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 a deemed disposition takes place in circumstances where a basement is converted for short time to income-producing purposes with no structural changes and no CCA claimed.
Position TAKEN:
Based on the situation presented it would appear not.
Reasons FOR POSITION TAKEN:
The situation is similar to one described in IT-120R4 at para. 36 to 38. The changes made to and overall usage made of the property are not sufficient to be considered a disposition.
951429
XXXXXXXXXX J.A. Szeszycki
Attention: XXXXXXXXXX
September 11, 1995
Dear XXXXXXXXXX:
Re: Principal Residence and Change in Use
This is in reply to your letter of May 25, 1995 in which you requested our views as to the appropriate tax treatment that should be given in connection with the changes in use made of a taxpayer's principal place of residence. We apologize for the delay in responding.
Our understanding of the relevant circumstances described in your letter can be summarized as follows:
1.The residence was acquired in 1989 as a principal place of residence.
2.When originally acquired, the basement portion of the residence was unfinished but was finished shortly thereafter without having made any structural changes to the property.
3.The initial usage made of the property, including the basement, was that of a principal residence.
4.In 1991 the basement was rented out to non-family members until the spring of 1993 at which time it was rented to family members for the remainder of the year. The rental revenue was reported without having made claims for capital cost allowance.
5.From the end of 1993 to the present, the property has reverted to being used as a principal residence in its entirety.
6.The floor space of the basement is equal to 50% of the total floor space of the entire house. However, some of the basement area is shared (laundry room, storage and furnace room, etc.)
You have asked whether the taxpayer is subject to tax on the capital gains realized on a portion of the home, either in the spring of 1993 or at the end of that year when the last tenants left.
The situation, as outlined above, is one that is discussed in paragraphs 36 to 38 of interpretation bulletin IT-120R4 "Principal Residence". It recognizes that the conversion of a portion of the property for income producing purposes does in fact trigger a deemed disposition of that portion of the property, which may result in a capital gain.
The bulletin, however, goes on to explain that the deemed disposition rule is normally applied where the portion of the property converted is substantial and the change is more or less of a permanent nature. It further explains, at paragraph 38, that the deemed disposition rule will not be applied where (i) the income-producing activity remains ancillary to the overall use of the property, (ii) no structural changes were made to the property, and (iii) no capital cost allowance was claimed in the computation of rental income from the property.
Our understanding of the situation described in your letter is that, while the proportion of the house that was rented out was indeed substantial, it would likely still be considered ancillary to the overall use made of the property as a whole. In addition, you indicate that no structural changes were made to the property and that no capital cost allowance was claimed during the short period for which the basement was used for income producing purposes.
Based solely on the circumstances as described above, it is our view that the conversion to and then from income-producing purposes would not be sufficient to be considered a disposition of the property for tax purposes.
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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