2023-0993691E5 Principal Residence Exemption

Principal Issues: Whether a townhouse located outside of Canada qualifies as an individual’s “principal residence”, as defined in section 54 of the Act, in respect of the 2020 and 2021 taxation years where the individual did not travel to the location of the townhouse during those years.

Position: Question of fact. Depends if the townhouse was "ordinarily inhabited" in the year by the individual, the individual’s spouse, common-law partner, former spouse, former common-law partner or child.

Reasons: For a property to qualify as a taxpayer’s principal residence, the property must, among other things, be “ordinarily inhabited” by the individual, the individual’s spouse, common-law partner, former spouse, former common-law partner or child in the year.

Author: Wallace, Ryan
Section: 40(2)(b), 54 “principal residence

XXXXXXXXXX                                                                     Ryan Wallace, CPA
                                                                                             2023-099369

February 1, 2024

Dear XXXXXXXXXX:

Re: Principal Residence Exemption

We are writing in response to your email of October 3, 2023, wherein you requested our views on whether an individual’s townhouse located outside of Canada would qualify as their principal residence, as defined in section 54 of the Income Tax Act (“Act”), for the 2020 and 2021 years for purpose of the principal residence exemption (“PRE”).

In your email you indicated that an individual and her husband, who are both resident in Canada for tax purposes, did not travel to the country where the townhouse is located in 2020 and 2021 due to COVID-19 travel restrictions and guidance from the federal government to avoid non-essential travel outside of Canada. Consequently, the townhouse was not inhabited during those two years. The townhouse was also not rented during those two years. The townhouse was sold in 2023.

Our Comments

This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced). 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 IC 70-6R12, Advance Income Tax Rulings and Technical Interpretations. However, we can provide the following comments.

The CRA’s general views on claiming the PRE are set out in Income Tax Folio S1-F3-C2, Principal Residence (“Folio”). If a property qualifies as a taxpayer's principal residence, an exemption can be claimed under paragraph 40(2)(b) of the Act to reduce or eliminate any capital gain otherwise realized on the disposition of the property.

As noted in paragraph 2.74 of the Folio, a property that is located outside Canada can, depending on the facts of the case, qualify as a taxpayer’s principal residence, provided that all requirements are met. A taxpayer who is resident in Canada and owns such a qualifying property outside Canada during a particular tax year can designate the property as a principal residence for that year in order to use the PRE.

In general, for a property to qualify as an individual’s principal residence for a taxation year, it must be demonstrated that the taxpayer owns the property, the property is ordinarily inhabited in the year by the taxpayer, the spouse or common-law partner, former spouse or common-law partner or child of the taxpayer, and that the taxpayer designates the property as their “principal residence” for the year. Additionally, no other property can be designated by the taxpayer for the year and no other property may have been designated as the “principal residence” of any member of the taxpayer’s family unit for the year.

As explained in paragraphs 2.10-2.12 of the Folio, the question of whether a housing unit is ordinarily inhabited in the year by a person specified above must be resolved on the basis of the facts in each particular case. Even if a person inhabits a housing unit only for a short period of time in the year, this may be sufficient for the housing unit to be considered ordinarily inhabited in the year by that person. However, if the main reason for owning a housing unit is to gain or produce income, then that housing unit will not generally be considered to be ordinarily inhabited in the year by the taxpayer where it is only inhabited for a short period of time in the year.

Notwithstanding that travel guidance and travel restrictions of varying degrees were in effect during the COVID-19 pandemic, for a property to qualify as a taxpayer’s principal residence as defined in section 54 of the Act for the year, the condition that the property be ordinarily inhabited by the individual, the individual’s spouse, common-law partner, former spouse, former common-law partner or child in the year is still required to be met.

We trust our comments will be of assistance.

Yours truly,

Pamela Burnley, CPA, CA
Manager
Business and Capital Transaction Section
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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