Principal Issues: Using an example, where an individual transforms two housing units of a duplex in one housing unit, the CRA is asked to clarify how an individual should calculate and ask the principal residence exemption.
Position: Where several housing units of a building can be designated as principal residence for various years, the individual has to produce in the year of the sale of the building a form T2091 for each housing unit being designated.
FEDERAL TAX ROUNDTABLE OCTOBER 7, 2019
2019 APFF CONFERENCE
Question 3
Percentage of use having varied and impact on principal residence exemption
Monsieur is the owner of a duplex consisting of two units, which was acquired in January 2011. The first unit, with 40% of the floor area, is rented to a third party. The second unit, covering 60% of the floor area, is used by Monsieur as his principal place of residence.
In July 2019, Monsieur ceased to rent the first unit and decided to make modifications to the duplex so that the entire duplex became a single dwelling, which he will live in.
By virtue of paragraph 45(1)(c), in July 2019 there was a partial change of use of the duplex, since it was now used 100% for personal purposes, whereas it was previously used 60% for personal purposes. Generally, such a partial change in use should result in a deemed disposition of 40% of the duplex at fair market value. However, following the changes proposed in the March 19, 2019 federal budget, it will be possible for Monsieur to make an election under subsection 45(3) with respect to such partial change in use. Thus, by making that election, Monsieur would not be deemed to have disposed of 40% of the duplex at the time of the change of use in July 2019 and will thus defer the taxation of a capital gain on that portion of the duplex.
However, for purposes of the principal residence exemption rules, the proportion of the building occupied by Monsieur increased from 60% to 100% in July 2019.
Suppose that Monsieur sells his duplex in December 2022. Suppose he realizes a capital gain of $150,000. During the 12-year holding period, Monsieur’s dwelling represented, for the first 8.5 years, 60% of the total building area, whereas for the subsequent 42 months, his dwelling represented 100% of the duplex area.
Question to the CRA
Can the CRA clarify how Monsieur should calculate and report the principal residence exemption on his 2022 tax return for the capital gain realized on the sale of his duplex, taking into account the change in use of the duplex in July 2019?
CRA Response
An immovable is usually considered to be a single property unless it is legally subdivided into two or more separate properties. Real property may, however, include one or more housing units for the purposes of the principal residence exemption.
Determining the number of housing units in a building for the purposes of the principal residence exemption is a question of fact that can only be resolved after an analysis of all relevant circumstances. For the purposes of this response, however, the CRA has assumed that each of the units described in the submitted situation is a housing unit for the purposes of the principal residence exemption.
In the situation submitted, the CRA is of the view that there are three housing units in the immovable over the years, namely the unit that the taxpayer rented from 2011 to 2019 (Unit 1), the one in which the taxpayer lived from 2011 to 2019 (Unit 2) and the housing unit resulting from the 2019 in which the taxpayer lived from that time on (Unit 3).
Where more than one housing unit in an immovable is eligible for a principal residence designation for different years, the taxpayer must file with the taxpayer’s income tax return for the taxation year of the disposition of the property a T2091IND-WS Principal Residence Worksheet, and designation form T2091 (IND) - Designation of a Property as a Principal Residence by an Individual (Other than a Personal Trust) for each of the units in the immovable that are the subject of a designation.
The taxpayer will therefore have to file two worksheets and two T2091 forms in the year of disposition of the immovable if the taxpayer wishes to designate Unit 2 and Unit 3 as his principal residence for the applicable years.
Where an election under subsection 45(3) is made, the taxpayer must inform the CRA by enclosing a duly signed letter to that effect with the taxpayer’s return for the year in which the taxpayer actually disposed of the property, or earlier if the CRA issues a formal demand for that election. In that letter, the taxpayer should provide all relevant information related to the change of use.
With respect to the calculation of the capital gain, an allocation of the adjusted cost base ("ACB") and the proceeds of disposition of a property based on the size of each unit is, in some cases, that of a reasonable allocation. However, the allocation does not need to be based on area. All factors that may affect the value of any unit in the building must also be considered.
Isabelle Landry
(514) 496-9550
October 11, 2019
2019-081262