Question
Demolition of Building
A taxpayer owns a house which he uses as a rental property. The lessee leaves upon termination of the lease and the taxpayer takes up residence in the house as his principal residence, electing under subsection 45(3) to defer tax. Subsequently, he demolishes the existing house and builds a new residence on the lot, which he occupies as his principal residence upon completion. In the circumstances,
(a) will the taxpayer be considered to have disposed of the building alone, or both the building and the land?
(b) if the answer to (a) is the building alone, will the taxpayer's election under subsection 45(3) continue to apply to defer tax on the land until an ultimate actual or deemed disposition of the land occurs? and
(c) would the answers to (a) and (b) differ if the taxpayer demolished the old house without first having occupied it for a period as his principal residence?
Answer
(a) The taxpayer will be considered to have disposed of the building alone upon demolition thereof. The disposition could result in a recapture of capital cost allowance and a realized capital gain to the taxpayer, as the case may be. The Supreme Court of Canada decision in The Queen v. Compagnie Immobiliere BCN Limitee 79 DTC 5068 supports the view that the demolition of a building constitutes a disposition thereof.
(b) The election under subsection 45(3) will continue to apply to defer tax on the land until an actual disposition of the land occurs. Support for this position can be found in paragraph 15 of IT-120R3 under the heading "Disposition of Part of a Principal Residence".
(c) The demolition of the building without it first having been occupied by the taxpayer as a principal residence, would not alter the views set out in answers (a) and (b) above.
R.B. Day911176May 17, 1991