Principal Issues: [TaxInterpretations translation] When calculating the capital gain from a change in use of a property under paragraph 45(1)(a), how is the taxpayer's proceeds of disposition determined?
Position: The fair market value of the property must be used as of the date of the change of use.
Reasons: The Income Tax Act.
XXXXXXXXXX 2011-042648
December 9, 2011
Dear Sir,
Subject: Date of determination of fair market value
This is in response to your letter dated November 24, 2011 regarding the above subject.
Please note that, unless otherwise indicated, all statutory references herein are to the provisions of the Income Tax Act (the "Act").
Specifically, you described two situations that deal with the application of the change of use rules in subsection 45(1). You wish to know, for the purpose of computing the capital gain from the deemed disposition of the property of a taxpayer, whether the Canada Revenue Agency must consider the fair market value of the property at the time of the change in use of the property to establish the proceeds of disposition to the taxpayer.
Our Comments
A taxpayer who completely converts the taxpayer’s principal residence into an income-producing property is deemed by paragraph 45(1)(a) to have disposed of the property (land and building) at its fair market value ("FMV") and to have immediately thereafter reacquired it at the same amount. A capital gain may arise from this deemed disposition.
In the same vein, a taxpayer who completely changes the use of a property (in respect of which a subsection 45(2) election is not in effect) used to produce income by converting it into a principal residence property is deemed by paragraph 45(1)(a) to have disposed of the property (land and building) and to have immediately thereafter reacquired it at FMV. That deemed disposition may also give rise to a taxable capital gain.
We confirm that, on a deemed disposition under paragraph 45(1)(a), it is necessary to determine the FMV of the property on the date of the change of use for the purposes of calculating the capital gain that could result from the deemed disposition.
Best regards,
François Bordeleau, Advocate
Manager
Business and Partnerships Section
Income Tax Rulings Directorate
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