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:
referral requests that comments be made regarding capital gains and principal residences when spouses have been separated only because of employment conditions
Position TAKEN:
for years after 1981, that there may only be only property designated as a principal residence each year by a family unit applies to all situations including when spouses are separated entirely for employment related reasons and extends to all individuals
Reasons FOR POSITION TAKEN:
while there are provisions in the Act which permit a property to be claimed as a principal residence when it would not otherwise qualify (45(2), 45(3), 54.1), there is no provision to permit a second principal residence exemption
June 5, 1995
Client Assistance Directorate HEADQUARTERS
Louis Lamontagne Sandra Short
Chief, Correspondence Section (613) 957-8953
951457
MINISTERIAL CORRESPONDENCE - Docket 95-03358M
This is in reply to a memorandum of May 30, 1995 from Nicole Chambers concerning correspondence received from XXXXXXXXXX about the principal residence exemption. You have asked that we provide comments regarding capital gains and principal residences between spouses when they are separated due to employment reasons only so that such comments may be incorporated into your response to XXXXXXXXXX
XXXXXXXXXX
has expressed the view that limiting the number of properties which may be designated as a principal residence in a year by a taxpayer and the taxpayer's family unit to one for all years after 1981 is unfair.
He has said that it is unfair that some individuals (for example, Members of parliament) whose work is situated in two separate places are able to claim two principal residences and yet a family unit may not do so. Secondly, had XXXXXXXXXX and his spouse obtained a legal separation, each would be entitled to a principal residence exemption in respect of their homes and XXXXXXXXXX would have had the additional advantage of being entitled to claim an equivalent-to-married amount for his son. In his words, "(i)t seems unfair to stack the scales so heavily against those who stay married rather than obtain a separation".
For years after 1981, the rule that there may only be one property designated as a principal residence each year by a family unit applies to all situations including when spouses are separated entirely for employment related reasons and extends to all individuals. Where an individual, including a Member of parliament, is required by the duties of office or employment to work from two separate places in a year, that individual is not permitted two principal residence exemptions in respect of the same taxation year even if two residences are maintained by the individual.
The Income Tax Act permits a taxpayer to preserve the principal residence status on a property in some circumstances when the property would not ordinarily qualify as a principal residence for a particular taxation year (as explained below) but XXXXXXXXXX is correct in that there are no provisions, after 1981, which permit a family unit to designate two principal residences.
The Act allows a taxpayer, under certain circumsatnces, to designate a property as a principal residence for up to four years without it being occupied by the taxpayer or a member of the taxpayer's family unit. This four year limitation may be extended indefinitely provided the property is not ordinarily inhabited by the taxpayer as a consequence of a relocation of the place of employment or that of his or her spouse. These provisions are discussed below should you wish to comment on them in your reply to XXXXXXXXXX.
When a taxpayer completely converts a principal residence to an income-producing use, there is a deemed disposition of the property at fair market value and reacquisition immediately thereafter at the same amount. Any gain otherwise determined on this deemed disposition may be eliminated or reduced by the principal residence exemption. However, the taxpayer may choose to defer recognition of any gain to a later year by electing under subsection 45(2) of the Act to be deemed not to have made the change in use of the property. The election is made by means of a letter signed by the taxpayer and filed with the income tax return for the year in which the change in use occurs. The Department will accept a late-filed election provided that no capital cost allowance has been claimed on the property since the change in use occurred and during the period in which the election remains in force. An election under subsection 45(2) is valid for up to four taxation years even if the housing unit is not ordinarily inhabited by the taxpayer or the spouse, former spouse or a child of the taxpayer. However, we would point out that a designation for the same year of one property by virtue of a subsection 45(2) election being in force and another property by virtue of the taxpayer ordinarily inhabiting it would not be permitted.
The four year limitation referred to above may be extended indefinitely if the following conditions are met:
a) the taxpayer does not ordinarily inhabit the residence during the years covered by the election because the taxpayer's or spouse's place of employment has been relocated,
b) the employer is not related to the taxpayer or spouse,
c) the housing unit is at least 40 kilometres farther from such new place of employment than is the taxpayer's subsequent place of place of residence, and
d) the taxpayer resumes ordinary habitation of the residence during the term of such employment by such employer or before the end of the taxation year immediately following the taxation year in which such employment terminates, or the taxpayer dies during the term of such employment.
Again, while these provisions serve to permit a taxpayer to preserve the principal residence status for a property which would otherwise fail to qualify, they do not extend to permit a second principal residence exemption.
We agree that, if the residences otherwise qualified for the principal residence exemption and had XXXXXXXXXX obtained a legal separation from his spouse, each could claim a principal residence exemption in the circumstances.
B.W. Dath
Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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