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.
Principal Issues: Clarification of our position taken in 2011-041748.
Position: Clarification provided.
Reasons: N/A.
XXXXXXXXXX N. Pulandiran
2013-049870
August 28, 2013
Dear XXXXXXXXXX:
Re: Principal Residence Exemption - Excess Land
We are writing in response to your letter of January 23, 2013 that we received on July 18, 2013, wherein you sought clarification of some comments that were made in technical interpretation 2011-041748 as they pertain to land in excess of ½ hectare ("excess land") and the claiming of the principal residence exemption ("PRE").
In particular, you want us to clarify whether a taxpayer would be allowed to claim the PRE on excess land subjacent to a housing unit where the minimum lot size restriction was relaxed following the acquisition of the residence by the taxpayer but no steps were ever taken to sever or subdivide the excess land.
Our Comments
Written confirmation of the tax consequences that apply to proposed fact situation is given by this Directorate only in the context of an advanced income tax ruling request submitted in the manner set out in Information Circular 70-6R5, "Advanced Income Tax Rulings", dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the internet at http://www.cra-arc.gc.ca/formspubs/menu-e.html. Where a particular transaction has already been completed, a review of the relevant facts and circumstances surrounding the situation would be required. Such review would normally be conducted by the applicable Tax Services Office ("TSO") during the course of an income tax audit, which, if undertaken, would be carried out after the particular taxpayer has prepared and filed its income tax return for the year.
Notwithstanding the foregoing, we are prepared to provide the following general comments that may be of assistance.
The first part of the definition of "principal residence" in paragraph 54(e) of the Income Tax Act (the "Act") deems a principal residence to include land subjacent to the housing unit and such portion of any immediately contiguous land as can reasonably be regarded as contributing to the use and enjoyment of that housing unit as a residence. Paragraph 2.32 of the Income Tax Folio S1-F3-C2: Principal Residence contains the CRA's general views on this part. While it remains a question of fact as to whether a portion of any immediately contiguous land can reasonably be regarded as contributing to the use and enjoyment of a housing unit as a residence, as generally set out in paragraph 2.32, absent the existence of some mitigating factors, the CRA does not normally require evidence that this is the case.
The second part of the definition of "principal residence" in paragraph 54(e) of the Act deems any subjacent land in excess of ½ hectare not to have contributed to the use and enjoyment of the housing unit as a residence unless the taxpayer establishes that it was necessary to such use and enjoyment. This deeming rule means that the burden of proof is placed on the taxpayer for establishing that such excess land is actually necessary to such use and enjoyment and not simply desirable. Paragraphs 2.33 to 2.35 of S1-F3-C2 contain the CRA's general views on this part. While a question of fact, as generally set out in paragraph 2.35, if a minimum lot size or severance restriction existed in any given year during which the taxpayer owned the property the area that is in excess of ½ hectare would normally be part of the principal residence for the year.
Accordingly, the determination as to whether a particular housing unit and any excess land are considered to be a principal residence for a year requires an annual determination and any such determination remains a question of fact. Therefore, in circumstances where subsequent to a taxpayer's acquisition of a particular property there has been a relaxation of a previously existing minimum lot size or severance restriction, the taxpayer would need to clearly demonstrate that any excess land continued to be necessary for the use and enjoyment of the housing unit as a residence for each of those years even if the taxpayer did not take any steps to actually sever the excess land.
We trust that these comments have been of assistance.
Yours truly,
Michael Cooke, C.P.A, C.A.
Manager
Business Income and Capital Transaction Section
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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