Principal Issues: Client is requesting clarification on when capital gains is applicable on the sale of one of two principal residences resulting from a marriage.
Position: A question of fact
Reasons: Legislation and previous position
XXXXXXXXXX 2010-038253 George A. Robertson, CMA
February 8, 2011
Dear XXXXXXXXXX :
Re: Capital Gain on Principal Residence
This is in response to your request of September 30, 2010 requesting as to when a second principal residence, as a result of a marriage, must be sold to avoid capital gains.
Our understanding of the facts is:
- You and your wife were married in July 2010.
- Before the marriage, both you and your wife had your own respective primary residences for over 7 years.
- You are in the process of moving to one of the two homes.
- The plan is to remodel the vacant home over the winter to have it ready for sale in the spring of 2011.
- During this time the vacant house will not be rented and there will be no other source of income from the vacant house.
Written confirmation of the tax implications inherent in particular transactions may only be provided by this Directorate where the transactions are proposed and are the subject matter of an advance income tax ruling submitted in the manner set out in Information Circular (IC) 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. This Information Circular and other Canada Revenue Agency (CRA) publications can be accessed on the Internet at http://www.cra-arc.gc.ca/formspubs/menu-e.html. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office (TSO). A list of TSOs is available on the "contact us" page of CRA's website. We are however, prepared to provide the following general comments, which may be of assistance.
Our comments
CRA's position on the principal residence exemption is set out in Interpretation Bulletin IT-120R6 Principal Residence. If a property qualifies as a principal residence, an exemption can be claimed under paragraph 40(2)(b) of the Income Tax Act (the Act) to reduce or eliminate any capital gain otherwise realized on the disposition of the property. The term principal residence is defined in section 54 of the Act. In order for a property to qualify for a designation as a taxpayer's principal residence for a tax year, it must be demonstrated, among other things, that he or she owns the property, and that it is ordinarily inhabited in the year by the taxpayer, or the spouse or common-law partner, former spouse or common-law partner or child, of the taxpayer.
The question of whether a housing unit is ordinarily inhabited in the tax year by a person must be resolved on the basis of the facts in each particular case. Even if a person inhabits a housing unit only for a short period of time in the year, this is sufficient for the housing unit to be considered "ordinarily inhabited in the year" by that person. The CRA's position on the term ordinarily inhabited is outlined in paragraph 5 of IT-120R6.It should be noted that, generally only one housing unit per family unit can be designated as a principal residence for any particular year.
Paragraph 8 of the IT-120R6 discusses a formula applicable for calculating the capital gain on the disposition of a principal residence. The period during which a residence qualifies as a principal residence is extended by one year by adding one year to the number of taxation years ending after the acquisition date for which the property was the taxpayer's principal residence and during which the taxpayer was a resident of Canada.
While we trust that these comments will be of assistance, they are given in accordance with the practice referred to in paragraph 22 of IC 70-6R5 and are not binding on the CRA in respect of any particular situation.
Yours truly,
Sharmini Ratnasingham
Assistant Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch