17 October 2003 External T.I. 2003-0033555 - PRINCIPAL RESIDENCE

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 CCRA.

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

Principal Issues: What is CCRA's interpretation of the words "relatively small" as used in the sentence "...you are not considered to have changed its use if: your rental or business use of the property is relatively small in relation to its use as your principal residence"?

Position: No specific percentage provided, taxpayer referred to comments provided in paragraph 30 - 32 of IT-120R6

Reasons: Question of fact.

		2003-003355
XXXXXXXXXX 	Karen Power, CA
(613) 957-8953
October 17, 2003

Dear XXXXXXXXXX:

Re: Partial Change in Use of a Principal Residence

We are writing in reply to your letter of May 29, 2003, requesting our comments on the interpretation of the words "relatively small" as used in the sentence "...you are not considered to have changed its use if: your rental or business use of the property is relatively small in relation to its use as your principal residence...". This sentence is contained in the Capital Gains guide under the heading "Changing Part of your Principal Residence to a Rental or Business Property". Your letter was forwarded to us on August 5, 2003 by the Shawinigan-Sud Tax Centre. Specifically you enquire whether a particular percentage can be used in determining whether there has been a partial change in use in respect of a particular property.

Our Comments

Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular IC 70-6R5 dated May 17, 2002. Where the particular transaction is completed, the inquiry should be addressed to the relevant Tax Services Office. Although we are unable to provide any opinion in respect of the specific transactions described in your letter, we have set out some general comments, which we hope, are of assistance to you.

As discussed in paragraphs 30 to 32 of Interpretation Bulletin IT-120R6 "Principal Residence" (available at http://www.ccra-adrc.gc.ca/menu/ITSC-e.html), when a taxpayer has partially converted a principal residence to an income-producing use, paragraph 45(1)(c) of the Income Tax Act (the "Act") provides for a deemed disposition of the portion of the property so converted for proceeds equal to its proportionate share of the property's fair market value. Paragraph 45(1)(c) of the Act also provides for a deemed reacquisition immediately thereafter of the same portion of the property at a cost equal to the same amount. Any gain otherwise determined on the deemed disposition is usually eliminated or reduced by the principal residence exemption. If the portion of the property so changed is later converted back to use as part of the principal residence, there is a second deemed disposition (and reacquisition) thereof at fair market value. A taxable capital gain attributable to the period of use of such portion of the property for income-producing purposes can arise from such a second disposition or from an actual sale of the whole property subsequent to the original partial change in use.

Paragraph 31 of the bulletin indicates that the Canada Customs and Revenue Agency ("CCRA") will apply the above-mentioned deemed disposition rule where the partial change in use of the property is substantial and of a more permanent nature, i.e., where there is a structural change. Examples where this occurs are the conversion of the front half of a house into a store, the conversion of a portion of a house into a self-contained domestic establishment for earning rental income (a duplex, triplex, etc.), and alterations to a house to accommodate separate business premises.

In addition, paragraph 32 of the bulletin indicates that it is not the CCRA's practice to apply the deemed disposition rule but rather to consider that the entire property retains its nature as a principal residence if the income-producing use is ancillary to the main use of the property as a residence, there is no structural change to the property, and no capital cost allowance is claimed on the property. These conditions can be met, for example, where a taxpayer carries on a business of caring for children in his or her home, rents one or more rooms in the home, or has an office or other work space in the home which is used in connection with his or her business or employment.

There is no specific percentage which may be used in determining whether there has been any change in use in respect of a particular property. Such determinations are questions of fact, which require a review of all relevant facts of each particular case and are normally the responsibility of the tax services office serving the area in which the taxpayer resides.

We trust our comments will be of assistance to you.

Yours truly,

Milled Azzi, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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