12 January 1993 Income Tax Severed Letter 9231515 - Capital Gains Exemption—Non-qualifying Real Property

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.

[SUBJECT: CAPITAL GAINS EXEMPTION - NON-QUALIFYING REAL PROPERTY

SECTION: 110.6(1)]

923151
XXXXXXXXXX L. Holloway
(613) 957-2104

Attention: XXXXXXXXXX

January 12, 1993

Dear Sirs:

Re: Non-Qualifying Real Property - Draft Legislation

This is in reply to your letter dated October 16, 1992 requesting an interpretation on the meaning of non-qualifying real property as found in draft amendments to subparagraph 110.6(1)(a)(ii) of the Income Tax Act (the "Act").

Specifically you enquired about the use of the word "principally" in this subparagraph and asked that we confirm your interpretation that where a building is used at 60% in an active business and 40% rented, the building will not be non-qualifying real property. Therefore the entire gain realized on the disposition of such a building will be eligible for the $100,000 capital gain exemption provided all the other requirements of that section are met.

Our comments

Interpretation Bulletin IT-195R4 Rental property Capital Cost Allowance Restrictions explains the meaning of "principally" in paragraph 4 as follows:

• "As used in the definition of rental property in subsection 1100(14), the word "principally" means "primarily" or "chiefly". In establishing whether a property is used principally for a given purpose, one of the main factors to be considered is the proportion of time that the property is used for that purpose. If the property is used more than 50 percent of the time for the purposes of gaining or producing gross revenue that is rent, that pattern of use is a good indication that the property is used principally for that purpose. Another important factor to be considered is the proportion of the amount of space rented in relation to the total area of the building. Again, if more than 50 percent of the total area is rented, that is an indication that the property is being used principally for producing rental revenue. See the current version of IT-331, Investment Tax Credit, for additional comments on the meaning of the word "principally"."

The use of the word principally in the draft definition of non- qualifying real property can be interpreted as described in the above paragraph. In our view the use of the word principally requires that the property as a whole must be considered rather than a percentage or a portion of the property. Provided that the principal or primary use test is met, the entire property would be excluded from being considered to be non-qualifying real property.

The foregoing is an expression of our opinion based on our understanding of the draft legislation as it currently reads; as such it is not an Advance Income Tax Ruling and is not binding on the Department. We caution that these proposals have not yet been enacted and should be reviewed for changes when royal assent has been granted.

We trust these comments will be of assistance to you.

Yours truly,

E. Wheeler
for Director
Business and General Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch