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: Is there authority to accept a late election under ITA 45(2)?
Position: Yes
Reasons: ITA 220(3.2) and Reg 600. See paragraphs 25-27 of IT-120R6
February 6, 2008
Summerside Tax Centre Headquarters
T1 Reassessment Sandy Parnanzone
Attention: D. Kavanagh
2008-026574
XXXXXXXXXX
This is in response to your Round Trip Memorandum of January 14, 2008, concerning an election under subsection 45(2) of the Income Tax Act ("Act").
Attached to your RTM was a letter dated XXXXXXXXXX , that the estate's executor, XXXXXXXXXX , wrote to your office concerning the filing of a late election under subsection 45(2) in respect of the deceased taxpayer's principal residence.
As we understand the facts, the taxpayer and her spouse lived at XXXXXXXXXX , a property that they owned and used as principal residence until XXXXXXXXXX , at which time they moved to XXXXXXXXXX . After their move to XXXXXXXXXX , the XXXXXXXXXX property, which had appreciated since its acquisition, was rented and the rental income was duly reported for income tax purposes.
Where a taxpayer starts using a property that is a principal residence for an income earning purpose, the taxpayer would normally be deemed to have disposed of and reacquired the property at fair market value under paragraph 45(1)(a) of the Act, unless an election is filed under subsection 45(2). If the taxpayer files a subsection 45(2) election (including a late-filed election, as mentioned below) in the tax return for the taxation year in which the change in use occurs, the taxpayer is deemed not to have commenced to use the property for an income earning purpose, with the result that the taxpayer is able to designate the property as a principal residence generally for up to four years during which the election is in effect. If the mentioned election is not filed and the property appreciated in value, a deemed disposition at fair market value would result in a capital gain having to be reported by the taxpayer in the year of the property's change in use.
In the case you are reviewing, the taxpayer and her spouse, who are now both deceased, neither reported in XXXXXXXXXX the deemed deposition of the residence resulting from the change in use nor did they file an election under subsection 45(2).
The executor would like to file a late subsection 45(2) election so that the taxpayer can claim the principal residence exemption for up to four years during which this election is in effect. As we understand it, the reason for your referral to us was the uncertainty concerning the authority that would allow the CRA to accept a late election under subsection 45(2). The election under subsection 45(2) is discussed in detail in paragraphs 25 to 27 of Interpretation Bulletin IT-120R6, Principal Residence. There is authority for your office to accept a late-filed subsection 45(2) election, as explained in paragraph 25 of the bulletin, where it is stated:
"Subsection 220(3.2) of the Act, in conjunction with section 600 of the Income Tax Regulations, provides the authority for the Canada Customs and Revenue Agency (the CCRA) to accept a late-filed subsection 45(2) election. Such a late-filed election may be accepted under certain circumstances, one of which is that no CCA has been claimed on the property since the change in use has occurred and during the period in which the election is to remain in force. For further particulars on the acceptance of late-filed elections, see the current version of Information Circular 92-1, Guidelines for Accepting Late, Amended or Revoked Elections."
With respect to the reference to Information Circular 92-1, we would note that this circular (together with IC 92-1 and IC 92-3) has been discontinued and replaced by the new Information Circular IC 07-1, Taxpayer Relief Provisions.
Whether or not CCA was claimed in respect of the property and whether or not the conditions in IC 07-1 are met in the situation under review are questions of fact to be resolved by taking into account all details and circumstances of the case. In view of this and the fact that we do not have complete details of the case, we feel that your office is in a better position to ascertain the facts and advise the executor as to whether your office is prepared to accept a late-filed subsection 45(2) election.
If you have any other specific question, please call the writer.
S. Parnanzone
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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