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:
1. Whether there is a deemed disposition of property in a case where a taxpayer has partially converted a principal residence to an income-producing use (a bed and breakfast business)
Position:
Not possible to determine based on the information provided.
Reasons:
This file is similar to file 972728. See also paragraphs 36 to 38 of IT-120R4.
XXXXXXXXXX 980324
G. Moore
April 15, 1998
Dear XXXXXXXXXX:
Re: Principal Residence - Partial Change in Use
We are replying to your fax of January 27, 1998, 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.
I understand Ms Gwen Moore of this division telephoned you on April 8, 1998, and discussed your enquiry with you. You have asked about the use of a portion of a principal residence as a bed and breakfast business. A proportional share of the maintenance and repairs on the house would be claimed but no capital cost allowance would be claimed. You have enquired as to whether the future sale of the house would result in any capital gains. We offer the following general comments.
The Department’s general interpretation of the provisions of the Income Tax Act (the “Act”) which apply to such property is contained in IT-120R4, Principal Residence. In particular, please refer to paragraphs 36 to 38 of that bulletin (copy enclosed). With respect to the specific situation described in your letter, whether the partial use of a principal residence as a bed and breakfast business would result in a deemed disposition of the property would be a question of fact. However, in the case of a small bed and breakfast business that only uses a small portion of the principal residence, and if the conditions in paragraph 38 of the bulletin are satisfied, then generally, there would not likely be any deemed disposition resulting from the partial change in use of a principal residence as a bed and breakfast business.
If the conditions in paragraph 38 of the bulletin are not met, 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 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, based on the rules regarding the disposition of capital property (see paragraph 25 of the bulletin). Paragraph 39 of the bulletin discusses the rules relating to capital cost allowance and depreciable property in the context of partial change in use of property.
We trust this information will be of assistance to you.
J. Wilson
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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