August 6, 1986
Small Business and General Division N.M. Sheerin 957-2135
RE: XXXX
This is in reply to your memorandum of April 4, 1986 (and the follow-up memorandum of June 6, 1986) concerning the income tax implications of the 1982 change in use of a rental property which was previously the principal residence of the above-named taxpayers.
XXXX
We agree with our opinion that the capital gain arising from the change in use of the rental property in 1982, when it became once more the principal residence of XXXX should be attributed to XXXX. It is also our opinion that the taxpayer is entitled to make an election under subsection 45(3) to defer this capital gain. As a result of the earlier change in use that occurred in 1979, when the taxpayers commenced using their home as a rental property, in our view the property can be considered to have been acquired for the purpose of gaining or producing income within the meaning of subsection 45(3)
It should be noted that an election under subsection 45(3) operates to prevent a deemed disposition of the property only under subsection 45(1), that is, only for capital gains purposes.
XXXX. This election is valid, since the coming into effect provisions of subsection 45(3) state that the election will be applicable with respect to property that a taxpayer commences to use as a principal residence after 1981, except that for any such property actually disposed of in taxation years ending after 1981 and before 1985, the reference to "April 30 following the year in which the property is actually disposed of by him" shall be read as a reference to "April 30, 1986."
The prohibition against claiming capital cost allowance where a taxpayer intends to make an election under section 45(3) is effective for any taxation year ending after 1984. XXXX election is valid, therefore, even though he claimed capital cost allowance on the property while it was rented.
When filing his election under subsection 45(3) XXXX. He is entitled to make such a designation by virtue of the provisions of subparagraph 54(g)(ii), as amended by Bill C-72.
You have asked when XXXX would have been required to file his subsection 45(3) election if the transfer of the property to XXXX and the subsequent sale of the property by her had not taken place in the same year.
XXXX
We trust these comments will be of assistance to you. The taxpayers' files are returned herewith.
for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch