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:
Prior to marriage, father owned and lived in residence with adult son. After marriage, he moved in with new spouse and son continued to live rent-free in the residence. What are the capital gains repurcussions. Property transferred to son in 1994.
Position TAKEN:
Principal residence exemtion and capital gains deduction may be used to offset the capital gain which arose on the transfer in 1994.
Reasons FOR POSITION TAKEN:
Section 54 definition of principal residence refers to circumstances where the residence is occupied by the child of the taxpayer. Accordingly, the residence can be designated as a principal residence assuming the other requirements are satisfied. IT-120R4, previous correspondence.
950030
XXXXXXXXXX D. Zion
Attention: XXXXXXXXXX
March 7, 1995
Dear Sirs:
Re: Principal Residence Exemption and Capital Gains
We are writing in response to your correspondence forwarded to us on January 6, 1995 wherein you have requested a ruling with respect to one of your client's tax situation.
As discussed in our telephone conversation of March 3, 1995 (Zion/XXXXXXXXXX), advance income tax rulings, in addition to a charge for the service, are given only in respect of proposed transactions. Further, a ruling cannot be provided where the main issue involves a question of fact. However, we will provide general comments as they pertain to the circumstances outlined in your letter.
As we understand the situation, an individual purchased an apartment in 1989. Both he and his adult son occupied the property until 1991, at which time the individual remarried and moved into his spouse's residence, a home owned by the spouse. The son continued to live in the apartment rent-free until the February 1994, at which time the father transferred the apartment to his son. Our comments are based on the assumption that there has not been a change in use from a personal-use property to an income producing property.
Subsection 69(1) of the Income Tax Act (the Act) would apply to a gift of property to an adult child. In such cases, the transferor would be deemed to have transferred the property at its current fair market value thereby triggering any taxable gain or loss at the time of the transfer. The recipient adult child would then be deemed to have acquired the property at its fair market value at that same time. It is possible that the capital gain resulting on the transfer could be partially or completely offset through the use of the principal residence exemption and/or capital gains deduction. In relation to these circumstances, the definition of a principal residence in section 54 of the Act sets out the rules under which a property can be designated as an individual's principal residence for a particular taxation year. Since this definition refers to the situation where a housing unit was occupied by the child of the taxpayer, it is our view that the father could designate the apartment property for any year that he owned it and he or his son "ordinarily inhabited" the apartment, assuming he would otherwise qualify to do so. It would follow that the related gain on the transfer of the apartment property would be fully exempt on the basis that the property is so designated for those years with respect to the formula set out in paragraph 40(2)(b) of the Act. In the years subsequent to the marriage, however, we would caution that only one property per family unit could be so designated. Paragraph 15 of the enclosed interpretation bulletin IT-120R4 ("IT-120R4") discusses the fact that the formula in paragraph 40(2)(b) of the Act recognizes that the taxpayer can have two residences in the same year.
In the event that not all the years in question are designated for the purpose of the principal residence exemption, it is possible that a portion of the remaining capital gain may be eligible for the capital gains deduction. With respect to the election on real estate, only the pre-March 1992 gains can be recognized which is based on the proration rules established in the February 1992 Budget. We are also enclosing a copy of the 1994 Capital Gains Guide which includes a chapter on the subject of principal residences. Should you have any further questions regarding this matter, we suggest that you contact your local Revenue Canada Tax Services office. Upon provision of the facts of the situation they will be in a position to assist you.
We trust our comments will be of assistance to you.
Yours truly,
P.D. Fuoco
for Director
Business and General Division
Rulings Directorate
Policy and Legislation Branch
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