Principal Issues: [TaxInterpretations translation] (1) Does the capital gain from the disposition of two condominium units, connected by a stairway, fully qualify for the capital gains exemption on principal residences?
(2) Would the answer to the previous question be different if the two units were sold to two different purchasers in two separate transactions?
(3) Would the answer to the second question be different if the first sale transaction occurred in 2005 and the second in 2006?
Position: (1) Question of fact. In the case at bar, the two condominium units cannot be considered to form a single housing unit for purposes of the exemption for gain on sale of a principal residence.
(2) n/a.
(3) n/a.
XXXXXXXXXX 2005-014809
November 8, 2005
Dear Sir,
Subject: Request for Technical Interpretation: Exemption - Gain on Principal Residence
This is in response to your letter dated August 18, 2005, requesting our opinion on the above subject. In this regard, we are enclosing a copy of Canada Revenue Agency ("CRA") Interpretation Bulletin IT-120R6.
Facts
For the purposes of our review, we set out the facts which were provided in your letter of August 18, 2005:
- Mr. X and Ms. X became spouses in 1999 through marriage and jointly purchased Condo A in that year;
- In 2001, Mr. X purchased Condo B, located directly beneath Condo A;
- Work was done in 2001 to connect the two units by an interior staircase;
- Condo AB (we do not assume at this stage that Condos A and B constitute a single unit for the purposes of the principal residence gains exemption) was ordinarily inhabited by Mr. and Ms. X from 2001;
- The original addresses of Condos A and B were retained and the two units continued to have separate property tax and electricity accounts;
- Mr. and Ms. X anticipate selling Condo AB in 2005 and it is possible that the two units will be sold separately.
Questions
Your letter states the following questions:
(1) If Condo AB is sold in 2005 to a single purchaser, could the capital gain be fully exempted by the application of paragraph 40(2)(b)?
(2) Would the answer to (1) above be different if Condo AB were sold to two different purchasers in two separate transactions in 2005, given that Mr. and Ms. X would continue to ordinarily reside in one of the two units between the two sales transactions? (exempt capital gains on both sales?)
(3) Would the answer to (2) above be different if the first sale transaction occurred in 2005 and the second in 2006?
Analysis
Your questions require the CRA to focus on whether Condos A and B together constitute a housing unit within the meaning of section 54 of the Income Tax Act (the “Act") or whether, on the other hand, Mr. and Ms. X can designate only one of those two units as their principal residence for the years 1999 to 2005 inclusive.
This determination is key in two respects. First, a taxpayer cannot have more than one principal residence in a particular taxation year (although the formula in paragraph 40(2)(b) does take into account situations where a taxpayer moves and acquires a new principal residence in the year), and second, the taxpayer's spouse, common-law partner or child cannot designate a housing unit as a principal residence other than the one designated by the taxpayer for purposes of the paragraph 40(2)(b) exemption.
The Act defines the term "principal residence" as a "... property that is a housing unit, a leasehold interest in a housing unit or a share of the capital stock of a co-operative housing corporation acquired for the sole purpose of acquiring the right to inhabit a housing unit owned by the corporation and that is owned, whether jointly with another person or otherwise, in the year by the taxpayer…”1. In addition, it is necessary that the property be ordinarily inhabited by the taxpayer, the taxpayer's spouse or common-law partner or former spouse or common-law partner or a child of the taxpayer.
Since the term "housing unit" is not defined by the Act, it is necessary to refer to the ordinary and grammatical meaning of the term. Thus, the Petit Robert defines the term "logement" [better translated as “residence” or “dwelling” rather than “housing unit”] as being [TaxInterpretations translation] a living space, the part of a house or building where one usually resides. In addition, the dictionnaire de l'urbanisme et de l'aménagement [urban planning and development dictionary]2 defines the term "logement" in the following way: [TaxInterpretations translation]
The concept of housing unit is more precise than that of dwelling, which is a physical unit, identified with the house, rural or urban, with its outbuildings, and which can include several dwellings (with distinct accesses and equipment, such as the kitchen or the shower room), without it being always, however, a collective building.
The same dictionary offers us an additional definition of what a housing unit is: [TaxInterpretations translation]
Premises or group of premises forming a whole, intended for habitation, and where several persons live together, whether or not they are related to each other, who constitute a household.
The English version of the Act translates the term "logement" into "housing unit". This term is defined as follows by the Dictionary of Canadian Law3:
A unit that provides therein living, sleeping, eating, food preparation and sanitary facilities for one or more persons, with or without essential facilities shared with other housing units.
Thus, a synthesis of the above definitions allows us to understand that a housing unit is normally represented by a room, or a set of rooms, occupied by a household and which has a distinct access and equipment (kitchen, bathroom etc...).
Whether Condos A and B together constitute a housing unit or whether they each constitute a housing unit is a question of fact to be answered in light of all the relevant circumstances. However, it is clear that the two units must be sufficiently integrated - and to do so, have undergone major work - for the use of and access to one of the units to be a condition of the full enjoyment of the other unit. Thus, if each unit can be ordinarily inhabited without access being provided to the other unit, (for example, each unit has a kitchen and a bathroom and both have separate access) it will be difficult to consider the two units to be a single housing unit within the meaning of section 54.
On the other hand, if one unit has all the bedrooms and the other unit consists primarily of the kitchen and bathrooms and they are truly used as one unit, the CRA may be more likely to conclude that there is a single unit for purposes of the definition of "principal residence" and fully eligible for the capital gains exemption.
We emphasize that the above principles are not an exhaustive list of principles to consider and will depend on the particular circumstances of each case.
Applying these precepts to the questions you have asked us, and based on the facts you have provided, we are of the view that Condo AB is not a single unit for purposes of the capital gains exemption on the sale of a principal residence. Although units A and B are connected by an interior staircase, it appears that the layout of the two units has not been altered significantly enough to be considered a single unit. Furthermore, the fact that the two units have retained their respective civic addresses and continue to be subject to separate property tax and electricity accounts seems to support the validity of our position.
In light of our response above, we do not consider it useful to pursue our analysis further and answer your other questions. Suffice it to say that, in light of our conclusion and the facts of this case, the manner in which Condos A and B are resold will not affect the calculation of the paragraph 40(2)(b) exemption.
We hope that the above comments are of assistance.
Best regards,
Phil Jolie
Director
Business and Partnerships Division
Income Tax Rulings Directorate
ENDNOTES
1 Section 54 of the Income Tax Act.
2 Published under the direction of Pierre and François Choay; Paris, Presses universitaires de France, 1988.
3 D. A. Dukelow & B. Nuse, The Dictionary of Canadian Law (Scarborough: Carswell, 1991).