| 19(1) | File No. 5-8083 |
| A. Humenuk | |
| 957-2135 |
July 14, 1989
Dear Sirs:
Re: Principal Residence Exemption
We are responding to your letter of May 10, 1989, in which you ask whether a particular taxpayer will be able to designate a certain property as his principal residence for the period of time during which he is posted abroad by the Department of External Affairs.
In the situation you describe, a taxpayer has sold his existing principal residence and has acquired another property which he intended to use as his principal residence. However, before the closing date for the purchase of the new property, the taxpayer is relocated by his employer to a location outside Canada for approximately four years.
The taxpayer will leave Canada before the closing date and will rent the property during his absence and generate profit therefrom.
Our response to your question is formulated on the assumption that at all relevant times, the taxpayer will be resident in Canada for the purposes of the Income Tax Act (the Act). Please refer to Interpretation Bulletin IT-221R2 "Determination of an Individual's Residence Status" (copy enclosed) for further information on factors to be considered in determining an individual's ordinary place of residence.
We also assume that the property in question will otherwise qualify as a principal residence. Paragraph 34 of IT-120R3 "Principal Residence" describes the criteria which must be met in order to designate a particular property as a principal residence. Please note that paragraph 34 of this bulletin has not yet been updated to reflect the interaction of subsection 45(3) and paragraph 54(g) of the Act. We assume that the taxpayer will not make a deduction for capital costs allowance under paragraph 20(1)(a) of the Act in respect of the property in computing his income from that property for the taxation years during which it is rented.
When the taxpayer ceases to use the property to earn income, there will be a deemed disposition under subsection 45(1) of the Act unless the taxpayer makes an election under subsection 45(3) of the Act. Provided that the property is eventually designated as a principal residence under subparagraph 54(g)(i) of the Act, for at least one year after the change in use, the taxpayer will be able to make the election under subsection 45(3) of the Act. As long as he does make the election under subsection 45(3) of the Act, he may also designate that property as his principal residence for up to four years during which he did not ordinarily inhabit it. The four year limit can be extended if the taxpayer meets all the criteria outlined in section 54.1 of the Act.
We hope that our comments will be of assistance to you. We would caution you however, that this does not constitute a ruling and is therefore not binding on the Department.
Yours truly,
for DirectorSmall Business and General DivisionSpecialty Rulings DirectorateLegislative and IntergovernmentalAffairs Branch