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:
Whether the capital gains election can be filed as if a subdividable lot had been subdivided as of February 22, 1994.
Position TAKEN:
No.
Reasons FOR POSITION TAKEN:
The capital gains election can only be filed in respect of property owned by the taxpayer at the end of February 22, 1994.
5-943234
XXXXXXXXXX C.Chouinard
February 13, 1995
Dear Sir:
Re: Capital Gains Election
We are writing in response to your letter of December 6, 1994, in which you requested our comments regarding the capital gains election as it applies to property you own.
More specifically, you inquire whether you can treat the lot on which your principal residence is situated as two lots, for purposes of the capital gains election, since the lot can be subdivided into two lots.
In the February 22, 1994 budget, the federal government announced that the $100,000 capital gains exemption would no longer be available for capital property or eligible capital property sold after February 22, 1994. However, taxpayers who owned such property at the end of February 22, 1994 and who have
not used all of their $100,000 capital gains exemption, may file a one-time election. The election allows taxpayers to report a capital gain to take advantage of the unused portion of their $100,000 capital gains exemption, even though they did not actually sell their property. In order to recognize the accrued gain in respect of a property owned by a taxpayer at the end of
February 22, 1994, the taxpayer is required to elect to have the provisions of proposed subsection 110.6(19) of Bill C-59 apply to the property. This election can be made in respect of any property that constitutes capital property.
In the situation you describe, although the lot is subdividable, since it had not been subdivided at the end of February 22, 1994, the property owned at the end of February 22, 1994 is considered to be the entire lot. Accordingly, the capital gains election can only be filed in respect of the entire lot. In addition, since your principal residence appears to be situated on the lot,
the lot, or a portion thereof, may also qualify for the principal residence exemption. Therefore, it may be possible to shelter all, or a good portion, of the accrued gain on the lot with the principal residence exemption and the capital gains election.
The Department's position with respect to matters concerning principal residences is set out in Interpretation Bulletin IT-120R4, a copy of which is enclosed. As you will note from paragraph 20 of the Bulletin, the principal residence of a taxpayer for a taxation year is deemed to include the land upon which the housing unit stands and any portion of the adjoining land that can reasonably be regarded as contributing to the taxpayer's use and enjoyment of the housing unit as a residence. Evidence is not usually required to establish that 1/2 hectare of land or less, including the area on which the housing unit stands, contributes to the taxpayer's use and enjoyment of the housing unit as a residence. However, as indicated in paragraphs 21 and 22 of the Bulletin, the question of whether land in excess of 1/2 hectare contributes to the use and enjoyment of the housing unit, and therefore qualifies as a principal residence, is a question of fact. Should you have any queries in this respect, we suggest you contact your local Revenue Canada Tax Service Office.
If the excess land is found not to qualify as a principal residence, the accrued capital gains on the excess land, or a portion thereof, may nevertheless be sheltered from taxation by filing the capital gains election in respect of the entire property. As mentioned above, by using the principal residence exemption with respect to the portion of the property that qualifies as principal residence and the capital gains election with respect to the balance of the property, a good portion of the accrued capital gain on the property may be sheltered from taxation. Please note that, in order to compute the portion of the accrued gain on the entire property that can be sheltered with the principal residence exemption, you will be required todetermine the portion of the total accrued capital gain that is attributable to that part of the property that qualifies as principal residence.
In addition, since the 1992 budget eliminated the $100,000 capital gains exemption on the disposition after February 1992 of real property, only the capital gains accrued before March 1992 are eligible for the capital gains election. Therefore, if an election is filed in respect of real property acquired prior to March 1992, the elected capital gain must be reduced by the portion of the capital gain that does not qualify for the capital gains exemption. In order to determine the amount of the reduction, the capital gain (before reduction) must be multiplied by the following ratio: 24 (being the number of calendar months between March 1992 and February 1994) over the number of calendar months in the period that commences with the calendar month in which the property was acquired and ends with the calendar month in which the property is disposed of, which, where the capital gains election is filed, is February 1994.
We offer the following example:
Principal Residence Excess Land Total
$ $ $
FMV on
Feb. 22/94 137,500 137,500 275,000
Adjusted Cost
Base (75,000) (25,000 (100,000)
Capital Gain 62,500 112,500 175,000
If the property described above had been acquired in January 1972 and the principal residence portion of the property was designated as a principal residence for all of the years that the property was owned, and also assuming that the taxpayer has not used any portion of the $100,000 capital gains exemption, the taxpayer could designate the following amount under subsection
110.6(19) of the proposed legislation:
110.6(19) elected amount $272,417
Minus: Adjusted cost base 100,000
Gain otherwise determined 172,417
Minus: Principal residence portion: 62,500
Capital gain $109,917
Eligible real property gain:
242 x $109,917 $100,000
266
Taxable capital gain (3/4) $75,000
We are enclosing a copy of Form T2091 which will help you calculate the number of years that you are entitled to designate your home as a principal residence, as well as the part of the capital gain, if any, that you can shelter with the principal residence exemption.
We trust that these comments will be of assistance.
Yours truly,
R. Albert
for Director
Business and General Division
Rulings Directorate
Policy and Legislation Branch
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