Principal Issues: Various questions regarding change in use of a duplex.
Position: See response.
Reasons: See below.
FEDERAL ROUNDTABLE ON TAXATION 10 OCTOBER 2014
APFF - CONGRESS 2014
Question 2
Impact of two technical interpretations on duplex and triplex
In two technical interpretations published in 2012 (2011-0417471E5, 2011-0420171E5), the CRA indicated that it was not possible to make an election under subsection 45(3) for one of the units of a duplex that the individual will now use as principal residence. In our understanding, the same principle would also apply for the purposes of subsection 45(2).
Even if, for the purpose of the tax provisions relating to the principal residence exemption, a duplex is composed of two separate "housing units", a duplex (or a triplex) would, according to the CRA, constitute only one property for the purposes of the rules on a change of use. However, as a partial change in use of a single property is not possible (it takes a complete change of use), the CRA has indicated that there would be a problem with duplexes, triplex, etc., where there is a change of use with respect to one of the housing units. Therefore, it would not be possible to postpone the triggering of a capital gain or to benefit from the four additional year rule for the principal residence exemption under subsection 45(2) or 45(3). The CRA's position, however, has surprising consequences.
Thus, in the case of a single property, this would mean, by way of example only, that it would be possible to claim the entirety of a capital loss on the portion of the land occupied by a triplex occupied as to 40% by the owner because it would be a single property. Indeed, the definition of "personal-use property" ("PUP") in section 54 and subparagraph 40(2)(g)(iii) would not have the effect of denying 40% of the capital loss on the "land" portion (a non-depreciable capital property) simply because the land would not be personal property. Indeed, the non-depreciable property (land) would not be used primarily (this means more than 50%) for the personal use or enjoyment of the taxpayer or taxpayer-related persons. As for the "building" portion, it is a depreciable property, the tax rules for which do not, however, make it possible, according to our understanding, to claim any loss on the 40% portion occupied by the owner.
If the CRA's position is based on the fact that it is a single property, making the February 22, 1994 election on a duplex would have resulted in the disposition of the owner-occupied housing unit, forcing the owner to make a decision on the principal residence designation on this housing unit at the expense of a cottage, for example. Yet, CRA officials repeatedly said at the time that the property had to be treated as two distinct properties (rental and personal residence), so that the overwhelming majority of experts who made the February 22, 1994 election on duplexes or triplexes would not have made the election correctly. Since it was a single property, they should have increased the proceeds of disposition (without exceeding the fair market value ("FMV")) so as to trigger a gain sufficient to use the entire $100,000 deduction (the other portion of the gain being potentially exempt as a principal residence). At that time, the experts were receptive to the comments of the CRA.
Questions to the CRA:
a) Can the CRA confirm its position that a duplex (or triplex) is a single property (subject to the land-building allocation) for the purposes of subsections 45(2) and (3)?
b) Can the CRA confirm that the capital loss on the "land" portion of a triplex occupied at 40% by the owner could result in a fully qualifying capital loss if it is a single property (if there is loss)?
c) Can the CRA comment respecting the February 22, 1994 election in such a case?
d) Could the CRA advise the Department of Finance of Canada of this problem involving duplex, triplex, etc. so that the tax policy is modified to reflect the concept of "housing unit" for the purposes of subsections 45(2) and (3) and thus harmonize the tax rules with other measures related to principal residence, such as the principal residence exemption, the HBP and the First-Time Home Buyers’ Tax Credit (HBTC), both of which use the concept of "housing unit"?
CRA Response to Question 2(a)
The question of whether there is one or more property is a private law matter. In the case of a single property under private law, the CRA is of the view that it is also a single property for the purposes of section 45.
CRA response to Questions 2(b) and (c)
The issues raised in (b) and (c) require further analysis by the CRA. Given the short time to respond, the CRA is not in a position to comment at this time. The Income Tax Rulings Directorate will conduct this analysis and will make a decision once it has been completed.
CRA Response to Question 2(d)
The CRA's position with respect to subsections 45(2) and (3) has already been brought to the attention of the Department of Finance Canada.
Isabelle Landry
(450) 623-0193
October 11, 2013
2013-049562