24 June 1998 External T.I. 9809245 - 2 P/R MAY BE APPLIC TO A SURVIVING SP FOR PRE-81 PERIOD

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: whether the operation of 40(4) permits a widow or widower to shelter the full amt of gain realized on 2 properties in the pre-82 period when the widow acquired full ownership of the 2 properties as a result of the death of a spouse who had held a 50% interest in each of the 2 properties and 79(6) applied to the transfer

Position: yes

Reasons: the p/r designation is available on property that is owned, jointly or otherwise and is occupied by the individual making the designation - since the deceased spouse could have designated one property and the survivor the other, the operation of 40(4) makes in possible when the spouse's interest is transferred to the survivor and 70(6) applies

XXXXXXXXXX 980924
A. Humenuk

Attention: XXXXXXXXXX

June 24, 1998

Dear Sir:

Re: Principal Residence Designation for Property Acquired from a Spouse

This is in reply to your letter of April 8, 1998, in which you ask us to confirm your analysis of the interaction between subsection 40(4) and paragraph 40(2)(b) of the Act when property that has been held jointly by a married couple is transferred to a surviving spouse upon the death of his or her spouse.

You outlined a hypothetical situation in which a married couple acquired a cottage and a house in 1971. They held both properties in joint tenancy and they both ordinarily inhabited each property every year prior to the one spouse’s death which occurred after 1981. Subsection 70(6) of the Income Tax Act (the "Act") applied to the transfer of the deceased spouse’s interest to the surviving spouse. Although your example contains other factors concerning the subsequent remarriage of the surviving spouse, they do not appear to be relevant to the analysis of the issue which concerns you.

For 1981 and prior taxation years, an individual could designate a property as his or her principal residence without regard to whether other family members had designated some other property as a principal residence for that same taxation year. Effective for 1982 and subsequent taxation years however, only one property may be designated as a principal residence for any particular taxation year by all members of a family unit. Paragraph 6 of Interpretation Bulletin IT-120R4, Principal Residence, explains who is considered to be a member of an individual’s family unit for this purpose.

Accordingly, while it is clear that only one of the two properties can be designated as the surviving spouse’s principal residence for any taxation year after 1981, you ask us to confirm that the provisions of subsection 40(4) of the Act permit both properties to be considered the individual’s principal residence for the taxation years before 1982.

When subsection 70(6) of the Act applies to the transfer of property to an individual upon the death of a spouse, subsection 40(4) of the Act deems certain conditions to have been met for the purpose of determining the amount of capital gain realized, if any, under paragraph 40(2)(b) of the Act on the subsequent disposition of the property by the individual. Pursuant to paragraph 40(4)(a) of the Act, the individual is deemed to have owned the property throughout the years in which the individual’s spouse owned it. In addition, pursuant to subparagraph 40(4)(b)(i) of the Act, the property is deemed to have been the individual's principal residence for any year for which it would have been the spouse’s principal residence, if the spouse had designated it to be his or her principal residence for that year.

As noted in previous correspondence issued by this Directorate (E9507695), it is our view that the effect of subsection 40(4) of the Act is not to deem the individual to have two principal residences for the pre-1982 period in which the individual’s spouse owned the property but rather to make it possible for the individual to claim the principal residence exemption under paragraph 40(2)(b) of the Act for taxation years when the property would have been the spouse’s principal residence. For the property to have been the spouse’s principal residence, the individual’s spouse must have been eligible to so designate it, i.e., the property must have otherwise met the definition of a principal residence for the years in question. The deeming provision of subparagraph 40(4)(b)(i) of the Act does not prevent an individual from designating his or her own property as her principal residence, assuming it so qualifies, for the years 1972 to the year of the spouse’s death. However, the limit of one principal residence per family unit for years after 1981 ensures that both properties cannot qualify as the principal residence of either spouse for the same year after 1981.

The situation in your example differs from the situation in our previous correspondence referred to above in that, in your example, the two properties are held in joint tenancy whereas in the example used in our previous opinion, each spouse was the sole owner of a residence. This difference does not result in any change to the tax consequences resulting from the transfer of property which was eligible to be designated as the principal residence of the deceased spouse. One of the requirements which must be met in order to designate a property as a principal residence for a particular year is that the individual must have owned the property, whether jointly with another person or otherwise, during that year. Since the reduction in an individual’s capital gain on his or her principal residence is based in part on the number of years it was owned by that individual whether jointly with another person or otherwise, a change to an individual’s share in the ownership of a particular property during the period since it was last acquired by that individual does not affect the computation of the individual’s principal residence exemption.

These comments represent a general interpretation of the law and, as such, may not be applicable in every situation. The determination of the tax consequences of a particular situation can only be made following a review of all the relevant facts and documentation. We trust, however, that these comments will be of assistance.

Yours truly,

J.F. Oulton, CA
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch