15 January 1998 External T.I. 9727885 - PARTIAL CHANGE IN USE OF 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.

Principal Issues:

Whether total proceeds on sale of house would be accepted for purposes of the principal residence exemption where there was a partial change in use of principal residence.

Position: Unlikely.

Reasons:

Any capital gain associated with the period and that part of the property relating to an income-producing use is not eligible for the principal residence exemption. Situation described does not appear to satisfy conditions for application of departmental practice. (The practice is to ignore partial change in use where entire property retains its nature as a principal residence.)

972788
XXXXXXXXXX P. Spice

January 15, 1998

Dear XXXXXXXXXX:

Re: Partial Change in Use of Principal Residence

This is in reply to your letter of October 8, 1997, in which you ask for our interpretation concerning the disposition of a property which has undergone a partial change in use from principal residence to an income-producing property.

Interpretation Bulletin IT-120R4 (the “Bulletin”), a copy of which is enclosed, contains the Department’s general interpretation of the provisions of the Income Tax Act (the “Act”) which apply to such a property in these circumstances. In particular, please refer to paragraphs 36 through 38.

With respect to the specific situation you describe in your letter, we are unable to confirm whether the conditions in paragraph 38 of the Bulletin have been satisfied. Note that where a “large percentage” of the property is now used for the income-producing purpose it would appear that the main use of the property is not that of a residence for the owners. If that is the case, paragraph 45(1)(c) of the Act provides that there is a deemed disposition and immediate reacquisition of the portion of the property converted to the new use for proceeds and cost equal to the portion’s proportionate share of the property’s fair market value. Any resulting gain on the deemed disposition is usually eliminated by the principal residence exemption - see paragraph 14 of the Bulletin for an explanation of the calculation of the amount eligible for the exemption.

When the whole property is sold after the partial change in use, any capital gain relating to the income-producing portion of the property will be realized and taxable in accordance with the usual rules respecting the disposition of capital property (see paragraph 25 of the Bulletin).

We have not discussed the rules relating to capital cost allowance and depreciable property in the context of a partial change in use of the property since it was not pertinent to your situation, but they are explained in paragraph 39 of the Bulletin.

We trust this information assists.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch