13 September 2010 External T.I. 2010-0364781E5 - principal residence exemption

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.

Principal Issues: Can an individual designate two different properties for different taxation years as his or her principal residence?

Position: Depends on the facts.

Reasons: If an individual meets the conditions of the term "principal residence" for each property for a particular tax year, an individual can allocate which tax years each property will be designated as his or her principal residence.

XXXXXXXXXX
                                                      2010-036478
                                                      N. Shea-Farrow
September 13, 2010

Dear XXXXXXXXXX :

Re: Technical Interpretation Request - Principal Residence Exemption

We are writing in response to your e-mail of April 23, 2010 requesting our comments on the principal residence exemption with respect to the following scenario:

1. Individual A purchases and moves into House A with his family in 2005.

2. Individual A purchases House B in October 2006 and moves into it with his family but his daughter who is over the age of 18 at that time continues to live in House A.

3. In 2009 Individual A sells House B for a profit and moves back into House A with his family.

4. In 2010 Individual A sells House A for a profit.

Your question is can Individual A designate House A as his principal residence for the 2005 and 2009 tax years and designate House B for the 2006, 2007 and 2008 tax years?

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request as set out in Information Circular IC 70-6R5 dated May 17, 2002. Where the particular transactions are completed the inquiry should be addressed to the relevant tax services office. However, we are prepared to offer the following general comments, which may be of assistance.

Our Comments

The Canada Revenue Agency's (CRA) position on the "principal residence exemption" is set out in Interpretation Bulletin IT-120R6 "Principal Residence". If a property qualifies as a "principal residence", an exemption can be claimed under paragraph 40(2)(b) of the Income Tax Act "(the Act") to reduce or eliminate any capital gain otherwise realized on the disposition of the property. The term "principal residence" is defined in section 54 of the Act. In order for a property to qualify for a designation as a taxpayer's "principal residence" for a tax year, it must be demonstrated, among other things, that he or she owns the property, and that it is ordinarily inhabited in the year by the taxpayer, or the spouse or common-law partner, former spouse or common-law partner or child, of the taxpayer.

The question of whether a housing unit is ordinarily inhabited in the tax year by a person must be resolved on the basis of the facts in each particular case. The CRA's position on the term "ordinarily inhabited" is outlined in paragraph 5 of IT-120R6.

For a property to be a taxpayer's principal residence for a particular tax year, generally, the taxpayer must designate it as such and no other property may have been so designated by the taxpayer or any member of the taxpayer's family unit for that tax year.

A taxpayer's designation of a property as a principal residence for one or more tax years is to be made in his or her income tax return for the tax year in which he or she has disposed of the property or granted an option to another person to acquire the property. The designation form used for this purpose is Form T2091(IND), "Designation of a Property as a Principal Residence by an Individual (Other Than a Personal Trust)". However, in accordance with our administrative practice, Form T2091(IND) generally need only be completed and filed with the taxpayer's income tax return where a taxable capital gain on the disposition of the property remains after using the principal residence exemption formula (see paragraph 7 of IT-120R6).

The principal residence exemption rules recognize that a taxpayer can have two residences in the same tax year, i.e., where one residence is sold and another acquired in the same tax year. The effect of the "one plus" in the formula used to calculate the exemption (as described paragraph 8 of IT-120R6, variable B) is to treat both properties as a principal residence in such a tax year, even though only one of them may be designated as such for that tax year.

Individual A in the scenario above can designate House A for the 2005 and 2009 tax years as his principal residence providing that all the conditions for the term principal residence have been met. Further Individual A can designate House B as his principal residence for the 2006, 2007 and 2008 tax years again providing that all the conditions for the term principal residence have been met. The variable C in the formula is the number of tax years ending after the acquisition date during which the taxpayer owned the property, which is 6 for House A and 4 for House B. Thus it is likely that House A will still have a taxable capital gain to report after the principal residence exemption has been applied.

While we trust that our comments will be of assistance to you, they are given in accordance with the practice referred to in paragraph 22 of IC70-6R5 and are not binding on the CRA in respect of any particular situation.

Yours truly,

Sharmini Ratnasingham
Managern.
For Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch