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:
Hypothetical situation where two properties owned by spouses separately since time of purchase prior to 1982, are transferred in 1991 to joint ownership. Can the pre-1982 gains realized on the two properties be exempt through the use of the principal residence exemption available under 40(2)(b) assuming that they otherwise qualfiy as principal residences.
Position TAKEN:
We are in agreement that the change in ownership from the original sole ownership of each property to joint ownership of the two properties by the spouses would not eliminate the ability to shelter the pre-1982 gain from tax through the use of the principal residence designation on both properties.
Reasons FOR POSITION TAKEN:
IT-366R, previous correspondence 903578.
950061
XXXXXXXXXX D. Zion
March 24, 1995
Dear XXXXXXXXXX:
Re: Subsection 40(4)
We are writing in reply to your letter of December 23, 1994, wherein you request a technical interpretation regarding the application of subsection 40(4) of the Income Tax Act (the "Act") in a hypothetical situation.
The hypothetical situation, as we understand it, is as follows:
1.Mr. A and Mrs. A are married.
2.Mr. A owned a house, registered in his name only, since 1976.
3.Mrs. A owned a cottage, registered in her name only, since 1955.
4.Mr. A and Mrs. A have "ordinarily inhabited" both dwellings from the date the properties were acquired to the present time.
5.In 1991, the legal ownership of both the house and cottage was changed to joint tenancy.
6.The transfers described in item 5 above were made pursuant to subsection 73(1) of the Act.
7.Mr. A and Mrs. A wish to make the 1994 capital gains election in order to shelter the net capital gain after the principal residence exemption on the properties.
8.Mr. A will designate the house to be his principal residence for the period 1976 to 1993 inclusive while Mrs. A will designate the cottage to be her principal residence for the taxation years 1971 to 1981 and 1994.
More specifically, you have asked for confirmation of your view that the pre-1982 gains realized on both the cottage and the house will be exempt from tax through the application of the principal residence exemption available under 40(2)(b) of the Act. This view is based on your understanding of the application of subsections 73(1) and 40(4) of the Act to the inter-spousal property transfers and our comments contained in a letter of March 27, 1991 to which you refer in your letter. The situation as presented in your enquiry was not specifically addressed in our letter of June 23, 1992 (to which you also refer) and, as a result, those comments are not necessarily applicable to the situation currently under review.
Where one spouse has transferred his or her interest in a particular capital property to the other, subsection 73(1) of the Act will apply to deem the property to be transferred at the "cost amount" of the property (as that term is defined in subsection 248(1)) unless the transferor elects not to have subsection 73(1) apply. In this situation no such election has been made.
Subsection 40(4) of the Act will, for the purposes of paragraph 40(2)(b), deem the transferee to have owned the property throughout the years the transferor owned the property and to have been the transferee's principal residence for any year that it was the transferor's principal residence. In order for it to have been the transferor's principal residence, the property must have met the criteria described in the definition of principal residence contained in section 54 of the Act, including the stipulation that the property must be so designated by the transferor for the years in question. Alternatively, if the transferor chooses not to designate the transferred property as his or her principal residence, subparagraph 40(4)(b)(ii) is not applicable and the transferee will not be able to claim the principal residence exemption unless the transferee, in his or her own right, could designate the property as his or her property for the period of time under consideration.
Accordingly, we are in agreement that the change in ownership from sole ownership of each property to joint ownership of the two properties by the spouses would not eliminate the ability to shelter the pre-1982 gain from tax through the use of the principal residence designation on both properties. In addition, in the circumstances under review, the cottage property will be considered to have been owned at the end of 1981 and continuously thereafter for purposes of the alternative determination of the gain pursuant to 40(6) of the Act.
We also are in agreement that, as there has been a transfer of property from one spouse to the other upon the change in the ownership of the properties, the attribution rules found in subsection 74.2(1) of the Act will apply. Paragraph 3 of IT-511R, Interspousal and Certain Other Transfers and Loans of Property, comments that, where an individual has transferred property to the individual's spouse, any taxable capital gains arising from the disposition of the property will be deemed to be taxable capital gains of the individual. To determine the amount of gain deemed to be that of the individual, it is first necessary to calculate the taxable capital gain of the individual's spouse upon disposition of the property. It is this amount which will be attributed to the transferor. The individual can offset the capital gain attributed to the extent permitted by the rules respecting the capital gains deduction.
These comments represent a general interpretation of the law and, as such, may not be applicable in every situation. The determination of the tax consequences of a particular situation can only be made following a review of all the relevant facts and documentation.
We trust our comments will be of assistance to you.
Yours truly,
P.D. Fuoco
for Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 1995
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 1995
Email this Content