Principal Issues: [TaxInterpretations translation] What are the tax consequences of using part of a rental property as a principal residence when a non-resident immigrates to Canada?
Position: (1) For the purposes of calculating the recapture and depreciation that may be claimed under sections 13 and 20, the owner of the rental property is deemed to have disposed of depreciable property of the same class for proceeds of disposition equal to the fraction of the fair market value of the rental property at the time of the partial change of use represented by the ratio of the decrease in the use of the property for the purpose of earning income to the total use of the property; (2) For the purposes of computing a capital gain under the rules in subdivision c of Division B of Part I, the owner of the rental property is deemed to have disposed of the property for proceeds equal to that proportion of the fair market value of the rental property at the time of the partial change of use that the increase in the use of the property for personal purposes is of the total use of the property.
Reasons: Wording of subparagraphs 13(7)(d)(ii) and 45(1)(c)(i)
XXXXXXXXXX François Mathieu 2017-070685
September 11, 2017
Dear Mr. X,
Re: Your request for a technical interpretation
This is in response to the letter dated June 2, 2017 in which Mr. X asked us to comment on the tax treatment applicable to the following hypothetical situation:
1. Mr. X was a resident of Canada prior to 2002.
2. In 2002, Mr. X acquired a three-unit rental building (the "Triplex").
3. The value of the three units in the Triplex was identical because they had the same surface area and the same characteristics.
4. Following the acquisition of the Triplex in 2002, Mr. X became a non-resident.
5. Mr. X remained a non-resident between 2002 and 2015 (the "Non-Residency Period").
6. During the Non-Residency Period, the three units in the Triplex were rented to unrelated persons resident in Canada.
7. In accordance with section 216, Mr. X elected to file a separate income tax return (Form T1159) in order to be taxed on his Canadian-source net rental income for each taxation year included in the Non-Residency Period (the "Taxation Year").
8. In computing his net rental income for each Taxation Year, Mr. X claimed an amount as capital cost allowance in respect of the Triplex.
9. On July 1, 2016, Mr. X again became a Canadian resident.
10. On July 15, 2016, Mr. X moved into one of the three units in the Triplex to use it as his principal residence.
Our Comments:
This technical interpretation provides general comments on provisions contained in the Income Tax Act ("ITA") and the Income Tax Regulations ("ITR").
It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC70-6R12, Advance Income Tax Rulings and Technical Interpretations.
Tax consequences of a partial change in use of depreciable property
A taxpayer who disposes of depreciable property as defined in subsection 13(21) may be required to include in income an amount as recapture of depreciation claimed in respect of such property under the rules set out in section 13. In addition, the disposition of a capital property, which includes depreciable property, may result in a taxable capital gain pursuant to the rules set out in sections 38 to 55 (subdivision c of Division B of Part I).
In general, subsection 13(7) provides specific rules that apply for the purposes of computing the depreciation that may be claimed by a taxpayer under paragraph 20(1)(a) and the regulations enacted for the purposes of that provision, as well as for calculating the recapture of depreciation under section 13. In particular, subparagraph 13(7)(d)(ii) provides that where a taxpayer's use of a property for the purpose of gaining or producing income decreases at a Particular Time after its acquisition (the "Particular Time"), the taxpayer is deemed to have disposed, at the Particular Time, of depreciable property of the same class for proceeds of disposition equal to the proportion of the fair market value ("FMV") of the property at the Particular Time represented by the ratio of the decrease in use of the property for the purpose of earning income to the total use of the property.
For purposes of computing a taxpayer's taxable capital gain from the disposition of a capital property, clause 45(1)(c)(i)(A) also provides that where a taxpayer's use of a property for purposes other than earning income ("Personal Purposes") has increased at a Particular Time, the taxpayer is deemed to have disposed of the property at the Particular Time for proceeds of disposition equal to the proportion of the FMV of the property at the Particular Time that the increase in use of the property for Personal Purposes is of the total use of the property.
Pursuant to clause 45(1)(c)(i)(B), the taxpayer is deemed to have reacquired the property immediately after the Particular Time at a cost equal to the proceeds of disposition referred to in clause 45(1)(c)(i)(A).
In the present situation, Mr. X's use of a unit in the Triplex as his principal residence from July 15, 2016 likely represents a partial change of use of the Triplex. Indeed, it is reasonable to claim that a proportion equal to one-third of the Triplex was now used by Mr. X for Personal Purposes instead of being used to earn rental income. For this reason, the rules in subparagraphs 13(7)(d)(ii) and 45(1)(c)(i) could apply.
Depending on the balance of the unamortized capital cost ("UCC") of the Triplex at the Particular Time, the deemed disposition of a property of the same class as the Triplex for proceeds of disposition equal to one-third of the FMV of the Triplex at the Particular Time could result in a recapture of depreciation claimed on such property under subsection 13(1) ("Recapture"). The deemed disposition of the Triplex for proceeds of disposition equal to one-third of the FMV of the Triplex at the Particular Time could also result in a taxable capital gain (a "Taxable Capital Gain") in accordance with the rules set out in sections 38 to 55 (subdivision c of Division B of Part I) if the deemed proceeds of disposition exceed the cost attributable to the housing unit in the Triplex into which Mr. X moved on July 15, 2016.
If so, the Recapture and the Taxable Capital Gain should be included in Mr. X's income for his taxation year ending December 31, 2016.
We hope you will find these comments of assistance.
Best regards,
Nicolas Bilodeau
Section Manager,
for the Director
International Operations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch