Principal Issues: [TaxInterpretations translation] (1) Does paragraph 70(6)(a) apply to deemed dispositions of Immovables A and B that occur as a consequence of the death of a taxpayer whose spouse inherited Immovable A and common-law partner inherited Immovable B? (2) On the subsequent sale of Immovables A and B by the spouse and common-law partner, will the spouse and common-law partner be able to designate their property as their principal residence on the assumption that they will have, respectively, ordinarily inhabited their respective immovables throughout the period during which the taxpayer owned them and thereafter until the time of the sale?
Position: (1) Yes, the provisions of paragraph 70(6)(a) apply on a property-by-property basis. (2) General comments on the application of subsection 40(4)
Reasons: Application of the Act.
September 30, 2010
Laval Tax Services Office Income Tax Rulings Directorate
Technical Interpretation Services Business and Partnerships Division
Attention: Marc Lemyre
Danielle Bouffard
2010-037390Tax bigamy - transfer of property on death
This memorandum is in response to your email dated July 7, 2010 requesting our comments regarding the application of subsection 70(6) of the Income Tax Act (the "Act") and the designation of immovables as principal residence in the context of tax bigamy.
Unless otherwise indicated, all statutory references herein are to the provisions of the Act or the Income Tax Regulations (the "Regulations").
More specifically, you submitted to us a situation of a taxpayer who, upon his death in XXXXXXXXXX, devised two immovables by will. Immovable A was devised to his spouse, from whom he was separated but not divorced, while Immovable B was devised to his common-law partner with whom he had lived in a conjugal relationship since XXXXXXXXXXX.
You asked us the following two questions:
1. Does paragraph 70(6)(a) apply to the two deemed dispositions of immovables that occurred following the death of the taxpayer?
2. During the subsequent sale of Immovables A and B by the spouse and common-law partner, will they be able to designate these properties as their principal residence on the assumption that they each ordinarily inhabited their immovable throughout the period when the taxpayer was the owner and thereafter until the time of the sale?
Our Comments
Question 1
Paragraph 70(6)(a) reads in part as follows:
Where any property of a taxpayer who was resident in Canada immediately before the taxpayer’s death that is a property to which subsection 70(5) would otherwise apply is, as a consequence of the death, transferred or distributed to
(a) the taxpayer’s spouse or common-law partner who was resident in Canada immediately before the taxpayer’s death,
[...]
Paragraph 70(6)(a) provides that a transfer or distribution of property on the death of a taxpayer to the "spouse or common-law partner" is made on a property-by-property basis. Consequently, in light of the facts of this case, provided that all the conditions of subsection 70(6) are satisfied, including that the taxpayer, his spouse and common-law partner were resident in Canada immediately before the taxpayer's death and that the immovable vested indefeasibly in the spouse and common-law partner, respectively, within 36 months after the taxpayer's death, we are of the view that the provisions of subsection 70(6) apply to the dispositions of the two properties.
Question 2
Under the "principal residence" definition in section 54, the principal residence of a taxpayer for a taxation year includes a property that is a housing unit owned in the year by the taxpayer jointly with another person or otherwise. Under this 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, the taxpayer's spouse or common-law partner, former spouse or common-law partner, or a child of the taxpayer. Finally, the property must have been designated by the taxpayer for a taxation year as the taxpayer’s principal residence.
For the 1982 and subsequent taxation years, it is not possible for the taxpayer and another person in a "family unit" to designate two properties as their principal residence in the same year. A family unit includes, among others, a taxpayer and a person who was throughout the year the taxpayer's spouse or common-law partner. If throughout the year a person lived separate and apart from the taxpayer by virtue of a legal separation or written separation agreement, that person is no longer part of the taxpayer's family unit. However, two spouses who lived separate and apart throughout the year as a factual matter are still part of the same family unit. For example, if an immovable is designated for a taxation year as the principal residence of a husband, the spouse, who lived separate and apart throughout the year from her husband as a factual matter, cannot designate another immovable as her principal residence for that year.
Paragraph 40(2)(b) generally allows a taxpayer's capital gain from the disposition of a property that was the taxpayer's principal residence at any time after the date of acquisition to be exempted or reduced based on the number of years for which a principal residence designation is made.
Where a taxpayer has disposed of property to an individual in circumstances such that the provisions of subsection 70(6) applied, subsection 40(4) provides special rules for calculating the gain from the disposition of the property by the individual under paragraph 40(2)(b). In particular, paragraph 40(4)(a) provides that the individual, being the spouse or common-law partner, is deemed to have owned the property throughout the period during which the taxpayer owned it. Subparagraph 40(4)(b)(i) deems the property to have been the individual's principal residence for a taxation year for which the property would have been the taxpayer's principal residence if the taxpayer had designated it under section 2301 of the Regulations as the taxpayer's principal residence for that year. Two examples of the application of subsection 40(4) are given in paragraph 38 of Interpretation Bulletin IT -120R6.
Finally, from 1993 to 2000 inclusive, former subsection 252(4) extended the meaning of the word "spouse" of a taxpayer to include a person of the opposite sex who, among other things, lives with the taxpayer in a conjugal relationship and has so lived for a period of 12 months or who lives with the taxpayer in a conjugal relationship and is the parent of a child of whom the taxpayer is the father or mother. For the 2001 and subsequent taxation years, reference should be made to the definition of "common-law partner" in subsection 248(1), which includes, inter alia, same-sex spouses.
Assuming that subsection 70(6) applied to the dispositions of the two immovables on the taxpayer's death in XXXXXXXXXX, paragraph 40(4)(a) deems the spouse and common-law partner to have owned Immovable A and Immovable B, respectively, throughout the period during which the taxpayer owned them. Subparagraph 40(4)(b)(i) deems Immovable A and Immovable B to have been the principal residence of the spouse and common-law partner respectively for each taxation year in which the taxpayer would have designated one of the two immovables as his principal residence. Given the generality of the facts in this case, it is not possible for us to make that determination.
For the purposes of our analysis and comments, we therefore have assumed the following additional facts:
(1) The taxpayer owned:
- Immovable A from XXXXXXXXXX to XXXXXXXXXX, being XXXXXXXXXX years. During that period, that immovable was ordinarily inhabited by either the taxpayer or his spouse. The taxpayer lived separate and apart from his spouse from XXXXXXXXXX to XXXXXXXXXX by virtue of a legal separation or written separation agreement.
- The taxpayer lived in Immovable B from XXXXXXXXXX to XXXXXXXXXX, or XXXXXXXXXX years. During that period, that immovable was ordinarily inhabited by the taxpayer and a person of the opposite sex with whom the taxpayer was living in a conjugal relationship (referred to herein as the taxpayer's common-law partner).
(2) Subsection 70(6) applied to the two deemed dispositions of the immovables in XXXXXXXXXX.
(3) No other property was owned by the spouse or common-law partner which could be the subject of the principal residence designation. The taxpayer has never designated any other property as a principal residence.
(4) The taxpayer, spouse and common-law partner have no children.
Taking the above into account, the spouse could designate Immovable A as her principal residence for the period from XXXXXXXXXX to XXXXXXXXXX. Under paragraph 40(4)(a), she was deemed to own the immovable throughout the period during which the taxpayer owned it. In addition, since the taxpayer could have designated Immovable A as his principal residence from XXXXXXXXXX to XXXXXXXXXX inclusive (assuming the conditions in the definition of "principal residence" were satisfied by the taxpayer), Immovable A would be deemed to be the spouse's principal residence for each taxation year in that period under subparagraph 40(4)(b)(i). Effective XXXXXXXXXX, the taxpayer was no longer part of the spouse's family unit. Consequently, assuming that the conditions of the definition of "principal residence" were satisfied by the spouse for the period XXXXXXXXXX to XXXXXXXXXX, the spouse could designate Immovable A as her principal residence.
The common-law partner could also designate Immovable B as her principal residence from XXXXXXXXXX to XXXXXXXXXXX. Under paragraph 40(4)(a), she was deemed to own it during that period. Similarly, since the taxpayer could have designated Immovable B as his principal residence (assuming the conditions in the definition "principal residence" were satisfied by the taxpayer), Immovable B would be deemed to be the common-law partner's principal residence for each taxation year in that period under subparagraph 40(4)(b)(i). Although from and including XXXXXXXXXX, that unmarried person living in a conjugal relationship with the taxpayer was not recognized as a spouse for purposes of the Act, the taxpayer could have designated Immovable B as the principal residence since all of the conditions in that definition were satisfied.
For ownership years after XXXXXXXXXX until the year of sale, the spouse and common-law partner will have to satisfy the conditions of the definition of principal residence if they are to be entitled to designate their property as a principal residence and reduce the capital gain for the purposes of paragraph 40(2)(b).
If during XXXXXXXXXX to XXXXXXXXXX, the taxpayer had a spouse (with whom he was living separate and apart) and a common-law partner, only one of the two properties could have been designated as the taxpayer's principal residence for each of the taxation years in that period and have been deemed to be the principal residence of either the spouse or the common-law partner under subparagraph 40(4)(b)(i).
Access to Information
For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should the taxpayer request a copy of this memorandum, they may request a severed copy using the Privacy Act criteria, which does not remove taxpayer identity. Requests for this latter version should be made by you to Ms. Celine Charbonneau at (613) 957-2137. In such cases, a copy will be sent to you for delivery to the taxpayer.
We hope that these comments are of assistance.
François Bordeleau, Advocate
Manager
Business and Partnerships Section
Income Tax Rulings Directorate.