19 March 1998 External T.I. 9726055 - principal residence, capital gains deduction

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

		                                                						972605
XXXXXXXXXX                                                 		Denise Dalphy

Attention: XXXXXXXXXX

March 19, 1998

Dear Sirs:

Re: Principal Residence

This is in reply to your letter dated September 23, 1997 concerning the deemed gain on the disposition of a principal residence computed pursuant to paragraph 40(2)(b) of the Income Tax Act (the “Act”) where a 1994 capital gains election was filed under subsection 110.6(19) of the Act.

It appears that the interpretations you seek relate to a specific taxpayer. To the extent that your queries relate to completed transactions, it is appropriate that a determination be made by the relevant Tax Services Office. Where interpretations are sought on transactions that are seriously contemplated in the near future, you may consider requesting an advance income tax ruling. The process for requesting advance rulings is described in Information Circular IC-70R3 dated December 30, 1996. Notwithstanding the foregoing, we are prepared to offer the following comments.

Subparagraph 40(2)(b) of the Act, which applies to dispositions that occur after February 22, 1994, reduces by two amounts a taxpayer's capital gain otherwise determined with respect to the disposition of real property that was, at any time since it was last acquired by the taxpayer, the taxpayer's principal residence. In light of subsection 40(7.1), subparagraph 40(2)(b) only applies where the property is, at the time of disposition, designated as a principal residence for any taxation year following the date on which the taxpayer originally acquired the property. Furthermore, as a result of subsection 40(7.1) and for purposes of subparagraph 40(2)(b), the capital gain otherwise determined is calculated without reference to the deemed disposition and reacquisition of the property resulting from an election made under subsection 110.6(19) of the proposed legislation.

The two amounts which will reduce a taxpayer's capital gain otherwise determined are the principal residence exemption, determined in the usual way, and the lesser of the reported taxable capital gain, which is the taxable capital gain that was reported when the election was filed, and the maximum taxable capital gain, which is the taxable capital gain that would have resulted from the election if the principal residence designations made in respect of the property covered by the election for years prior to 1995, regardless of whether they were made in the 1994 tax return or in a return for a subsequent year, were taken into consideration.

Therefore, if the years in respect of which a principal residence designation is made on the ultimate sale of the property differ from those used in the calculation of the gain under subsection 110.6(19) of the Act or, if no principal residence designation was made at the time the capital gains election was filed and a designation is subsequently made on the actual disposition, paragraph 40(2)(b) of the Act requires that the gain under subsection 110.6(19) be recalculated, using the post-February 22, 1994 principal residence designation. The purpose of the recalculation is to ensure that the amount of the gain deferred in 1994 is not different than it would have been had the years ultimately designated for purposes of the principal residence exemption been used in that calculation. If the amount of the gain resulting from this recalculation is lower than the original amount calculated under subsection 110.6(19) of the Act, the lower amount will have to be used as the deduction on the ultimate sale. Consequently, whereas a taxpayer would normally deduct the original amount calculated under subsection 110.6(19) from his capital gain on the ultimate sale, where a different principal residence designation is made on the actual disposition of the principal residence, the taxpayer may be required to deduct a lesser amount. New paragraph 40(2)(b) ensures that a taxpayer does not obtain two deductions in respect of the gain accrued during a single period, as it essentially prevents a taxpayer from doubling up on the principal residence exemption and the capital gains exemption.

The November 1994 Department of Finance Explanatory Notes contain examples illustrating the impact of an election under subsection 110.6(19) in respect of a property that was for a time, the elector's principal residence. Please note, however, that two of these examples, namely, Examples C and D, are incorrect. In Example C, the figure for the recalculated gain from the deemed disposition (under (R)) should read $31,905 instead of $36,083. As regards Example D, the gain on the ultimate sale of the principal residence was calculated under the false assumption that new paragraph 40(2)(b) would not apply. However, new paragraph 40(2)(b) would apply because the property has, since it was last acquired, been designated as a principal residence. According to subsection 40(7.1), the property was last acquired in January 1985, since the property was the taxpayer's principal residence for the 1994 taxation year. Hence, the amounts under (O) to (U) in Example D should read as follows: (O) n/a; (P) $40,000; (Q) n/a; (R) $24,000; (S) $24,000; (T) $24,000; (U) $16,000; and (V) $12,000.

The foregoing comments represent our general views with respect to the subject matter. As indicated in paragraph 22 of Information Circular 70-6R3, the above comments do not constitute an income tax ruling and accordingly are not binding on the Department. Our practice is to make this specific disclaimer in all instances in which we provide an opinion.

Yours truly,

for Director
Resources, Partnerships and
Trusts Division
Income Tax Rulings and
Interpretations Directorate