25 March 2002 External T.I. 2002-0125475 - GENERAL ISSUES RE DISPOSITION OF PROPERTY

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: General issues related to the disposition of properties.

Position: General comments.

Reasons: No specific technical question.

XXXXXXXXXX 2002-012547
J. Gibbons, CGA
March 25, 2002

Dear XXXXXXXXXX:

We are replying to your letter dated February 23, 2002, in which you asked us to confirm your income tax calculations with respect to several transactions involving your mother's estate. In our telephone conversation on March 18 (Gibbons/XXXXXXXXXX), we explained that we could not confirm the tax implications and the related tax calculations for particular transactions that are completed. This is explained in paragraph 22 of Information Circular IC 70-6R4 dated January 29, 2001. Accordingly, we are returning the documentation you submitted to us. However, we were able to provide the following general comments:

Issue 1

When a portion of a principal residence is used for rental purposes, how do you make an allocation between the principal residence portion and the rental portion?

Our Comments

In general terms, paragraphs 13(7)(c) and 45(1)(b) of the Income Tax Act (the "Act") deem the capital cost and the proceeds of disposition for the rental-use portion of the property to be the proportion of the property that the rental use is of the whole use. Generally, the portion of the property used as a principal residence will be exempt from capital gains. As indicated on page 40 of the 2001 "Capital Gains" guide, the apportionment of property between its use as a principal residence and its use as a rental property may be done by using square metres or the number of rooms, as long as the split is reasonable. Also, see the example on page 40 of that guide.

Issue 2

Can an adjoining lot to a principal residence that was used extensively as a garden be considered part of the principal residence?

Our comments

By virtue of paragraph (e) of the definition of "principal residence" in section 54 of the Act, a taxpayer's principal residence generally includes the land upon which the housing unit stands and any portion of the adjoining land that can reasonably be regarded as contributing to the use and enjoyment of the housing unit as a residence. As indicated in paragraph 14 of IT-120R5, "Principal Residence," evidence is not usually required to establish that one-half hectare of land or less, including the area on which the housing unit stands, contributes to the use and enjoyment of the housing unit as a residence. However, where a portion of that land is used to earn income from business or property, such portion will not usually be considered to contribute to such use and enjoyment. Where the taxpayer claims a portion of the expenses related to the land (such as property taxes or mortgage interest) in computing income, the allocation of such expenses for this purpose is normally an indication of the extent to which he or she considers the land to be used to earn income.

The issue of whether a principal residence can include land which does not legally form part of the property upon which the housing unit is built depends on the facts. Where a lot on which a housing unit is located and an adjacent lot are both acquired in conjunction with the acquisition of the housing unit (and the adjacent lot was not used to earn income from a business or property), it is our view that no proof would normally be required with respect to the "use and enjoyment" requirement set out in section 54 of the Act provided the total area of the land does not exceed 1/2 hectare. Thus, if an adjacent lot is acquired along with a house and used as a garden, it is probable that it can reasonably be considered to have contributed to the use and enjoyment of the housing unit as a principal residence. However, if an adjacent lot was acquired subsequent to the acquisition of the original lot containing the house, the onus would be on the taxpayer to substantiate that the adjacent lot contributed to the use and enjoyment of the housing unit, even if the total area was less than 1/2 hectare.

Issue 3

Is it necessary to obtain a formal appraisal for the fair market values used in income tax calculations?

Our comments

Although there is no requirement in the Act to obtain a written appraisal to substantiate the fair market values that are used for income tax purposes, a taxpayer must be able to support the fair market values used by some other appropriate means.

We trust that our comments will be of some help. However, since your situation involves the interpretation of relatively complex provisions of the Act, you may wish to consider obtaining professional advice if you need further assistance. Most of our publications, including the ones referred to in this letter, are available on our website which is located at www.ccra-adrc.gc.ca.

Yours truly,

John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate

enclosure

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