27 February 1996 External T.I. 9603895 - PRINCIPAL RESIDENCE

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.

RULINGS DIRECTORATE
CORRESPONDENCE SUMMARY

Principal Issues:

Clarification of the term "principal residence" as defined by section 54 of the Income Tax Act.

Position TAKEN:

Question of fact - Discussion of definition and dictionary meanings of the terms "inhabit" and "ordinarily inhabit".

Reasons FOR POSITION TAKEN:

Departmental Position, Previous correspondence

Department of Foreign Affairs
  and International Trade
125 Sussex Drive
Ottawa, Ontario	960389
K1A 0G2		D. Zion

Attention: Harry van der Veer

February 27, 1996

Dear Sirs:

Re: Principal Residence

We are writing in response to your letter of January 25, 1996 in which you request clarification of the term "principal residence" as defined by the Income Tax Act (the "Act").

You are particularly concerned with the eligibility of a property to qualify as a principal residence for income tax purposes where the residence is originally purchased for rental or business purposes. Although we cannot confirm a taxpayer's ability to designate a property as a principal residence for a particular period of time since there are many factors which may change prior to the disposition of that residence which must be considered in determining whether the property can be so designated, we can offer the following general comments on the income tax implications of your enquiry.

Section 54 of the Act contains the definition of a principal residence for the purposes of the capital gains exemption provided for a principal residence in paragraph 40(2)(b) of the Act. As outlined in paragraph 34 of the attached Interpretation Bulletin IT- 120R4, Principal Residence, when a taxpayer completely changes the use of a property which has solely been used for income-producing purposes to a principal residence then paragraph 45(1)(a) of the Act will deem the taxpayer to have disposed of the property at fair market value and to have immediately reacquired it at the same fair market value. Generally, up until the time of the change in use of the property, the property would not qualify as a principal residence because the individual would not have ordinarily inhabited the housing unit in those years in which it was income-producing. Any gain must be included in the taxpayer's income for the year unless a subsection 45(3) election is made in respect of the property. Subsection 45(3) of the Act enables a taxpayer who has changed the use of a housing unit from income-producing to personal use i.e. by commencing to "ordinarily inhabit" the property, to defer recognition of any capital gain that would otherwise be triggered by subparagraphs 45(1)(a)(ii), (iii) and (iv) of the Act. An election under subsection 45(3) of the Act is only available where the property in question does in fact become the "principal residence" of the taxpayer by virtue of being occupied as such and where no other property has been designated in the years in question.

In the event of the sale of the property while it is the taxpayer's principal residence, the existing exemption from the computation of the capital gain on disposition of a principal residence could then be invoked for an additional 4 years prior to the date that the property was actually the individual's principal residence through the use of an election under subsection 45(3) of the Act as provided for by paragraphs (b) and (d) of the principal residence definition.

Whether or not a taxpayer can be considered to have "ordinarily inhabited" a particular housing unit in the year as required by the principal residence definition contained in the Act is a question of fact which can only be determined upon a review of all facts and circumstances surrounding each case. The expression "ordinarily inhabited" is not defined in the Act and in such cases we look to the ordinary meaning of the term. The Shorter Oxford English Dictionary defines "inhabit" to dwell in, occupy as an abode. The New Webster Encyclopedic Dictionary of the English language also defines "inhabit": to live or dwell in; to occupy as a place of settled residence. The word inhabitant is defined as: one who inhabits; one who dwells or resides permanently in a place, as distinguished from an occasional visitor. The Tax Court of Canada had occasion in Ennist et al. v. M.N.R. (85 DTC 669) and Flanagan v. M.N.R (89 DTC 615) to review the meaning of "principal residence" and more particularly the term "ordinarily inhabit". In Flanagan the Court was of the view that a person may ordinarily inhabit more than one housing unit if he does so in the course of the customary mode of his life. This is comparable to the Department's position, as discussed in paragraph 12 of Interpretation Bulletin IT-120R4, that where a residence has been occupied by such a person for only a short period of time during a taxation year (such as a seasonal residence), that the taxpayer "ordinarily inhabited" that residence in the year provided that the principal reason for owning the property was not for the purpose of gaining of producing income therefrom.

In the case of Ennist et al., the Appellants spent one 24-hour period in the housing unit in order to satisfy the requirement that they had "ordinarily inhabited" the housing unit for the purposes of the principal residence definition contained in section 54 of the Act (previously paragraph 54(g)). The Court was of the view that the Appellants' "24-hour stay" did not meet the ordinary meaning of the expression "ordinarily inhabit" which was considered to be "in most cases, usually or commonly occupied as an abode".

You have also asked whether or not documentation should be obtained from employees which certifies that the reimbursed property management fees which have been included in their income pursuant to paragraph 6(1)(a) of the Act, have not been deducted from rental income on their individual income tax returns. The conditions under which an employee is reimbursed property management fees by his or her employer, as well as the documentation required by the employer from the employee, are matters to be determined between the employee and employer and with which this Department would not involve itself. However, the fact that an employee has received a reimbursement of these fees, which has been included in his or her income, would not preclude the individual from a deduction from the income generated from rental of the property if the fees are a bona fide rental expense.

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