it at the time at which the other person disposed of it. The time at which non-qualifying real property was last deemed to be acquired by the individual is relevant in computing the amount of the attributed capital gain that may be eligible for the capital gains exemption. Consequently, where the property was transferred after February 1992, no capital gain exemption will be permitted in respect of the gain so attributed.
Where the transfer of property is made under certain of the "rollover" provisions of the Act, paragraph 110.6(18)(c) of the Act will apply. Where the transferee spouse acquires the property for an amount not exceeding the adjusted cost base of the property to the transferor, the transferee spouse will be treated, for the purpose of determining his or her eligible real property gain or loss on the disposition, as having acquired the property at the time it was last acquired by the transferor. Where the acquisition cost on the rollover was greater than the adjusted cost base of the property to the transferor which would occur, for example, under some of the provisions listed in paragraph 110.6(18)(c) of the Act where the transferor has elected to recognize part of the accrued gain on the property the individual will not be entitled to the benefit of the earlier acquisition date.
In addition, it should be noted that paragraph 110.6(18)(d) of the Act will exclude from the calculation of the number of months to be used in both the numerator and denominator of the fraction used in the formula for determining an individual's eligible real property gain or loss, any months that are in a taxation year for which the property disposed of was designated as a principal residence of either the individual or the individual's spouse.
We trust our comments will be of assistance to you.
Yours truly,
P.D. Fuoco for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch
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