11 April 1995 Internal T.I. 9509467 - CAPITAL GAINS ELECTION

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, where a spouse transfers his or her interest in a principal residence to the other spouse after February 22, 1994, the other spouse will be considered to have owned the principal residence on February 22, 1994 by virtue of subsection 40(4) of the Act.

Position TAKEN:

Subsection 40(4) would not apply.

Reasons FOR POSITION TAKEN:

Subsection 40(4) only applies to the subsequent disposition of a principal residence, that is, a disposition of the principal residence which takes place following its transfer to the other spouse under subsection 73(1) of the Act.

			April 11, 1995

	Client Services Directorate	Headquarters
		Income Tax Rulings and
		Interpretations 		Directorate
	Attention: Fay Bisaillon	C. Chouinard
		957-8953

		7-950946

Capital Gains Election and Subsection 40(4) of the Income Tax Act

This is further to our telephone conversation regarding the above-mentioned matter. You have inquired whether, where a spouse transfers his or her interest in a principal residence to the other spouse after February 22, 1994, the other spouse will be considered to have owned the principal residence on February 22, 1994 by virtue of subsection 40(4) of the Income Tax Act (the "Act").

Subsection 40(4) of the Act applies on the disposition of a principal residence by an individual, only if that principal residence, or an interest therein, was previously acquired from a taxpayer in a transaction to which the rollover provisions of subsection 70(6) or 73(1) of the Act applied. Subsection 40(4) of the Act provides that, for the purpose of computing the gain under paragraph 40(2)(b) of the Act on the subsequent disposition of the property by the individual, the property is deemed to have been the principal residence of the individual for any year during which it was owned by the taxpayer, if, in respect of that year, it was the taxpayer's principal residence. Thus, subsection 40(4) of the Act applies to the disposition of a principal residence which, prior to the disposition, was transferred by a taxpayer to an individual in a transaction to which the rollover provisions of subsection 73(1) of the Act apply. Therefore, if a principal residence or an interest therein is transferred to an individual pursuant to subsection 73(1) of the Act after February 22, 1994, subsection 40(4) will not only apply for purposes of the capital gains election, since subsection 110.6(19) of the Act deems property in respect of which the election is filed to have been disposed of on February 22, 1994, which precedes the transfer of the property.

For instance, if a husband and wife have jointly owned a house and a cottage since 1979 and, on December 15, 1994, each spouse transfers his or her interest in each property to the other spouse under subsection 73(1) of the Act, such that one spouse (the wife) has sole ownership of the house, and the other (the husband) has sole ownership of the cottage, on a subsequent disposition of either the cottage or the house, the wife could designate the house as a principal residence for the 1979 to 1981 taxation years and the husband could designate the cottage as his principal residence for the 1979 to 1981 taxation years. Hence, if the spouses were to transfer their interests in each property to each other in order to become sole owners and subsequently disposed of the two properties, they could each claim the principal residence exemption with respect to one property for years prior to 1982. However, since the transfer in this example occurs after February 22, 1994, subsection 40(4) of the Act would not apply to the deemed disposition triggered by a capital gains election, since the deemed disposition would have occurred prior to the transfer of the property. Subsection 40(4) of the Act would, however, apply to a disposition occurring after December 15, 1994.

As per your request, you will find attached a copy of a memorandum to the West Toronto Tax Services office and the response to one of the questions prepared for the breakfast seminar organized by the West Toronto Tax Services Office dealing with subsection 40(4) of the Act.

R. Albert
for Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

Encl.