Principal Issues
- Whether a taxpayer can claim the principal residence exemption for taxation years during which the taxpayer was a non-resident of Canada.
- Whether a non-resident taxpayer can designate a property in Canada as a principal residence.
Position
- A taxpayer cannot claim the principal residence exemption for taxation years throughout which the taxpayer was a non-resident of Canada.
- A property owned by a non-resident may qualify as a principal residence, depending on the facts; however, the availability of the exemption is limited to years in which the taxpayer was resident in Canada.
Reasons
Pursuant to paragraph 40(2)(b) of the Income Tax Act, the principal residence exemption is limited by reference to the number of taxation years ending after the acquisition date during which the taxpayer was resident in Canada.
Accordingly, a taxpayer cannot claim the principal residence exemption in respect of a property for a taxation year throughout which the individual was a non-resident of Canada.
The term “principal residence” is defined in section 54 of the Act and generally requires that the property be a housing unit owned by the taxpayer and ordinarily inhabited by the taxpayer, the taxpayer’s spouse or common-law partner, or a child of the taxpayer in the year.
A property in Canada owned by a non-resident taxpayer may qualify as a principal residence for a particular year where it is ordinarily inhabited by a child of the taxpayer, subject to the facts.
However, notwithstanding that a property may qualify as a principal residence, the principal residence exemption remains restricted by the “resident in Canada” requirement under paragraph 40(2)(b), which generally prevents a non-resident from fully or partially eliminating a capital gain on disposition.
Where there is a change in use of a property from personal use to income-producing use, a deemed disposition at fair market value may occur. A taxpayer may elect under subsection 45(2) to defer recognition of the gain; however, the benefit of such election does not override the residency requirement for purposes of the principal residence exemption.
Limitations
The determination of whether a property qualifies as a principal residence and the extent to which the exemption is available is fact-specific and depends on all relevant circumstances, including residency status and use of the property.
These comments are general in nature and do not constitute a binding ruling.
Written confirmation of the tax implications of a specific situation is provided only where the transactions are the subject of an advance income tax ruling request submitted in accordance with CRA administrative procedures.
