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.
Principal Issues:
Assuming that no other residence is designated by two married individuals, can they designate the residence under paragraph 54(g) which they own where it is rented to their adult son and a subsection 45(2) election is not in effect?
Position TAKEN:
Yes
Reasons FOR POSITION TAKEN:
Subparagraph 54(g)(i) refers to circumstances where the residence is occupied by the child of the two married individuals. Accordingly, the residence can be designated as a principal residence assuming the other requirements are satisfied.
940581
XXXXXXXXXX M. Eisner
Attention: XXXXXXXXXX
August 16, 1994
Dear Sirs:
Re: Principal Residence Exemption
This is in reply to your letter of March 2, 1994 in which you asked us for our comments on the above-noted subject in respect of the situation set out in your letter. We apologize for the delay in replying.
The situation on which you asked us for our views appears to relate to an actual fact situation. Should you wish the Department's views on such a situation, you should submit the relevant facts and documentation to your local District Taxation Office. We are, however, prepared to provide you with the following general comments which should not be construed as relating to a specific fact situation.
In the following comments unless otherwise stated, all statute references are to the Income Tax Act S.C. 1970-71-72, c.63 as amended consolidated to June 10, 1993 (the Act).
In the type of situation with which you are concerned, two married individuals jointly purchased a home in 1972 which was occupied by them. Four years later, the two individuals acquired and moved to a new home which was occupied by them. However, the initial home was not sold by them and an election under subsection 45(2) of the Act was made. The initial home subsequent to the move to the new home was occupied by their adult child who paid rent to the two individuals.
The two individuals claimed capital cost allowance (CCA) on the initial home for some of the years while it was being rented to the adult child. However, no CCA was claimed for the years 1976 to 1980 during which the election filed under subsection 45(2) was in effect. The two individuals continue to occupy the new residence and the adult child continues to occupy and pay rent for the initial property. The two married individuals will proceed to sell the initial property during 1994. We have assumed that CCA was first claimed in 1981.
In the above situation, the CCA claimed will be subject to recapture pursuant to the relevant provisions of the Act when the initial property is sold. The issue concerns the determination of the extent to which the capital gain on the sale of the initial property is exempt from taxation by virtue of paragraphs 40(2)(b) and 54(g) of the Act assuming no other residence will be designated by the two individuals for the relevant years (1981 - 1993 as explained below).
With respect to the above issue, it is the Department's position that if CCA is claimed on a property in respect of which a subsection 45(2) election has been filed, the election is considered to be rescinded on the first day of the year in which the claim is made (see paragraph of 31 of Interpretation Bulletin IT-120R4 "Principal Residence). It follows that the two married individuals in the above situation would be deemed to have disposed of the initial property at the beginning of 1981 (the year in respect of which CCA was first claimed) for proceeds equal to fair market value and to have acquired it for the same amount by virtue of subsection 45(2), paragraph 13(7)(b) and subparagraph 45(1)(a)(i) of the Act. Accordingly, the gain on the proposed sale will relate to the years 1981 to 1994.
In relation to these circumstances, paragraph 54(g) of the Act sets out the rules under which a property can be designated as an individual's principal residence for a particular taxation year. Since subparagraph 54(g)(i) refers to the situation where a housing unit was occupied by the child of each of the two married individuals, it is our view that each of the two current owners of the initial property are able to designate the initial property for the years in question (1981 to 1993) assuming they otherwise qualify to do so. It would follow that the related gain of each of the two individuals on the sale of the initial property would be fully exempt on the basis that the initial property is so designated for those years with respect to the formula set out in paragraph 40(2)(b) of the Act assuming that the residency requirement in that provision has been satisfied.
These comments represent our opinions of the law as it applies generally. As indicated in paragraph 21 of Information Circular 70-6R2, these opinions do not constitute an advance income tax ruling and are not binding on the Department.
We trust our comments will be of assistance to you.
Yours truly,
J.A. Szeszycki
for Director
Business and General Division
Rulings Directorate
Policy and Legislation Branch
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