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: Principal Residence Designation
We are replying to your letter of March 23, 1993, concerning the interaction of paragraphs 54(g), 40(2)(b) and subsection 40(4) of the Income Tax Act (the Act) as it relates to a particular fact situation. We apologize for the delay in our response.
In the situation you describe, a husband and wife each owned a property which they ordinarily inhabited for at least some portion of each year since the respective dates of acquisition. In 1986, the husband transferred his property to his spouse for no consideration and in accordance with subsection 73(1) of the Act, no gain was recognized on that disposition. The husband also designated that property as his principal residence for each of the years during which he owned it. In 1992, his spouse then transferred that same property to their children. You have asked for confirmation of your opinion that the entire gain on that property will be exempt from taxation by reason of the principal residence exemption rules. While you recognize that the wife will not be able to designate her other property as a principal residence for the taxation years 1982 to 1991 because of subparagraph 54(g)(iii) of the Act, it is your view that the wife can designate the other property as her principal residence for all years other than 1982 to 1991 provided that no other property is so designated by the husband for taxation years after 1991.
We cannot confirm the ability of a particular individual to designate a property as a principal residence for a particular period of time since there are many other factors which may impact on the individual's ability to designate a property as a principal residence. We offer the following general comments on the tax implications of your inquiry on the assumption that there are no other factors which would prevent the wife from designating either property as her principal residence at the time each is disposed of. In particular, we assume that there are no other properties held by the family unit (as that term is defined in paragraph 6 of Interpretation Bulletin IT-120R4 "Principal Residence") which are capable of being designated as a principal residence either now or in the future.
As a result of the application of subsection 73(1) of the Act, no gain was recognized on the transfer of the property from the husband to his wife. Consequently, the relevant issue in our view, is whether the gain, if any, on the 2 properties to be disposed of by the wife can be sheltered with the combination of the principal residence designations available to each spouse and in particular, whether the wife can have more than one property as a principal residence for the taxation years 1972 to 1981 inclusive.
Interpretation Bulletin IT-366R and Special Release "Principal Residence - Transfer to Spouse, Spousal Trust or Certain Other Individuals" explain the circumstances under which a property which has been transferred to a spouse will be deemed to be the principal residence of that spouse under subsection 40(4) of the Act. It is the Department's position that the deeming provision of paragraph 40(4)(b) of the Act precludes the spouse who receives the property from designating any other property as a principal residence for the taxation years during which the transferred property is deemed to be his or her principal residence.
While the husband did not report any gain on the transfer of the property to his spouse, it would be necessary for him to designate the property as his principal residence if he wishes the property to be considered his wife's principal residence during the years he held it and to be fully exempt from any future gain (assuming that he is still resident in Canada, such gain will be attributed to him as explained in paragraph 10 of IT-366R). However, by reason of his designation, paragraph 40(4)(b) of the Act deems the property to be his spouse's principal residence for those years as well and she will thus not be able to designate any other property as her principal residence during that period because paragraph 54(g) of the Act (as it read both before and after 1981) prevents her from designating more than 1 property as her principal residence for any particular year.
Consequently, in your example, the wife can have only one principal residence for each taxation year, including the years prior to 1982, notwithstanding that each spouse is entitled to claim separate properties as their principal residences for taxation years prior to 1982.
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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