Principal Issues: [TaxInterpretations translation] Can a taxpayer make an election under subsection 45(3) where the taxpayer inhabits as a principal residence a unit ("Unit A") of a duplex owned and incorporated by the taxpayer and integrates, through major renovations, the other unit ("Unit B") of the duplex that was, before those major renovations, rented to third parties?
Position: A taxpayer in such a situation cannot make an election under subsection 45(3).
Reasons: The change in use of the duplex in the submitted situation is a partial change in use within the meaning of paragraph 45(1)(c). A taxpayer cannot make an election under subsection 45(3) on a partial change in use.
XXXXXXXXXX 2011-041747 I. Landry, M. Fisc.
February 21, 2012
Dear Sir,
Subject: Change of Use - Application of subsection 45(3) of the Income Tax Act
This is in response to your email of August 15, 2011 in which you asked us if a taxpayer can make an election under subsection 45(3) of the Income Tax Act (the "Act") where the taxpayer inhabits as a principal residence a unit ("Unit A") of a duplex owned by the taxpayer and integrates it, through major renovations, with the other unit ("Unit B") in the duplex that was, before those major renovations, rented to third parties. We have assumed that the duplex is a capital property.
All legislative references herein are to the provisions of the Act.
Our Comments
The situation that you submitted to us appears to be an actual situation for which we cannot give you a definitive opinion. However, we are able to offer the following general comments that may be helpful to you.
An immovable is normally considered to be a single property unless it is legally subdivided into two or more separate properties. As a result, we usually consider that a duplex, which has not been subdivided by law, is a single property for the purposes of subsection 45(1).
Paragraph 45(1)(c) governs the situation where there has been a change in the relation between the use regularly made by the taxpayer of a property for gaining or producing income and the use regularly made of the property for other purposes (called for the present purposes, a "partial change in use"). Where the use regularly made of the property for those other purposes has increased, the taxpayer is deemed to have disposed of the property at that time for proceeds equal to the proportion of the fair market value of the property at that time that the amount of the increase in the use regularly made by the taxpayer of the property for those other purposes is of the whole use regularly made of the property. Paragraph 45(1)(c) also provides that the property is deemed to have been immediately thereafter reacquired at a cost equal to the same amount.
With respect to the submitted situation, we are of the view that there was a partial change of use of the portion of the duplex used for another purpose at the time that portion began to be used in its entirety for personal purposes. Consequently, subparagraph 45(1)(c)(i) would apply as described in the preceding paragraph. Depending on the circumstances, that deemed disposition may give rise to a capital gain or loss in respect of the period during which a portion of the property was used for the purpose of earning income.
Notwithstanding subsection 45(1), subsection 45(3) provides that where at any time a property that was acquired by a taxpayer for the purpose of gaining or producing income ceases to be used for that purpose and becomes the principal residence of the taxpayer, subsection 45(1) shall not apply to deem the taxpayer to have disposed of the property at that time and to have reacquired it immediately thereafter if the taxpayer so elects. By virtue of subsection 45(4), an election under subsection 45(3) is deemed not to have been made if an amount was deducted in respect of the property as depreciation by the taxpayer before the date of the change of use.
As indicated in paragraph 30 of Interpretation Bulletin IT-120R6, Principal Residence, a taxpayer cannot make an election under subsection 45(3) where the change in use of a property is a partial change in use. The election in subsection 45(3) cannot be made in the situation under consideration.
As stated in Information Circular 70-6R5, this opinion does not constitute an advance ruling with respect to income tax and does not bind us.
Best regards,
Michel Lambert, CA, M. Fisc.
for the Director
Corporate Reorganizations and Resource Industry Division
Income Tax Rulings Directorate
Legislative Policy and
Regulatory Affairs Branch