Principal Issues: Whether a capital loss incurred on the disposition of personal use property can be carried forward to be used to reduce any capital gains on personal use properties.
Position: No.
Reasons: Any loss realized on the disposition of a "personal-use property" will be deemed to be nil under subparagraph 40(2)(g)(iii) of the Act and thus can not be carried forward to reduce any future capital gains on personal use properties.
XXXXXXXXXX 2011-040025 Charles Rafuse 613-247-9237 April 26, 2011
Dear XXXXXXXXXX :
Re: Capital Loss on Personal Use Property
This is in response to your email of March 23, 2011, concerning the loss you incurred on the bankruptcy of a timeshare corporation.
You have indicated that, in 1998, you invested $25,900 in the timeshare XXXXXXXXXX (the "property") giving you the right to use the "property" for specified time periods of each year during a term of 57 years. There were issues with the management, which appeared under new names periodically and on June 29, 2004, you paid an additional $13,590 to change to a "points" resort with XXXXXXXXXX . Until 2010 you paid annual maintenance fees and then received notice that the company, now named XXXXXXXXXX , had filed for bankruptcy proceedings and that you no longer had any rights or privileges with the resort.
While you recognize that your purchase was made for personal use, you also note that if you had sold the "property" any gain would be considered a taxable capital gain on personal-use property. Therefore, you consider that in the current circumstance, you have incurred a capital loss and this loss should be noted by the Canada Revenue Agency ("CRA") and carried forward to be used, should the occasion arise, to reduce capital gains on personal-use properties you may realize in the future.
Our Comments
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, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office (the "TSO"). We are, however, prepared to make the general comments set out below, which may be of assistance.
Section 54 of the Income Tax Act (the "Act") includes a definition of the term "personal-use property" and, under that definition, the term includes a property owned by a taxpayer that is used primarily for the personal use or enjoyment of the taxpayer or a person related to the taxpayer. It is a question of fact as to whether a property was acquired for personal use of the taxpayer. Where a property is acquired by the taxpayer and used as a vacation property continuously throughout the period of ownership, either by the taxpayer or someone related to the taxpayer, it would generally be considered a personal-use property.
Subparagraph 40(2)(g)(iii) of the Act contains a special rule that deems any capital loss from the disposition of a "personal-use property" to be nil. Thus the CRA has no discretion concerning the tax treatment of a capital loss on personal-use property. In addition, there is no tax provision that provides that such loss be carried forward to be used to reduce capital gains on personal-use properties.
Based on the above, if the "property" you acquired was a "personal-use property" any capital loss you realize on its disposition will be deemed to be nil under subparagraph 40(2)(g)(iii) of the Act and thus can not be carried forward to reduce future capital gains on personal-use properties.
We trust that these comments will be of assistance.
Yours sincerely,
S. Parnanzone
Manager
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch