30 July 1992 Income Tax Severed Letter 9215895 - Deemed and Designated Principal Residences of Surviving Spouse

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.

921589
                                           A. Humenuk
       19(1)                               (613) 957-2134

July 30, 1992

Dear 19(1) Re: Disposition of Properties Designated as Principal Residences

We are replying to your letter of May 1, 1992 in which you ask for our opinion on the calculation of the principal residence exemption in a specific fact situation.

We cannot provide you with an opinion on an actual transaction without a review of all the relevant information and documentation. However, we would like to provide you with the following comments which may be of assistance to you in making your own determination. The tax law in this area is very flexible and offers taxpayers choices which can effect the amount of capital gain to be included in income and as a consequence, our comments are very detailed. If you would like further assistance concerning an actual situation, you may wish to contact your local district taxation office. We have enclosed copies of the relevant Interpretation Bulletins, Guides and forms referred to in our letter.

You describe a situation where a husband and wife had owned two properties since 24(1), both of which would presumably qualify as principal residences if so designated. In 24(1), the husband died and title to both properties passed to the wife. It is your understanding that the gain on one property will be fully exempt as a principal residence and that the gain on the other property will be based on the accrued gains since 1982, exclusive of any additions or improvements made on the property. You also asked for our comments on the capital gain exemption restriction on real estate proposed in the 1992 Federal Budget.

Before addressing your specific questions, we should point out that the manner in which the two properties were held will affect the ability of the two spouses to designate the properties as principal residences for the period before 1982 in such a way as to fully exempt any gain accrued to that date. The owner of an interest in a property is required to include in income any taxable capital gain arising from the disposition of that property, subject to a reduction for the individual's principal residence based on the number of years the individual had so designated the property. Provided that the individual designates a particular property as his or her principal residence for at least all but one of the taxation years in which the individual owned an interest in the property, no amount will be included in the individual's income on account of the gain on that property. An individual may only designate one property for each taxation year and, for taxation years after 1981, only one property can by designated as a principal residence for a particular year per family unit. Paragraph 3 of Interpretation Bulletin IT-120R3 "Principal Residence" includes more detailed information on the restrictions applicable to a family unit.

Consequently, while it is true that each spouse can claim a separate residence as a principal residence for taxation years before 1982, a full exemption will not be available if both properties were held either solely by one spouse or jointly during that period. For example, if one spouse held both properties throughout that period, only one of the residences could be designated for each taxation year since the other spouse did not own property during that period and could not, therefore, designate a property as a principal residence for the years in question. If each spouse owned a 50% interest in each of the two properties and each spouse designated one of the properties as their principal residence for all the years in question, each would be required to include in income the taxable capital gain arising from their interest in the property which was not designated by them as their principal residence even though their spouse may have designated that same property as the spouse's principal residence.

From the manner in which your question was worded, it would appear that subsection 70(6) of the Income Tax Act (the "Act") applied to the transfer of property to the surviving spouse and the executor of the estate did not opt out of the rollover provision, an option provided under subsection 70(6.2) of the Act. Provided that subsection 70(6) of the Act did apply to the transfer of property from the husband to the spouse upon death, no amount would have been included in the deceased's income for the year of death in respect of those properties and the surviving spouse would have acquired her husband's interests in the properties at their adjusted cost base immediately before his death.

The question then arises as to whether the surviving spouse can have more than one property as a principal residence for the taxation years 1972-1981 inclusive.

Interpretation Bulletin IT-366R and Special Release "Principal Residence - Transfer to Spouse, Spousal Trust or Certain Other Individuals" explains the circumstances under which a property which has been transferred to a spouse upon death will be deemed to be the principal residence of that spouse under subsection 40(4) of the Act. Where more than one property transferred would have qualified as the deceased's principal residence if designated, the surviving spouse may choose the order in which properties are considered and thus which one property will be deemed to be her principal residence for any of the taxation years up to and including the year of death. However, it is the Department's position that the deeming provision of subsection 40(4) of the Act precludes the surviving spouse from designating any other property as a principal residence for the taxation years in which a property has been deemed to be her principal residence. If one of the properties is deemed to be her principal residence for each year up to and including the year of death, the individual will not be entitled to designate the other property as her principal residence for the same taxation years.

Consequently, it is our view that the surviving spouse can have only one principal residence for each taxation year, including the years prior to 1982, notwithstanding that her spouse would have been eligible to claim a separate principal residence for taxation years prior to 1982 had the property been disposed of prior to his death or had the executor of the estate elected to transfer the property to the surviving spouse at its fair market value under subsection 70(6.2) of the Act.

You also asked for our comments on the calculation of the capital gain on the property which will not be fully exempt under the principal residence provisions. We refer you to the "Capital Gains Tax Guide" and form T2091 "Designation of a Principal Residence" which provide a more complete explanation of the required calculations. Where a property is not fully exempt under the principal residence provisions, form T2091 is used to calculate the exempt portion of the gain. As a result of this calculation, the capital gain to be included in income from a 1992 disposition of a principal residence which has been owned since 1971 and which has been designated to be a principal residence for the taxation years 1988 -1992 inclusive (for example, the years in which the deeming provision does not apply) would be the capital gain calculated in the normal manner for property held on Valuation Day (V-Day) less 6/21 (5+1 / 21) of the capital gain otherwise calculated. Please refer to chapter 6 of the Capital Gains Tax Guide for comments on V-Day, the determination of the adjusted cost b- ase of the property and the calculation of the gain or loss on such property. Since subsection 40(6) further limits the gain on a property held since the end of 1981, additional calculations may be required to ensure that the gain is not overstated. This is the provision which would limit the gain on a property that was designated or deemed to be a principal residence for all relevant taxation years preceding 1981 to the difference between the net selling price and the fair market value on December 31, 1981. See paragraph 13 of IT-366R for further details.

As a final point, you asked for our comments on the proposal in this year's Federal Budget to restrict the capital gains exemption on real estate. The Ways and Means Motion tabled June 19, 1992 contains a proposal to modify section 110.6 of the Act to exclude from eligibility for the $100,000 capital gains exemption all or part of the capital gain on a disposition of "non-qualifying real estate", a new term defined for the purposes of this provision. Full details of the proposal are available from the Department of Finance in the Explanatory Notes released June 1992.

We trust our comments will be of assistance to you.

Yours truly,

J.A. Szeszycki for Director Business and General Division Rulings Directorate Legislative and Intergovernmental Affairs Branch

Enclosure

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