4 June 2010 External T.I. 2010-0357631E5 - 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: 1. Whether a part-year would count as a year in term B of the principal residence exemption formula contained in paragraph 40(2)(b) of the Act? 2. Whether the filing of a subsection 45(2) election form would make a difference as to whether a part-year would count as a year in term B of the principal residence exemption? 3. Whether the ownership of the principal residence would make a difference as to whether a part-year would count as a year in term B of the principal residence exemption?

Position: 1. Yes. 2. No. 3. No.

Reasons: 1. If the taxpayer was resident in Canada any time in the year (and not necessarily for the whole of the year), the year would count as taxation year for which the property was the taxpayer's principal residence. 2 & 3. As long as the Canadian property meets the definition of a "principal residence" in section 54, then the taxpayer's residence is the only factor that affects whether a part-year is counted as a year in term B of the formula in paragraph 40(2)(b).

XXXXXXXXXX 2010-035763
T. Elsey
June 4, 2010

Dear XXXXXXXXXX :

Re: Principal residence - subsection 40(2)(b) of the Income Tax Act (the "Act")

We are writing in response to your letter dated February 16, 2010 regarding the principal residence formula in subsection 40(2)(b) of the Act. Specifically, you have asked for our views as to whether the year of departure would count as a year for term B in the principal residence exemption formula contained in subsection 40(2)(b) of the Act in a situation where a Canadian resident taxpayer vacates his principal residence in Canada in May 2009 and becomes a resident in the US. You indicate that following his departure, the taxpayer has rented out his Canadian property and that no subsection 45(2) election has been filed in relation to the Canadian property. Further, you have asked whether filing a subsection 45(2) election would make a difference as to whether the departing year would be included in the principal residence exemption calculation. Finally, you have asked whether selling the Canadian property upon departure would make a difference as to whether the departing year would be included in the principal residence exemption calculation.

Written confirmation of the tax implications inherent in particular transactions may only be provided by this Directorate where the transactions are proposed and are the subject matter of an advance income tax ruling submitted in the manner set out in 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/formspubs/menu-e.html. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. Although we cannot comment on your specific situation, we are prepared to provide the following general comments, which may be of assistance.

If a property in Canada qualifies as a taxpayer's "principal residence", the taxpayer can use the principal residence exemption in paragraph 40(2)(b) of the Act to reduce or eliminate any capital gain otherwise occurring for income tax purposes on the disposition (or deemed disposition). The term "principal residence" is defined in section 54 of the Act. For the purposes of this interpretation request, we have assumed that the taxpayer's home in Canada meets all the requirements of section 54 of the Act and is the taxpayer's principal residence up until the day he actually sold the home.

In accordance with paragraph 40(2)(b) of the Act, the exempt portion of the gain from the disposition of a principal residence is calculated by the formula: A - (A x B / C) - D. "Term B" is defined as one plus the number of taxation years ending after the acquisition date for which the property was the taxpayer's principal residence and during which he was resident in Canada. Note that both these conditions must be satisfied for a particular year in order for that year to qualify for inclusion in term "B". As described in paragraph eight of IT-260R6, Principal Residence, the word "during" in reference to a taxation year means "at any time in" rather than "throughout the whole of" the taxation year. Therefore, if the taxpayer was resident in Canada any time in the year (and not necessarily for the whole of the year), the year would count as a taxation year for which the property was the taxpayer's principal residence.

In accordance with Term B of the formula in paragraph 40(2)(b) of the Act, assuming a Canadian property meets the definition of "principal residence" in section 54 of the Act, whether or not a taxpayer ceases to be a Canadian resident will affect the calculation of the principal residence exemption in respect of Canadian property as the Canadian property will only qualify for the principal residence exemption for the years in which the individual is resident or deemed resident in Canada. Finally, ownership of the Canadian property and the filing of a subsection 45(2) election form have no bearing on whether a taxation year is included in Term B in the calculation of the principal residence exemption of paragraph 40(2)(b) of the Act.

In view of the above, for each of the scenarios you described, 2009 (the departure year) would be included in Term B of the principal residence exemption because the taxpayer was resident in Canada for part of the 2009 year and the Canadian property was the taxpayer's principle residence, as defined in section 54 of the Act, during the 2009 year.

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 IC 70-6R5 and are not binding on the CRA in respect of any particular situation.

Yours truly,

Randy Hewlett
for Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch