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.
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Dear Sirs:
RE: Disposition of Residence
This is in reply to your letter of September 22, 1993 in which you requested a ruling with respect to a potential disposition of a residence, part of which has been rented out. You queried whether a disposition would result in a capital gains tax.
Our Comments:
The situation you described involves a specific taxpayer and specific contemplated transactions. As explained in Information Circular 70-6R2 dated September 28, 1990, assurance as to the tax consequences of proposed transactions is provided by the Rulings Directorate but only on an advance income tax rulings basis and only with respect to the taxpayers identified in such rulings. A fee is charged for advance rulings and the procedure to request an advance ruling is described in our Information Circular. In addition, advance rulings are provided only directly to the relevant taxpayer or to a person who has been authorized in writing to represent that taxpayer.
Advance income tax rulings are provided with respect to proposed transactions which are seriously contemplated and not with respect to hypothetical transactions. Advance rulings are also issued on questions of fact but only if it is possible to determine all the material facts and those facts can reasonably be expected to prevail.
Based on your present submission, we are not able to provide an advance income tax ruling.
The Rulings Directorate also provides written opinions on the general interpretation of specific provisions of the Act. The purpose is to provide an interpretation of the law rather than to resolve a question of fact. Although we are unable to provide any opinion in respect of the specific case you have described, we have set out below some comments of a general nature. Our comments pertain to a general situation wherein a taxpayer rents a portion of his residence.
Whether the rental of a portion of a residence would constitute a business is a question of fact which can best be determined by a review of all the pertinent facts. As stated in the Capital Gains Guide, a house may qualify as a principal residence even though part of the house has been used for rental or business purposes. However, this exception applies only if ALL three of the following conditions are met:
1. the part used for rental or business purposes is small in relation to the whole property;
2. no major structural changes were made to the property to make it more suitable for rental or business purposes; and
3. you have not deducted any capital cost allowance on the part you are using for rental or business purposes.
Otherwise, if a part of a building is used principally to earn gross revenue that is rent, then that part of the building is "rental property" within the meaning of subsection 1100(14) of the Income Tax Regulations and therefore capital cost allowance with respect to such property cannot be claimed to create or increase a loss from that property. Where capital cost allowance has been claimed with respect to a portion of a house, a subsequent disposition (or a change in use from business use to personal use) of the residence may result in recapture of capital cost allowance and a capital gain on that portion in addition to whatever capital gain there may be on the portion used as a residence, although this latter gain may be exempt as being a gain on a "principal residence".
Prior to the amendments to the Income Tax Act which became effective on Royal Assent of Bill C-92 on June 10, 1993, capital gains on the portion of a residence that was not eligible for exemption as a principal residence may have qualified for the capital gains exemption provided for in section 110.6 of the Income Tax Act. However, for dispositions after February 1992, these gains are not eligible for such exemption except to the extent provided for by the formula contained in the definition of "eligible real property gain".
Whether the land subjacent and adjacent to a residence is used in part to earn or produce income is a question of fact. Generally up to 1/2 hectare is considered to be relevant to the personal use of a principal residence. However, where a portion of the land is used to earn income from a business or property, such portion will not usually be considered to contribute to such use and enjoyment. Where a taxpayer has claimed a portion of the expenses related to the land (such as property taxes or mortgage interest) in computing income, the allocation of such expenses for this purpose is normally an indication of the extent to which the taxpayer considers the land to be used to earn income.
We trust that our comments are of assistance. For further information on principal residences, we refer you to our Interpretation Bulletin IT-120R4 dated March 26, 1993. If you wish to discuss the affairs of the taxpayer in question, it would be appropriate to direct your questions to your local District Taxation Office.
Yours truly,
R. Albert for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch
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