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: What are the tax issues at the time of a disposition when a principal residence is no longer "ordinarily inhabited" by its owner?
Position: The home will be subject to capital gains for the years from when it no longer qualifies as a "principal residence" to the date it is sold. Taxpayer may be able to claim principal residence exemption for the years that home qualifies as a "principal residence" provided that the necessary conditions are met in section 54 of the Act.
Reasons: Legislation.
XXXXXXXXXX 2010-035910
S. Bernards
June 24, 2010
Dear XXXXXXXXXX :
RE: Principal residence IT-120R6
I am writing in response to your email of February 24, 2010 wherein you enquired about possible capital gain tax implications associated with the sale of a house. Specifically, you described a situation where a taxpayer owns a house in which she resided until moving to a care home in December 2009. You indicated that the care home is now the taxpayer's new residence effective December 2009 and it is likely that the taxpayer will remain there permanently. Lastly, you also indicated that there has been no change in the use of the house from a non-income-producing use to an income-producing use since December 2009 until present. We acknowledge the additional information provided to us during our telephone conversations (Bernards/XXXXXXXXXX).
It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the internet at http://www.cra-arc.gc.ca. Should your situation involve a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office ("TSO") for their views. We are, however, prepared to provide the following general comments.
Our Comments
Generally, if a property qualifies as a taxpayer's principal residence, the taxpayer can use the principal residence exemption to reduce or eliminate any capital gain otherwise occurring, on the disposition (or deemed disposition) of the property. The income tax rules relating to a principal residence, including the conditions to be met for designating a property as a principal residence are discussed in the Interpretation Bulletin, IT-120R6, Principal Residence.
For the house in question to qualify as a principal residence of the taxpayer for a particular year, the taxpayer must have "ordinarily inhabited" it during that year for the purposes of paragraph 54(g)(i) of the Income Tax Act. Our general position on the meaning of the term "ordinarily inhabited" is set out in paragraph 5 of the IT-120R6.
The issue of whether or not the taxpayer can be considered to have ordinarily inhabited her house while she is living in the care home throughout a year as a result of illness is a question of fact. If the taxpayer's stay at the care home could be regarded as being temporary with respect to a particular year, it is likely that the "ordinarily inhabited" requirement would be satisfied for that year. On the other hand, if the taxpayer's stay in the care home is permanent, it is our view that the "ordinarily inhabited" requirement would likely not be satisfied.
Paragraph 8 of the IT-120R6 discusses a formula applicable for calculating the capital gain on the disposition of a principal residence. The period during which a residence qualifies as a "principal residence" is extended by one year by adding one year to the number of taxation years ending after the acquisition date for which the property was the taxpayer's principal residence and during which the taxpayer was a resident of Canada.
In this case, you indicated that the taxpayer will likely remain in the care home permanently after commencing to reside there in December 2009. Consequently, in our view, the "ordinarily inhabited" requirement would not be satisfied for 2011 and subsequent years and the taxpayer's house would not qualify as her principal residence for those years. As a result, a capital gain may result in relation to 2011 and subsequent years.
We hope our comments will be of assistance.
Yours truly,
Randy Hewlett
Manger
for Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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