21 July 1999 External T.I. 9910055 - PRINCIPAL RESIDENCE WITHIN 40 KILOMETERS

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: Does the taxpayer meet the conditions of section 54.1(1) where he moves back to a housing unit that is within 40 kilometers of his original housing unit that he still owns?

Position: Yes, but for prior years only.

Reasons: Subsection 54.1(2) should only be interpreted as an annual test in light of the opening words in subsection 54.1(1) of the Act

XXXXXXXXXX 991005
C. Tremblay
July 21, 1999

Dear XXXXXXXXXX:

This is in reply to your letter of April 15, 1999, wherein you seek information on a principal residence issue.

In your letter, you describe a situation where in the early 1980’s you lived in XXXXXXXXXX and in 1984 you were relocated by your employer. Since 1984, you have been relocated five times. You still own the house in XXXXXXXXXX (“original housing unit”) which, since 1984, has been used as a rental property. Pursuant to subsections 45(2) and 54.1(1) of the Income Tax Act (the “Act”), you intend to designate the original housing unit as your “principal residence” for 1984 and subsequent years. You are still employed by the same employer who is not related to you, and you have reported the net rental income annually and have not claimed CCA at any time.

In August of 1998, you were transferred back to XXXXXXXXXX but since your family size has doubled since 1984, you feel the original housing unit is presently too small to occupy; accordingly, you have purchased a larger home in XXXXXXXXXX . You do intend, however, on returning to ordinarily inhabit the original housing unit while employed or within a year after termination of employment with the same employer before its disposition. Now that you have returned to a location that is within 40 kilometers of your original housing unit, you are concerned on how that will impact on your “principal residence” election.

Our Comments:

Under section 54.1 of the Act, a housing unit may continue as the “principal residence” indefinitely so long as, among other criteria, the absence from the housing unit was owing to the requirements of the employer. While the provisions of section 54.1 of the Act are satisfied, no year would be included in the 4 year limitation imposed in paragraph (d) of the definition of “principal residence” in section 54 of the Act in respect of a housing unit to which the taxpayer has made an election pursuant to subsection 45(2) of the Act. In order to fully satisfy the requirements of section 54.1 of the Act, the housing unit must become ordinarily inhabited by the taxpayer during the term of employment by that employer or before the end of the taxation year immediately following the taxation year in which the employment terminates. However, subsection 54.1(1) of the Act will no longer apply where a taxpayer returns to a location that is within 40 kilometers of the housing unit. Subsection 54.1(2) of the Act requires that at all times in the year, the housing unit (in your case, the original housing unit) be at least 40 kilometers farther from the new place of employment than was the taxpayer’s subsequent place or places of residence.

In our view, in 1998, which is the year you returned to a location that is within 40 kilometers of your original housing unit, you can no longer avail yourself of the exception described in section 54.1 of the Act. However, provided you return to ordinarily inhabit (see our comments on this issue in the following paragraph) the original housing unit during the term of employment by that employer or before the end of the taxation year immediately following the taxation year in which your employment terminates, a question of fact, the requirement of section 54.1 of the Act will be met for the 1985 to 1997 taxation years. Also, you would be entitled to designate the original housing unit as a “principal residence” for a further 4 years (i.e. 1998 to 2001) pursuant to paragraphs (b) and (d) of the definition of “principal residence” in section 54 of the Act.

Although the term “ordinarily inhabit” is not defined in the Act, it is our view that should a person move into the property for a short duration, he or she may not be considered to have resumed “ordinary habitation”. The courts have considered the term “ordinarily inhabit” in Ennist et al v MNR (85 DTC 669) to mean “in most cases usually or commonly occupied as an abode”. See also the tax court case Dusan Gavrilovic and Slavinks Gavrilovic v the Queen (97 DTC 142) where the principal residence was denied because the stated intention and the course of conduct were different. We also refer you to paragraph 12 of IT-120R4, Principal Residence (copy enclosed) titled Meaning of “Ordinarily Inhabited” and paragraph 33 which discusses the exception to the principal residence rules pursuant to section 54.1 of the Act.

We trust our comments are of assistance.

Yours truly,

Jim Wilson
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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