Mrs. X, who owned a duplex, 2/3 of which was her principal residence and 1/3 of which was rented to a third party, made a gift of the duplex to her grandson., and died three months later. The grandson occupied the portion of the duplex previously occupied by Mrs. X for a year and a half and then rented it out. Regarding the determination of the grandson’s cost at the time of the change of use, CRA stated:
Paragraph 13(7)(b) provides, inter alia, that for capital cost allowance purposes, where a taxpayer, having acquired property for some other purpose, has begun at a later time to use it for the purpose of gaining or producing income, the taxpayer shall be deemed to have acquired it at that later time at a capital cost to the taxpayer equal to the lesser of the amounts set out in subparagraphs 13(7)(b)(i) and 13(7)(b)(ii). In a situation where the FMV of the property exceeds the cost, one-half of the gain resulting from the application of subparagraph 45(1)(a)(iii) may be added to the capital cost of the property for the purposes of sections 13 and 20 provided that the taxpayer has not deducted an amount under section 110.6 in respect of the gain.