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 cottage may qualify for principal residence exemption in various situations (separated spouse, new common-law relationship commenced ramifications)
Position TAKEN:
once spouses are no longer members of the same family unit, a decision by one to designate the family cotage as the principal residence does not disqualify the other from designating another property. In the years in which the spouse is a member of the family unit, no other property can be designated as a principal residence if one spouse designates the cottage. The extended meaning of "spouse" includes parties to a common-law relationship (explained).
Reasons FOR POSITION TAKEN:
law. 951502
XXXXXXXXXX Sandra Short
September 6, 1995
Dear XXXXXXXXXX:
Re: Principal Residence
This is in reply to your letter of May 31, 1995 which requests a reply to your original correspondence of March 10, 1995, addressed to the Ottawa Taxation Centre, concerning the principal residence exemption. We apologize for the delay in responding.
As we understand it, you and your spouse separated in early 1993 and you recently signed a formal separation agreement. You are now in the process of selling the property which you and your spouse consider your "primary residence". However, you continue to be a joint owner with your spouse of a cottage property. You have asked the following questions:
1.If neither you nor your spouse buy another "permanent home", can you each claim the appropriate share of the cottage as a primary or principal residence and thereby be exempt from capital gains tax if and when the cottage is sold?
2.If either you or your spouse buys another principal residence, does this affect the tax status of the cottage and if so, how. Can the remaining joint owner still claim the tax exemption on his or her share?
3.Should you commence to live with your daughter's mother-in-law, is this relationship considered a common law relationship for income tax purposes and does this then mean that the cottage can no longer qualify as a principal residence? and
4.Do the answers to any of the above questions change in the event that your spouse and you decide to divorce?
Before addressing your specific questions as posed above, we offer the following general comments:
In order for a property to qualify as a principal residence for any particular taxation year, a number of qualifications must be satisfied. The basic requirements are described in paragraphs 3 through 6 of the enclosed Interpretation Bulletin IT-120R4. You may wish to review all requirements to determine whether the cottage may be designated as your principal residence. For the purposes of our reply, we will assume that the cottage property otherwise qualifies as your principal residence.
1.A family unit may only designate one principal residence for each year after 1981. It would appear from your correspondence that you intend to designate your primary or marital home as your principal residence for those years up to the year of its sale. If the marital home is designated your principal residence, the cottage cannot be so designated in the same years and hence capital gains which are subject to taxation may accrue on the cottage in those years.
A family unit does not include your spouse if, throughout the year, she were living apart from you and you are separated pursuant to a judicial separation or written agreement. Once your spouse is no longer a member of your family unit, each may designate a property which qualifies as a principal residence. If you choose to designate the cottage, any capital gains which accrue on the cottage during the years it is so designated will be exempt from capital gains tax. Your spouse will be exempt on her share of the gains only if she also designates the cottage in those years. However, capital gains may still have accrued on the cottage for those years in which you owned both the marital home and the cottage but during which the home was designated the principal residence.
2.The purchase of an additional residence by either of you need not alter your, or your former spouse's, decision to designate the cottage as the principal residence. As you are no longer members of the same family unit, a decision by one to designate the cottage as the principal residence does not disqualify the other from designating another property. However, in those taxation years in which your spouse was a member of your family unit, no other property can be designated as a principal residence if one spouse designates the cottage.
3.The Income Tax Act (the Act) provides an extended meaning to the word "spouse" and the definition includes common-law relationships. Two individuals of the opposite sex are considered to be spouses of one another for income tax purposes if they cohabit in a conjugal relationship and have either cohabited throughout a 12-month period, or are the parents of the same child. At the point in time when you sell the cottage, it will be necessary to define the "family unit" for each year in which you wish to designate the cottage as your principal residence. A principal residence designation is made in your income tax return in the year the property is disposed of - form T2091 may assist you.
Should your daughter's mother-in-law become your spouse for income tax purposes (either because of the extended meaning of spouse as explained above or you marry one another), the cottage is not necessarily disqualified from being designated your principal residence. However, if you do designate the cottage as your principal residence for any taxation year where your family unit includes your daughter's mother-in-law, no other property can be designated by her as a principal residence for that year.
4.A divorce will not impact our comments above.
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
Encl.
c.c. Ottawa Tax Services
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© Her Majesty the Queen in Right of Canada, 1995
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