The correspondent’s mother died and, in her will, left all her property to her children, including a farm, on which there was a residence which she had occupied together with her husband, and after his death as well until she moved into a nursing home (at which point, the home was not occupied). She became the sole owner of the farm on his death (until then, it had been held under community of property), and they had been actively engaged in its operation for more than five years. She made an election to keep her home as her residence, citing s. 45(3). The residence was not used to earn income at any time. In the course of a general discussion, CRA stated:
Generally, subsection 40(4) provides that where a taxpayer has, after 1971, disposed of property to an individual in circumstances where, inter alia, subsection 70(6) is applicable, certain rules apply for the purpose of calculating the individual's gain from the disposition of the property pursuant to paragraph 40(2)(b) or (c), as the case may be. Paragraph 40(4)(a) deems the individual 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 it would have been the taxpayer's principal residence if the taxpayer had designated it as the taxpayer’s principal residence.
Thus, your mother could designate the residence as a principal residence for all the years for which your father could have designated the residence as his principal residence.
… [Y]our mother did not ordinarily inhabit the residence during the years XXXXXXXXXX to XXXXXXXXXX. Consequently, the residence cannot be her principal residence during those years.
Regarding the s. 45(3) election, CRA stated:
[S]ince the facts do not show that there was a change of use, that election could not be made. Furthermore, no other election would have allowed your mother to designate her residence as her principal residence for the years XXXXXXXXXX to XXXXXXXXXX.