5 August 1998 Internal T.I. 9817567 - PRINCIPAL RESIDENCE - GENERAL COMMENTS.

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: Principal residence.

Position: General comments.

Reasons: Non-specific question.

		August 5, 1998

	Southern Interior Tax	HEADQUARTERS
	  Services Office	J. Gibbons
	Technical Interpretation Section	(613)957-8953

	Attention:  Suzanne Mackinder
		7-981756

XXXXXXXXXX

This is in response to your fax of June 30, 1998, regarding a letter of April 28, 1998, from XXXXXXXXXX. In their letter, the taxpayers enquired whether there are tax consequences related to the sale of their house in XXXXXXXXXX and the construction of a new principal residence on vacant land that was owned by them for the previous 18 years. In this regard, we offer the following general comments.

A gain on the disposition of a “principal residence,” which is defined in section 54 of the Income Tax Act (the “Act”), is calculated according to the rules in paragraph 40(2)(b) of the Act. These rules are discussed in detail in Interpretation Bulletin IT-120R4, “Principal Residence.” Generally, the disposition of a property which qualifies as an individual’s principal residence for all of the years it was owned by him or her will result in a nil gain. To qualify as a principal residence, the property must be a “housing unit” which is owned in the taxation year by the individual and ordinarily inhabited in the taxation year by the individual or by the spouse, former spouse or a child of the individual. In addition, the housing unit must be designated by the individual as his or her principal residence. For a list of the requirements to qualify as a principal residence, as well as a discussion of the meaning of the terms such as “housing unit” and “ordinarily inhabited,” we refer you to paragraphs 2 through 12 of IT-120R4.

According to section 2301 of the Income Tax Regulations, the designation of a particular property as a principal residence for one or more taxation years must be made in the individual’s income tax return for the taxation year in which he or she has disposed of the property or granted an option to another person to acquire the property. Form T2091 may be used for this purpose. However, as indicated in paragraph 13 of IT-120R4, it is Departmental practice to waive this requirement if there is no taxable capital gain on the disposition of the property after using the principal residence exemption, but before claiming any capital gains deduction under section 110.6 of the Act.

The tax consequences accompanying the construction of a principal residence on vacant land are discussed in paragraph 16 of IT-120R4. You will note therein our view that land cannot be designated as a principal residence for years that are prior to the year in which the individual, his spouse, former spouse or child commences to ordinarily inhabit the housing unit. Accordingly, although there are no immediate tax consequences at the time that vacant land becomes part of a principal residence, a taxable capital gain may result when the principal residence is later disposed of.

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

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