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 Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues: Whether XXXXXXXXXX acres can be included as part of the principal residence of an individual when zoning restrictions prevent such property from being subdivided. The taxpayer purchased the property then moved a mobile home on the property.
Position: Question of fact; however, likely no.
Reasons: The position in paragraphs 15 and 16 of IT-120R5 (that land in excess of 1/2 hectare may qualify is zoning restrictions do not allow small lot sizes) is based on court cases in which land and a home were acquired together. In the situation where land is acquired without a residence and later a mobile home is moved onto the site, it would be difficult to accept that the additional land was purchased in order to acquire a property as a residence.
XXXXXXXXXX 2000-001403
J. Gibbons
July 20, 2000
Dear XXXXXXXXXX:
We are replying to your facsimile of March 14, 2000, in which you requested clarification of the application of the principal residence rules in the Income Tax Act (the "Act"). More specifically, you wish to know how these rules apply with respect to a number of transactions that you have undertaken with respect to a former residence located on property in excess of one-half hectare.
As indicated in paragraph 22 of Information Circular 70-6R3 dated December 30, 1996, a request for a written opinion on a completed transaction is generally considered by a taxpayer's local tax services office. Accordingly, you may wish to submit all relevant facts and documentation to your local tax services office for their comments. However, we have provided some general comments below.
Briefly, the facts as we understand them are as follows:
- On XXXXXXXXXX, you and your husband purchased XXXXXXXXXX acres of land (the "property") in the XXXXXXXXXX. The title to the property was put in your husband's name, but the funds for the purchase came from both you and your husband.
- Starting in XXXXXXXXXX, you developed the property by installing a driveway, a well, a septic system, hydro, and telephone service.
- In XXXXXXXXXX you acquired a mobile home for $XXXXXXXXXX and moved it onto the property. Shortly thereafter, you moved into the mobile home and it became your principal and sole residence.
- On XXXXXXXXXX, you made an application to subdivide the property into XXXXXXXXXX.
- On XXXXXXXXXX, you bought your husband interest's in the property. The adjusted cost base of the property at that time was approximately $XXXXXXXXXX, and you used $XXXXXXXXXX as the fair market value of the property, which was based on an appraisal received by XXXXXXXXXX (your financier) on XXXXXXXXXX. You attribute the difference of $XXXXXXXXXX between the adjusted cost base and the fair market value to the mobile home and residential improvements such as the septic system and well.
- By a subdivision registered on XXXXXXXXXX, your property was subdivided into a XXXXXXXXXX. You appealed the decision not to allow a further subdivision of the XXXXXXXXXX.
- On XXXXXXXXXX, you moved off of your property and, in XXXXXXXXXX, sold the mobile home for $XXXXXXXXXX.
- On XXXXXXXXXX turned down your appeal that you be allowed to further subdivide your XXXXXXXXXX.
- In early XXXXXXXXXX, you sold the XXXXXXXXXX land for $XXXXXXXXXX.
- In XXXXXXXXXX, you sold the remaining XXXXXXXXXX acres for $XXXXXXXXXX.
- Throughout the time that you owned the property, you rented out the cultivated land (approximately XXXXXXXXXX acres) for purposes of keeping the weeds under control and the land worked. This generated approximately $XXXXXXXXXX per year.
In regard to the above transactions, you ask the following questions:
i. Your main concern with respect to the above transactions is whether the XXXXXXXXXX acres on which your mobile home was located qualifies as part of your principal residence?
ii. Whether you are correct in your view that your property could be designated as your principal residence in the years XXXXXXXXXX (when you started living on the property) through XXXXXXXXXX (when you moved off the property)?
iii. Whether it is necessary to obtain a written appraisal on the fair market value of the property in XXXXXXXXXX or will the Agency accept that the increase in the fair market value of the land was due to the subdivision?
iv. Will the attribution rules apply?
v. Whether you can include the XXXXXXXXXX acre parcel of land as part of your principal residence in those years prior to it being subdivided?
vi. Are there any provisions that allow you to receive a refund of the GST you paid on the personal portion of the land?
vii. Are there any other issues you that should be aware of when filing your income tax returns?
i. Will XXXXXXXXXX acres be allowed as part of your principal residence?
In support of your view that XXXXXXXXXX acres may be included as part of your principal residence, you refer to paragraphs 15 and 16 of IT-120R5, "Principal Residence." These paragraphs provide, among other things, that to the extent that a taxpayer, in order to acquire a property as a residence, is required because of a law or regulation to acquire land that exceeds one-half hectare, the land that must be so acquired is generally considered to be necessary for the use and enjoyment of the housing unit as a residence throughout the period that the property is continuously owned by the taxpayer after the acquisition date. Thus, since you say that you can clearly show that you were not allowed to have a lot size less than XXXXXXXXXX acres, you believe that the XXXXXXXXXX acres should be included as part of your principal residence. However, you are concerned with the last sentence in paragraph 16 which states that where any portion of the land in excess of one-half hectare is not used for residential purposes but rather for income-producing purposes, such portion is usually not considered to be necessary for the use and enjoyment of the housing unit as a residence. Your concern relates to the fact that, in some years, you received $XXXXXXXXXX in renting the cultivated land.
In our view, the $XXXXXXXXXX a year you received from renting your excess property would not, in and of itself, be cause to conclude that your property had income-producing purposes. However, whether you can include XXXXXXXXXX acres as part of your principal residence is not free from doubt. The position in paragraphs 15 and 16 of IT-120R5 is based on court cases in which land and a home were acquired together. In your situation, you acquired the land without a residence, then moved a mobile home onto the site. Thus, in our view, it would be difficult to accept that you acquired the additional land in order to acquire a property as a residence. Nonetheless, this issue is ultimately a question of fact, and a final determination can only be made by officials in the Audit Division of your local tax services office. Thus, all of the supporting facts and documentation would have to be submitted to them for a definitive answer.
ii. Whether your property (the mobile home and the XXXXXXXXXX acres on which it was situated) could be designated as your principal residence in the years XXXXXXXXXX (when you started living on the property) through XXXXXXXXXX (when you moved off the property)?
Again, this is a question of fact which can only be ascertained by your local tax services office. Certainly, the mobile home could be designated as your principal residence, but, as discussed above, it is unlikely that any portion of the land in excess of 1/2 hectare could be considered part of your principal residence.
iii. Whether it is necessary to obtain a written appraisal concerning the fair market value of the property in XXXXXXXXXX or will the Agency accept that the increase in the fair market value of the land was due to the subdivision?
Where property is transferred between spouses, subsection 73(1) of the Act deems the property to have been disposed of at that time for proceeds equal to, in the case where the property is not depreciable property, the adjusted cost base of the particular property immediately before that time. However, subsection 73(1) allows taxpayers to elect not to have the provision apply. In this case, the proceeds will be deemed to be equal to fair market value under paragraph 69(1)(b) of the Act. An election must be filed in the taxpayer's tax return for the year in which the property was transferred.
There is no requirement in the Act that taxpayers obtain a written appraisal to substantiate the fair market value of property used in their income tax calculations. Nonetheless, taxpayers must be able to support the fair market value used in their calculations.
iv. Will the attribution rules apply?
Pursuant to paragraphs 74.2(1)(a) and (b), where an individual has transferred or loaned property to the individual's spouse, any taxable capital gains or allowable capital losses arising from the dispositions of the property or property substituted for it (other than listed personal property) are deemed to be taxable capital gains or allowable capital losses of the individual. Thus, the attribution rules may apply to attribute some of the capital gain, if any, to your husband on the disposition of the property since it was transferred from your husband. However, if you contributed towards the initial purchase of the property, the end result of the attribution rules would be that you and your husband would each report a share of the capital gain on the basis of each of your respective contribution of capital to acquire the property. The attribution rules are discussed in detail in IT-511R, "Interspousal and Certain Other Transfers and Loans of Property." You may want to review paragraphs 18 - 26 of this bulletin, which discusses several exceptions to the attribution rules. You can obtain a copy of this and other interpretation bulletins on our website at www.ccra-adrc.gc.ca.
v. Whether you can include the XXXXXXXXXX acre parcel of land as part of your principal residence in those years prior to it being subdivided?
According to paragraph 17 of IT-120R5, if the housing unit is situated on land in excess of one-half hectare and part or all of that excess land is severed from the property and sold, the land sold is generally considered not to be part of the principal residence unless the housing unit can no longer be used as a residence due to the land sale. If the housing unit can still be so used, such a sale indicates that the land sold was not necessary for the use and enjoyment of the housing unit as a residence. Thus, it seems clear that the XXXXXXXXXX acre parcel of land cannot be included as part of your principal residence.
vi. Are there any provisions that allow you to receive a refund of the GST you paid on the personal portion of the land?
This question has been forwarded to the Excise and GST/HST Rulings Directorate. They will respond to this question under separate cover.
vii. Are there any other issues that you should be aware of when filing your income tax returns?
As we indicated above, if you have specific questions regarding the tax implications from the sale of your property, we encourage you to contact the XXXXXXXXXX Tax Services Office. In this regard, we have forwarded a copy of this letter to their Client Services Division
We trust that these comments will be of assistance.
Yours truly,
John Oulton
for Director
Business and Publications Division
Income Tax Rulings Directorate
??
- 5 -
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2000
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2000
Email this Content