Principal Issues: Whether the practise of not applying the deemed disposition rule where a principal residence has been partially changed to income-producing use would be affected by claiming CCA on some rental assets.
Position: No, as long as no CCA has been claimed on the building.
Reasons: The rental assets including a number of CCA classes and it is only the building class on which CCA cannot be claimed.
XXXXXXXXXX
2005-013468
Charles Rafuse
(613) 957-8967
June 30, 2005
Dear XXXXXXXXXX:
Re: Rental Property
This is in reply to your letter of January 29, 2005, concerning a case where a taxpayer partially converts a principal residence to income-producing use.
You have noted that it is not the Agency's practise to apply the deemed disposition rule for a partial change in use where a number of conditions have been met including that no capital cost allowance (CCA) is claimed on the property. You have asked if CCA can be claimed on the following assets without impairing the principal residence exemption:
1) Fixtures, fittings and furniture.
2) Equipment that the tenant can use.
3) Computers.
4) Additions to the building such as, furnace, light fittings, air conditioner.
5) Stove, fridge, microwave, washer, dryer.
Our Comments
Where a taxpayer has partially converted a principal residence to an income-producing use, paragraph 45(1)(c) of the Income Tax Act provides for a deemed disposition of the portion of the property so converted for proceeds equal to its proportionate share of the property's FMV. This deemed disposition rule applies where the partial change in use of the property is substantial and of a more permanent nature, i.e., where there is a structural change. It is our practice not to apply the deemed disposition rule, but rather to consider that the entire property retains its nature as a principal residence, where all of the following conditions are met:
(a) the income-producing use is ancillary to the main use of the property as a residence,
(b) there is no structural change to the property, and
(c) no CCA is claimed on the property.
Assuming that the first two conditions have been met, it is possible that a taxpayer could claim CCA on some income-producing assets without breaching the third condition. It is our opinion that in the examples that you have given there would be a number of CCA asset classes and it is only the building asset class on which CCA could not be claimed without impairing the principal residence. For example, furniture, computer equipment, stoves fridges, microwaves, washing machines and dryers would all be in CCA asset classes other than that of the building. The building asset class would include its component parts such as, air conditioning, furnace, lighting fixtures, etc. as explained in Interpretation Bulletin IT-79R3.
We trust this information is helpful.
Yours truly,
Charles Rafuse
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch