Principal Questions: [TaxInterpretations translation] Does the principal residence exemption apply to a situation where part of the residence is rented to a third party or to the son of the taxpayer's spouse?
Position: XXXXXXXXXX, the part of the residence that is rented to a third party will not qualify as the taxpayer's principal residence because the taxpayer or the taxpayer's spouse or common-law partner or former spouse or common-law partner or a child of the taxpayer did not ordinarily reside there. Beginning in XXXXXXXXXX, the portion of the residence will qualify as the taxpayer's principal residence because the taxpayer's spouse's child ordinarily resided there. Subject to the rule that a taxpayer may designate only one property as a principal residence for a particular taxation year.
Reasons: The Income Tax Act
XXXXXXXXXX
2010-036471 Anne Dagenais Advocate, M. Fisc. B.A.A.
September 23, 2010
Dear Sir,
Subject: Principal residence
This is in response to your letter of February 14, 2010 requesting our opinion on the eligibility of a principal residence for the capital gains exemption under paragraph 40(2)(b) of the Income Tax Act (the "Act").
More particularly, you described a situation where you acquired a residence in XXXXXXXXXX, including a small parental unit in the basement with an independent exit. Immediately after the acquisition, part of the residence was rented to a third party until XXXXXXXXXX. From XXXXXXXXXX to this day, this part of the residence has been rented to your spouse's son. The rented unit is a XXXXXXXXXX with kitchenette, washer/dryer entrance and separate municipal address. The rented unit represents approximately XXXXXXXXXX% of the total building area. We have assumed that for the XXXXXXXXXX and later years, you did not designate any other property under the principal residence exemption and you never claimed capital cost allowance.
Unless otherwise indicated, all statutory references herein are to the provisions of the Act.
Our Comments
It appears to us that the situation described in your letter and summarized above could constitute an actual situation involving taxpayers. As explained in Information Circular 70-6R5, it is not the practice of this Directorate to provide comments on proposed transactions involving specific taxpayers otherwise than in the form of an advance income tax ruling. If your situation involved specific taxpayers and one or more transactions, you should submit all relevant facts and documentation to the appropriate Tax Services Office ("TSO") for its opinion. However, we can offer the following general comments that may be helpful to you.
Paragraph 40(2)(b) generally permits the gain otherwise determined by a taxpayer from the disposition of a property that was the taxpayer's principal residence at any time after the date of acquisition to be eliminated or reduced by reference to the number of years that the property was the taxpayer's principal residence. A taxpayer may designate only one property as a principal residence for a particular taxation year.
Under the definition of principal residence in section 54, a principal residence of a taxpayer for a taxation year is a housing unit owned in the year by the taxpayer whether jointly with another person or otherwise. Under that definition, where the taxpayer is an individual other than a personal trust, the housing unit must also be ordinarily inhabited in the year by the taxpayer, by the taxpayer’s spouse or common-law partner or former spouse or common-law partner or by a child of the taxpayer. Section 252 expands the definition of certain terms in the Act and includes individuals who would not normally be considered to be blood relatives. Consequently, by virtue of paragraph 252(1)(c), your spouse's son in this case is considered to be your child.
Furthermore, paragraph 3 of Interpretation Bulletin IT-120R6 lists the types of property that qualify as a principal residence. A house, apartment or unit in a duplex, apartment building or condominium are included in property that qualifies as a principal residence.
An important consideration here is the determination of the number of housing units in the residence. While this determination is a factual one, there are several elements that can guide in that determination.
To begin with, the fact that there are two different municipal addresses may lead us to conclude that there are two housing units. Other elements may also come into play, such as the existence of independent entrances, separate heating systems, separate hot water tanks and a tax account with several municipal addresses. The legal nature of the property is also a factor to be taken into account in determining the number of housing units in the residence. In this regard, we understand that there are certain municipal by-laws enacted in accordance with provincial legislation that allow a residence to retain the character of a single-family dwelling while providing a housing unit for a family member. All of these elements must be considered as a whole to determine whether there is, in a given situation, one or more separate housing units for the purposes of the definition of "principal residence" in section 54.
In the given situation, we are of the view that your residence has two housing units. Consequently, you cannot designate the unit that is rented to a third party as your principal residence from XXXXXXXXXX to XXXXXXXXXX since you or your spouse or common-law partner or former spouse or common-law partner or one of your children did not ordinarily reside there. For the same period, the housing unit where you lived may qualify as your principal residence because you ordinarily resided there.
Similarly, starting in XXXXXXXXXXX , the unit your spouse's son lived in may be designated as his principal residence for the taxation years in which he ordinarily resided there. However, since for a particular taxation year, it is only possible to designate one housing unit as your principal residence, you should choose the housing unit for which you would like to claim the principal residence exemption - either your housing unit or the housing unit ordinarily inhabited by your spouse's son.
For more details regarding the determination of the capital gain realized following the sale of the property, we invite you to consult the tax guide T4037, Capital Gains 2009, on the Canada Revenue Agency (CRA) website at the following address: http://www.craarc.gc.ca/E/pub/tg/t4037/t4037-e.html. You will also find detailed information on the principal residence exemption in Interpretation Bulletin IT-120R6 which can be found at the following address: http://www.cra-arc.gc.ca/tax/technical/incometax/current-e.html.
These comments do not constitute an advance income tax ruling and are not binding on the CRA in respect of any particular factual situation.
We hope that the above comments will be of assistance and answer your questions.
Best regards,
François Bordeleau, Advocate
Manager
Business and Partnerships Section
Income Tax Rulings Directorate.