22 June 1998 External T.I. 9810745 - 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: Which one of two properties can qualify as a principal residence

Position: No position taken, insufficient information provided. Referred taxpayer to IT-120R4 (“Principal Residence”)

Reasons:

XXXXXXXXXX 981074

N. Mondou, M.Fisc.

June 22, 1998

Dear Madam\Sir:

Re: Real Estate Holdings: Principal Residence

This is in reply to your letter dated April 27, 1998, in which you requested our views as to the determination of the principal residence status of two properties you owned up to May 1997.

The situation outlined in your letter involves an actual fact situation. To the extent that it relates to a past transaction you should contact the appropriate tax services office, since the review of such transactions falls within their responsibility. However, we offer the following general comments.

In order for a property to qualify as a taxpayer’s principal residence for a particular year, the requirements set out in the definition of principal residence in section 54 of the Income Tax Act (the “Act”) must all be satisfied. The general requirements are explained in paragraphs 3 to 6 of the enclosed Interpretation Bulletin IT-120R4 (“Principal Residence”).

If a taxpayer starts using his or her principal residence to earn rental income, the change in the use of the property will generally trigger a deemed disposition at fair market value under subsection 45(1) of the Act. Any gain otherwise determined on this deemed disposition may be eliminated or reduced if the property is designated by the taxpayer as his or her principal residence for the entire period of ownership preceding the change in the use. On the other hand, if the taxpayer otherwise qualifies, he or she may file the election provided for in subsection 45(2) of the Act with the result that the change in the use of the property will be deemed not to have occurred, thereby deferring the recognition of the gain to a later year.

Similarly, if a rental property is converted into a principal residence, a deemed disposition will occur under subsection 45(1) of the Act. However, this general rule will be considered not to apply if the taxpayer files the appropriate election under subsection 45(3) of the Act.

You will find a detailed explanation of the tax implications dealing with the above issues on principal residence in paragraphs 31 to 40 of the enclosed Interpretation Bulletin IT-120R4.

We trust that these comments are of assistance.

Yours truly,

J. F. Oulton, CA
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

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