2 October 2012 External T.I. 2012-0455621E5 - post immigration losses

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: A Canadian resident individual who recently immigrated disposes of a home situated in XXXXXXXXXX which remained vacant following his immigration to Canada. In such case would any loss, otherwise determined, be deemed nil pursuant to subparagraph 40(2)(g)(iii)?

Position: Yes.

Reasons: A property (i.e., a home) which is used primarily for the use and enjoyment of its owner is a "personal use property" within the meaning of section 54; this is so, despite the fact that it remained vacant for a period of time prior to its disposition. A loss on the disposition of personal-use property is deemed to be nil by virtue of subparagraph 40(2)(g)(iii).

XXXXXXXXXX
Angelina Argento
2012-045562

October 2, 2012

Re: Whether former home is “personal use property”?

Dear XXXXXXXXXX,

This is in response to your letter of July 10, 2012 wherein you describe a situation where an individual (the “Taxpayer”) and his spouse immigrated to Canada from XXXXXXXXXX on April 8, 2008, at which time the Taxpayer owned a home situated in XXXXXXXXXX which he had ordinarily inhabited with his spouse for their personal use and enjoyment (the “XXXXXXXXXX Home”) until his departure from XXXXXXXXXX. On April 8, 2008, the fair market value (“FMV”) of the XXXXXXXXXX Home was XXXXXXXXXX (footnote 1) and XXXXXXXXXX was worth CAN$XXXXXXXXXX (Canadian dollars). On September 3, 2008, the Taxpayer sold the XXXXXXXXXX Home for proceeds of disposition equal to XXXXXXXXXX and on this day, XXXXXXXXXX was worth for CAN$XXXXXXXXXX.

It is our understanding that the XXXXXXXXXX Home remained vacant following the Taxpayer’s departure from XXXXXXXXXX until it was sold on September 3, 2012. For the purposes of our response we have made the following assumptions:

• the Taxpayer was never engaged in the business of buying and selling houses;
• the purchase of the XXXXXXXXXX Home was not an adventure in the nature of trade; and

the XXXXXXXXXX Home was never used for the purpose of gaining or producing income from a business or property.

You would like to know what are the Canadian income tax consequences arising from the disposition of the Home. Specifically, you ask the following questions:

1. Whether the decrease in the XXXXXXXXXX to CAN$ exchange rate from April 8, 2008 to September 3, 2008 must be considered in determining the Canadian income tax consequences arising from the disposition of the XXXXXXXXXX Home; and

2. Whether the loss incurred in respect of the XXXXXXXXXX Home can be deducted by the Taxpayer (in 2008) for Canadian tax purposes?

For the purposes of our comments we have assumed that the sale proceeds in respect of the XXXXXXXXXX Home were paid in full in the year the property was sold (i.e., 2008). All references to section, subsection, paragraph, subparagraph or clause herein refer to the provisions of the Income Tax Act.

OUR COMMENTS

Where a taxpayer is resident in Canada throughout part of a taxation year (the “Canadian resident part”) and non-resident throughout another part of the year, section 114 is relevant in computing the taxable income of the taxpayer. However, that provision only affects the computation of the taxable income of the taxpayer for the part of the year during which he is non-resident and therefore does not affect the issues here in question as they arise in the Canadian resident part of the year.

Issue 1: Implications of differences in the foreign exchange rates

Where, at a particular time in a year, an individual becomes resident in Canada, he will be deemed, at that time, to have disposed of (footnote 2) each property (footnote 3) owned by him for proceeds of disposition equal to the FMV of the property at that particular time and to have re-acquired (footnote 4) each such property at a cost equal to the FMV of the property at that particular time. Pursuant to the Federal Court of Appeal decision in Gaynor (footnote 5) , in determining amounts denominated in a foreign currency, for the purpose of computing a capital gain or loss for Canadian tax purposes, the amounts "must be valued in Canadian currency which is the only monetary standard of value known to Canadian law" (footnote 6) . Therefore, the cost of the XXXXXXXXXX Home must be determined in Canadian dollars at the exchange rate prevailing at the time the Taxpayer became resident in Canada.

As a result, on April 8, 2008, the Taxpayer will be treated as having disposed of, and re-acquired the XXXXXXXXXX Home at a cost equal to CAN$XXXXXXXXXX (footnote 7) , this being the FMV of the XXXXXXXXXX Home in Canadian dollars at the time the Taxpayer became a resident of Canada. Furthermore, for the purpose of computing any capital gain or loss upon the disposition of the XXXXXXXXXX Home on September 3, 2008, the proceeds of disposition (in the amount of XXXXXXXXXX) must be converted into Canadian dollars at the exchange rate prevailing at the time of the disposition of the XXXXXXXXXX Home. Therefore, the proceeds of disposition in respect of the XXXXXXXXXX Home is equal to CAN $XXXXXXXXXX (footnote 8) .

As a result, subject to the application of subparagraph 40(2)(g)(iii), in his 2008 taxation year, the Taxpayer incurred a loss in respect of the disposition of the XXXXXXXXXX Home in the amount of CAN$XXXXXXXXXX (footnote 9) .

Issue 2: Whether the loss incurred in respect of the XXXXXXXXXX Home (in 2008) is deemed nil for Canadian tax purposes?

The loss incurred by the Taxpayer in 2008 in respect of the disposition of the XXXXXXXXXX Home is subject to the loss limitation rules found in subparagraph 40(2)(g)(iii), which generally provides that a taxpayer’s loss from the disposition of “personal-use property” (as defined in section 54) is deemed to be nil. A property which is used primarily as a residence (i.e., for the personal use and enjoyment of those living in it) is a “personal-use property” within the meaning of that term in section 54 (footnote 10) . Therefore, a loss on the disposition of a principal residence is deemed to be nil by virtue of subparagraph 40(2)(g)(iii).

Prior to the Taxpayer becoming resident in Canada, the XXXXXXXXXX Home was used by the Taxpayer as a principal residence (footnote 11) . Thereafter, the XXXXXXXXXX Home remained vacant until its disposition on September 3, 2008. It is our view that even though the XXXXXXXXXX Home remained vacant from April 8, 2008 to September 3, 2008, at all times it constituted “personal use property” of the Taxpayer within the meaning of that term in section 54. In particular, the deemed re-purchase of the XXXXXXXXXX Home (pursuant to paragraph 128.1(1)(c)) did not make it inventory to the Taxpayer or change its nature from a personal-use property to a home acquired as an adventure in the nature of trade. Support for our position can be found in the Solomons (footnote 12) case, where Judge Bowie held that the deduction of a loss incurred by a realtor on the disposition of his personal residence was disallowed in computing his income under section 3, for the following reasons:

“The Appellant seems to have assumed that because he wanted to sell the house from the time he closed the purchase in 1989 until he was able to sell it in 1993, it must be considered inventory in his hands during that period. However, he was in exactly the same position as anyone else who, having bought a house for personal use, decided that he could not afford it – he was selling a personal use property. He was never engaged in the business of buying and selling houses, nor was his purchase of this house an adventure in the nature of trade.”

As a result, we are of the view that the loss incurred by the Taxpayer in 2008 in respect of the disposition of the XXXXXXXXXX Home is deemed to be nil by virtue of subparagraph 40(2)(g)(iii).

We trust these comments will be of assistance.

Yours Truly,

Olli Laurikainen
for Director
International Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs.

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 You have indicated that there is a professional valuation dated April 8, 2008 to support this FMV.
2 Pursuant to paragraph 128.1(1)(b).
3 Other than property referred to in subparagraphs 128.1(1)(b)(i) to (iv), none of which applies to the facts in this case.
4 Pursuant to paragraph 128.1(1)( c).
5 Hope R. Gaynor v. The Queen 91 DTC 5288 (FCA).
6 See also paragraph 261(2)(a) and 261(2)(b) of the Act which were enacted for greater certainty to confirm that, in determining any amount under the provisions of the Income Tax Act, each amount is to be determined in Canadian currency. See also CRA Document No. 2008-0267831E5 dated May 8, 2008.
7 Namely, XXXXXXXXXX x CAN$1.9983 (being the XXXXXXXXXX to CAN$ exchange rate on April 8, 2008).
8 Namely, XXXXXXXXXX x 1.8873 (being the XXXXXXXXXX to CAN$ exchange rate on September 3, 2008).
9 Namely, proceeds of disposition of CAN$XXXXXXXXXX less a cost of CAN$XXXXXXXXXX.
10 See also Interpretation Bulletin IT-120R6, “Principal Residence” dated July 17, 2003 at paragraph 13.
11 Within the meaning of that term in section 54 of the Act. In other words, the XXXXXXXXXX Home was owned by the Taxpayer as a capital property and at all times (until the Taxpayer’s immigration to Canada), the Taxpayer and his spouse lived in the XXXXXXXXXX Home for their personal use and enjoyment.
12 Solomons v. The Queen 2003 DTC 505, at paragraph 11.