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 Files 920244, 920894, and 921589 contain position which will be superceded by the position contained in this memo and an opinion being issued in file # 950769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
950769
XXXXXXXXXX D. Zion
Attention: XXXXXXXXXX
September 1, 1995
Dear Sirs:
Re: Principal Residence Provisions
We are writing in response to your correspondence of March 19, 1995 in which you request our interpretation of the principal residence provisions as they would apply to a hypothetical situation. We apologize for the delay in our reply.
For the purposes of your discussion, you have outlined a situation where a married couple acquired residences prior to 1982. In 1965 the husband (H) purchased residence A and in 1975 the wife (W) purchased residence B. Both residences were solely owned by the respective spouses and met the definition of a principal residence pursuant to subsection 54(g) of the Income Tax Act (the Act), as it read prior to 1982. Although both residences appreciated in value, the appreciation of residence A was greater than residence B. H died in 1990 and, pursuant to the terms of his will, W inherited residence A. W subsequently sold both residences. Furthermore, we are to assume that residence B was sold in 1993, residence A was sold in 1994 (prior to February 23, 1994), and the adjusted cost base of each residence is the purchase cost at the time each was originally acquired.
More specifically, you have asked us to confirm your interpretation of the tax implications relating to the application of subsection 70(6) of the Act to the situation described above.
Where subsection 70(6) of the Act applies to the transfer of property to the surviving spouse and the legal representative of the estate does not opt out of the rollover provision, an option provided under subsection 70(6.2) of the Act, no amount will be included in the deceased's income for the year of death in respect of the property and the surviving spouse will have acquired the deceased spouse's interest in the property at its adjusted cost base immediately before his or her death.
You have commented on the consequences of an election by the legal representative pursuant to subsection 70(6.2) of the Act; however, as your specific enquiry does not relate to this particular provision, we will not make any further comments regarding this possible election.
Where after 1971, a taxpayer has disposed of a property to an individual where the provisions of subsection 70(6) of the Act applied, subsection 40(4) of the Act is applicable at the time of disposition of the property for the purposes of computing the transferee's gain from the disposition of the property under paragraph 40(2)(b) of the Act. Pursuant to paragraph 40(4)(a) of the Act, the transferee will be deemed to have owned the property throughout the years the transferor owned the property. In addition, pursuant to subparagraph 40(4)(b)(i) of the Act, the property shall be deemed to have been the transferee's principal residence for any year for which it would have been the transferor's principal residence, if the transferor had designated it to be his or her principal residence for that year. It is our view that the effect of subsection 40(4) of the Act is not to deem the transferee to have two principal residences for the period in which the transferor owned the property but rather to make it possible for the transferee to claim the principal residence exemption under paragraph 40(2)(b) of the Act for taxation years when the property would have been the transferor's principal residence. For the property to have been the transferor's principal residence, the transferor must have been eligible to so designate it, i.e., the property must have otherwise met the definition of a principal residence for the years in question. The deeming provision of subparagraph 40(4)(b)(i) of the Act does not prevent the transferee from designating her own property as her principal residence, assuming it so qualifies, for the years 1972 to the year of the transferor's death.
In the circumstances under review, where subsection 70(6) of the Act applies to the transfer of residence A, if W sells residence B and designates it as her principal residence for the years 1975 through 1992, the gain would be fully exempt by virtue of the principal residence exemption. Subsequently, when she sells residence A in early 1994, subsection 40(4) of the Act will apply and pursuant to paragraph (a) thereof she will be deemed to have owned residence A throughout the time H owned it. In addition, it is our view, based on our comments regarding subparagraph 40(4)(b)(i) of the Act above, that residence A will be deemed to be W's principal residence for the purposes of the principal residence exemption calculation under 40(2)(b) of the Act for the years 1972 to 1981. H would have been unable to designate the years 1982 to 1992 because W had previously designated residence B as her principal residence upon its disposition in 1993 and, for taxation years after 1981, only one property can by designated as a principal residence for a particular year per family unit. W would be able to designate residence A as her principal residence for 1993 and 1994 in her own right.
It is also our view that subsection 40(6) of the Act is relevant to the calculation of the gain on the sale of residence A and in the circumstances under review the pre-1982 gain calculated under paragraph 40(6)(a) of the Act would be offset by the principal residence exemption as discussed above.
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
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