1 September 1995 Internal T.I. 9417496 - PRINCIPAL RESIDENCE PROVISIONS

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:

Re-examination of our position with respect to the deeming provision of subsection 40(4) in conjunction with 70(6) and its interaction with subsection 40(2) and the definition of principal residence pursuant to former subsection 54(g), now contained in section 54 of the Act. Files 920244, 920894, and 921589 contain position which will be superceded by the position contained in this memo and an opinion being issued in file # 950769

At issue is whether or not someone loses their right to designate a property as their principal residence if a property was deemed to have been their principal residence as a result of 40(4). This is of particular importance as a family unit was not limited to one principal residence in the years prior to 1982.

Position TAKEN:

Where a subsection 70(6) transfer has taken place, the surviving spouse will not automatically lose his or her entitlement to designate another property as his principal residence as a result of the deeming provision contained in subparagraph 40(4)(b)(i) of the Act.

Reasons FOR POSITION TAKEN:

Review of the Law, IT-120 and 366 series backup files, previous correspondence, finance explanatory notes

		September 1, 1995

	AUDIT DIRECTORATE	HEADQUARTERS
	Large Business Audit Division	D. Zion
	Program Management and	(613) 957-8953
	  Operations Section

	Attention: I. Rathwell
		941749

Subsections 40(2), 40(4) and 54 of the Income Tax Act (the "Act")

We are writing in response to your memorandum of July 6, 1994 in which you request clarification of our position with respect to the deeming provision of subsection 40(4) and its interaction with subsection 40(2) and the definition of principal residence pursuant to former subsection 54(g), now contained in section 54 of the Act. We apologize for the lengthy delay in replying.

As a result of your enquiry, we have re-examined our view that the deeming provision of subsection 40(4) prevails over an individual's right to designate a property to be his or her principal residence assuming that the other requirements of subsection 54(g) of the Act are met. After our review of the matter, we have concluded that where a subsection 70(6) transfer has taken place, the surviving spouse will not automatically lose his or her entitlement to designate another property as his principal residence as a result of the deeming provision contained in subparagraph 40(4)(b)(i) of the Act. We will ensure that this revised position is noted on previous related correspondence.

Due to the fact that most of your concerns were raised on the assumption that our position with respect to the deeming provisions of 40(4) of the Act would remain unchanged, we will not specifically address them in our reply. Instead, we will review the situation you have described given our revised position.

You have outlined a situation where in 1965 "Bill" purchased a house and "Mary" a cottage. They each had separate title to their respective properties. Bill sold his house in May 1993 and Mary died in November 1993. We agree that upon Mary's death, pursuant to subsection 70(6) of the Act, Bill is deemed to have acquired Mary's cottage at her adjusted cost base. Subsection 40(4) of the Act is not applicable until the time of disposition of the cottage by the surviving spouse. Regulation 2301 requires that the principal residence designation be made in the taxpayer's return of income for the taxation year in which the property was disposed of. Bill has until that time to decide for which years he should designate the house as his principal residence. Assuming that the house has attracted the larger capital gain, Bill would then, in all probability, designate it for 1971 to 1992. If Mary had died in January 1994 rather than November 1993, Bill would have the same options available to him. Upon the subsequent sale of the cottage, he will, pursuant to paragraph 40(4)(a) of the Act, be deemed to have owned the cottage for the length of time that Mary owned the cottage. Under subparagraph 40(4)(b)(i) of the Act, the cottage will be deemed to have been Bill's principal residence for any taxation year for which it could and would have been designated as Mary's principal residence. Thus, where Mary could have designated the cottage for the years prior to 1982, the principal residence status is deemed to have been transferred to Bill. For years after 1981, Mary could have only designated years not already designated by Bill for the house.

We trust that this clarifies our position.

B.W. Dath
Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch