30 October 1989 Income Tax Severed Letter AC58219 - Sale of a 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.

5-8219
                                                   J.D. Jones    

                                                   (613) 957-2104

Dear Sirs:

Re: Sale of a Principal Residence

This is in reply to your letter of June 9, 1989, requesting our confirmation of your opinion on the income tax consequences resulting on a sale of a principal residence in the following hypothetical situation.

Mr. Taxpayer purchased a condominium 10 years ago (January 1, 1979) in City A. Mr. Taxpayer and his spouse, Mrs. Taxpayer, are joint owners of the condominium. The condominium originally cost $200,000 and currently has a fair market value of $500,000. The condominium has been the Taxpayers' principal residence for the last 10 years. The Taxpayers are currently moving (January 1, 1989) to City B where they have acquired a house which they intend to be their new principal residence. The condominium in City A will not be sold nor rented nor used for any non-personal purposes.

Mr. Taxpayer will purchase Mrs. Taxpayer's interest in the condominium in City A on January 1, 1989 for fair market value of $250,000 (i.e. 1/2 of $500,000). firs. Taxpayer will elect to have the condominium considered as her principal residence for the 10 year period ended on January l, 1989. On January 1, 1994, Mr. Taxpayer sells the condominium in City A to an arm's length party for $700,000. Mr. Taxpayer will elect to have the condominium considered to be his principal residence for the same 10 year period ended January 1, 1989.

Based on the foregoing hypothetical situation, it is your opinion that:

1. The sale by Mrs. Taxpayer to Mr. Taxpayer will result in a gain of $150,000 (proceeds of $250,000 less adjusted cost base of $100,000). This gain will be exempted from taxation because the principal residence election will be made under paragraph 40(2)(b) of the Income Tax Act (the "Act").

2. The taxpayers will elect not to have subsection 73(1) of the Act apply which will mean that subsection 40(4) of the Act will not apply. Therefore, the adjusted cost base of the condominium to Mr. Taxpayer will be $350,000 after the sale. This amount is comprised of his share of the original purchase price, $100,000 (1/2 of $200,000) and the $250,000 paid to Mrs. Taxpayer.

3. Section 47 of the Act with respect to identical properties, will not apply because the two halves of the condominium would not be deemed to be identical properties and as such there will be no new deemed acquisition date.

4. Subsection 45(1) of the Act with respect to a deemed disposition will also not apply because there is no change in use of the condominium as it will not be rented or otherwise used for business purposes.

5. When Mr. Taxpayer sells the condominium in City A in 1994, there will be a gain of $350,000 (proceeds of $700,000 less adjusted cost base of $350,000). Of this gain, $256,667 will be exempt from taxation because Mr. Taxpayer will elect to have the condominium treated as his principal residence for the years before January 1, 1989 (i.e. 10 years). Paragraph 7 of interpretation Bulletin IT-120R3 states that there may be only one principal residence per family unit. Therefore, Mr. Taxpayer must elect the condominium in City A as his principal residence for the same years as those elected by his wife.

6. The calculation of the taxable gain is as follows:

        $350,000 - ($350,000 x (1+10)/15)=
        $350,000 - $256,667 - $93,333.

The general anti-avoidance rules under section 245 of the Act will not apply to the transactions outlined above. There are no other provisions in the Act, which have not been identified above, which would impact these transactions.

Our Comments

As discussed in our telephone conversation (19(1)Jones) of July 27, 1989, you requested our opinion be given with respect to the above situation both where the funds used to purchase the condominium on January 1, 1979 by Mr. Taxpayer were furnished equally by each taxpayer's own funds and where the condominium was purchased exclusively with the funds being provided solely by Mr. Taxpayer.

in both cases, the condominium was purchased in full with cash and as such there was no mortgage on the property.

Based upon the above, in the situation where the condominium was purchased with funds provided equally by Mr. and Mrs. Taxpayer, we offer the following comments.

1. We concur with your opinion that, provided the taxpayers elect not to have subsection 73(1) of the Act apply, the sale by Mrs. Taxpayer to Mr. Taxpayer will result in a gain of $150,000 (proceeds of $250,000 less adjusted cost base of $100,000) and that this gain will be exempt from taxation pursuant to paragraph 40(2)(b) of the Act by Mrs. Taxpayer provided she designates the condominium as her principal residence.

2. We concur with your opinion that if the taxpayers elect not to have subsection 73(1) of the Act apply that subsection 40(4) of the Act will also not apply. Accordingly, the adjusted cost base of the condominium to Mr. Taxpayer would be $350,000 after the sale. This amount is comprised of his share of the original purchase price, $100,000, and the $250,000 paid to Mrs. Taxpayer.

3. It is our view that, in this situation, it is the Department's practice not to apply the provisions of section 47 of the Act such that the provisions contained therein would not have application with respect to the "adjusted cost base" calculation.

4. We concur with your opinion that subsection 45(1) of the Act with respect to a deemed disposition will not apply as there is no change in use of the condominium as it will not be rented or otherwise used for business purposes.

5. We concur with your opinion that when Mr. Taxpayer sells the condominium in City A in 1994, there will be a gain of $350,000 and of this amount $256,667 will be exempt from taxation as Mr. Taxpayer may elect to have the condominium treated as his principal residence for the 10 year period prior to January 1, 1989. We are also in agreement with your opinion that as there can only be one principal residence per family unit, Mr. Taxpayer must designate the condominium in City A as his principal residence for the same years as those elected by his wife.

6. It is our view that the calculation of the capital gain to Mr. Taxpayer, as calculated pursuant to paragraph 40(2)(b) of the Act, is as follows:

$350,000 - ($350,000 x (1+10)/15)= $350,000 - $256,667 = $93,333

7. Concerning the application of the general anti-avoidance rules pursuant to section 245 of the Act in the above situation, it is our view that section 245 of the Act may have application where it can be shown that the primary purpose of the transaction was to reduce the tax liability of one of the spouses.

8. We are not aware of any other provisions in the Act which would appear to impact on these transactions based upon the information submitted.

In the situation where the condominium purchased in January of 1979 by Mr. Taxpayer was purchased solely with his own funds, we offer the following comments.

It is our view that, in the circumstances you describe, any income or loss from the property transferred (i.e. $250,000) from Mr. Taxpayer to Mrs. Taxpayer would be attributed to Mr. Taxpayer pursuant to section 74.1 of the Act. in addition, any capital gain or loss from the property transferred would be attributed to Mr. Taxpayer pursuant to section 74.2 of the Act. It is also our view, depending upon the particulars of the situation, that sections 74.1 and 74.2 of the Act may or may not be applicable depending upon whether or not subsection 74.5(11) of the Act is applicable.

We are also of the opinion that the circumstances you describe are analogous to those cases where a couple jointly purchases a rental property which is registered in both their names but the purchase funds are provided solely from the assets or earnings of only one of the spouses. in these cases, such as Valitalo and Murillo v. M.N.R. 79 DTC 327, it is clear that the attribution rules apply even though the property is jointly owned from the moment of its acquisition. The courts have found there has, in effect, been a transfer of property from the spouse providing the purchase funds to the other spouse.

In addition, it is our view that a portion of Mr. Taxpayer's gain on the sale of the condominium (i.e. $300.000) will be exempt from taxation pursuant to paragraph 40(2)(b) of the Act provided Mr. Taxpayer designates the property as his principal residence.

Finally, it is our view that section 245 of the Act would not have application in the above situation nor does there appear to be any other provisions in the Act which would appear to impact on these transactions based upon the information submitted.

The foregoing represents our considered opinion as to the application of the law generally; however, this is not a ruling and is not binding on the Department.

Yours truly,

for Director Business and General Division Specialty Rulings Directorate Legislative and intergovernmental Affairs Branch