28 June 2002 External T.I. 2002-0143085 - PRINCIPAL RESIDENCE

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 CCRA.

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

Principal Issues: We have been provided with an actual fact situation where, inter alia, an owner of a duplex occupied one unit and rented the other unit for many years before it became vacant for a number of years. We have been asked whether the individual can claim the principal residence exemption with respect to the previously rented unit during taxation years that it was vacant.

Position: General comments were provided to the effect that this would not be the case.

Reasons: Each unit is "a housing unit" and the rented unit was never "ordinarily inhabited" by the individual for the purposes of the definition of "principal residence" in section 54 of the Income Tax Act.

XXXXXXXXXX 2002-014308
M. Eisner, CA
June 28, 2002

Dear XXXXXXXXXX:

Re: Principal Residence Exemption

This is in reply to your letter of May 27, 2002 concerning the above-noted subject.

You have outlined a situation where one unit (Unit A) of a duplex was always inhabited by its owner (the "Owner") since he or she purchased the duplex, and the other unit ("Unit B") was rented out for a long time by the Owner before becoming vacant for a number of years. While the duplex has one common entrance, each unit is separate, having its own separate door and its own separate living facilities and utilities. Since it was vacated, Unit B has been empty (no furniture) and the Owner rarely, if ever, went into it. The assumption is made that the Owner is entitled to designate Unit A as his or her "principal residence" for each year the Owner inhabited it. At about the time that Unit B became vacant, the Owner (an elderly individual) had been inflicted with a mental disorder that became progressively worse as time passed. As a result, the Owner was placed in a long-term care facility and in the same year the Owner was placed in the care facility, a curator sells the duplex.

In connection with Unit B, you have asked us to consider whether it can qualify as the principal residence of the Owner. You also note that, in your view, the change in use rules would not have applied when Unit B became vacant.

Our Comments

At the outset, we note that written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5. Where the particular transactions are completed, the enquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following comments, which are general in nature.

As you are no doubt aware, a detailed discussion of the principal residence exemption is set out in Interpretation Bulletin IT-120R5. Part of the definition of "principal residence" in section 54 of the Income Tax Act (the "Act") refers to "a housing unit". Paragraph 3 of IT-120R5 indicates that a housing unit includes a unit in a duplex while, as indicated in paragraph 6 of IT-120R5, a taxpayer (and family unit for 1982 and subsequent taxation years) can only designate one housing unit as his or her principal residence for a year. It is therefore our view that only one unit in the duplex could qualify as the Owner's principal residence. In addition, the definition of "principal residence" specifies that the housing unit must be ordinarily inhabited by, inter alia, the taxpayer. Where one individual lives in one unit of a duplex and the other is vacant, it is our general view that this requirement would not be satisfied in respect of the vacant unit. Accordingly, based on the facts provided, Unit B would not be considered the Owner's principal residence for any year.

In general terms, for purposes of capital cost allowance and recapture, subsection 13(7) of the Act provides for deemed dispositions and reacquisitions of property where, inter alia, a taxpayer having acquired a property for the purpose of gaining or producing income has begun at a later time to "use" it for some other purpose, and where there has been a change in the proportion of use of a property for the purpose of gaining or producing income in relation to some other purpose. Similar change in use rules are also set out in subsection 45(1) of the Act, for purposes of calculating any capital gain or loss on a change in use. It is a question of fact whether there has been a change in use in a particular situation and we have not been provided with sufficient information to comment on whether there has been a change in use in the above situation (as you also note in your letter that the Owner may have stored a minimal amount of personal effects in Unit B). Nonetheless, if it could be established that during the period when Unit B was vacant it was not in fact put to any use, we would agree that the change in use rules would not apply.

As all the above issues are questions of fact, we would suggest that you contact your local Tax Services Office and submit all relevant information, should you require further assistance.

Yours truly,

Milled Azzi, CA
for Director
Business and Partnerships Division
Income Tax Rulings
Policy and Legislation Branch

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