16 March 2011 Ministerial Correspondence 2010-0396361M4 - 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.

Principal Issues: Whether the disposition of shares held in a corporation that owns a residential apartment building, which it leases at cost to its shareholders, qualifies for the principal residence exemption under paragraph 40(2)(b) of the Act.

Position: Question of fact.

Reasons: Shares of a single purpose corporation are not a housing unit, a leasehold interest in a housing unit, or a share of the capital stock of a co-operative housing corporation, if such share is acquired for the sole purpose of obtaining the right to inhabit a housing unit owned by that corporation. However, under specific circumstances, where there is an indivisible unit composed of shares of a corporation and a lease entitling the owner to inhabit a housing unit owned by the corporation, the CRA has been of the view that the shares and lease may be considered a "housing unit" for purposes of the definition of principal residence.

March 16, 2011

XXXXXXXXXX

Dear XXXXXXXXXX :

Thank you for your correspondence received on February 8 and 14, 2011, concerning the estate of your late mother, XXXXXXXXXX , and whether a disposition of shares of XXXXXXXXXX qualifies for the principal residence exemption under paragraph 40(2)(b) of the Income Tax Act.

In the documents you submitted, as well as during your conversation with Mr. Randy Hewlett, an official of the Income Tax Rulings Directorate, on February 23, 2011, you stated that Revenu Québec has assessed tax on the capital gain associated with the disposition of the shares in XXXXXXXXXX and that you are concerned about the potential federal tax liability with the Canada Revenue Agency (CRA).

The CRA's general position concerning the principal residence exemption is set out in Interpretation Bulletin IT-120R6, Principal Residence, which is available on the CRA Web site at www.cra.gc.ca/E/pub/tp/it120r6. To qualify for the exemption, among other things, an individual must have disposed of a principal residence. A "principal residence" is defined in section 54 of the Act as a housing unit, a leasehold interest in a housing unit, or a share of the capital stock of a co-operative housing corporation, incorporated subject to the terms and conditions of the legislation governing such incorporation, acquired for the sole purpose of acquiring the right to inhabit a housing unit owned by the corporation.

A share held in the capital stock of a corporation whose only purpose is to hold property for its shareholder(s) will not qualify for the principal residence exemption. However, under specific circumstances, if there is an indivisible unit composed of shares of a corporation and a lease entitling the owner to inhabit a housing unit owned by the corporation, the CRA has previously accepted that the shares and lease may be considered a housing unit. Such specific circumstances include:

• The directors of the corporation are unable to pay dividends and cannot pay or otherwise provide income or benefits to shareholders for their personal benefit.
• The unit, composed of a lease and stock, is indivisible due to the combined effect of the statutes and regulations of the corporation.
• The lease is company-owned and gives the holder the right to personally enjoy the unit to which it pertains.

The above general comments do not confirm that the principal residence exemption applies in your situation. The CRA can only make such a determination after it reviews all the facts and relevant documents. Since you are the legal representative of your late mother's estate, I strongly suggest that you request a clearance certificate before you distribute your late mother's property. This process will help determine if the principal residence exemption applies and will certify that the estate has paid all amounts owed to the CRA. If you do not request a certificate, you can be liable for any amount the deceased owes.

To request a clearance certificate, you can complete and send the enclosed Form TX19, Asking for a Clearance Certificate, as well as any relevant facts and documentation, to the Assistant Director of Audit at the Montréal Tax Services Office, 305 René-Lévesque Boulevard West, Montréal QC H2Z 1A6. You can find more information about clearance certificates on the CRA Web site at www.cra.gc.ca/deceased.

I appreciate the opportunity to respond to your concerns.

Yours sincerely,

Keith Ashfield

Enclosure

Tom Posadovsky
(613) 952-8283
2011-039636