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: Can a taxpayer claim a personal residence exemption on 2 parcels of land that are adjacent.
Position: The excess probably would not qualify.
Reasons: It 120R-5 paragraph 15 and 16.
September 8, 2000
Re: Principal Residence and Capital Gains
This is in reply to your letter of June 15, 2000, wherein you requested us to comment on your eligibility to claim the principal residence exemption in respect of two properties of approximately 1.3 acres each.
You describe the properties as two parcels of land. The house used as a principal residence is situated on the front parcel and the other parcel is directly behind and has no road access, or services and is located at the bottom of a ravine. The properties are used for your enjoyment and for the purpose of accommodating your pets and livestock. The properties are also narrow, 82 feet wide, whereas municipal road allowances are 66 feet.
The particular circumstances in your letter on which you have asked for our views is a factual situation. As explained in Information Circular 70-6R3, it is not this Directorate's practice to comment on transactions involving specific taxpayers other than in the form of an advance income tax ruling submitted in the manner described in that Information Circular. However, we have considered your enquiry and have provided some comments below which are of a general nature only.
In applying paragraph (e) of the definition of "principal residence" in section 54 of the Income Tax Act (the "Act"), a taxpayer must first determine what portion of the immediately contiguous land can reasonably be regarded as contributing to the taxpayer's use and enjoyment of the housing unit as a residence. This is a question of fact to be determined on the basis of all relevant information.
Where the housing unit is located on land not exceeding 1/2 hectare, usually the land qualifies as part of the principal residence, with no requirement to prove that it is necessary for the use and enjoyment of the housing unit as a residence. If the area of land which contributes to "use and enjoyment" exceeds 1/2 hectare, the Act deems that the excess land does not contribute to the use and enjoyment of the housing unit as a residence. The one exception to the deeming provision is where the taxpayer establishes that the land in excess of 1/2 hectare is necessary for the use and enjoyment of the housing unit as a residence.
Paragraph 15 of Interpretation Bulletin IT-120R5 , copy enclosed, deals with land in excess of one-half hectare and it states that the excess land must clearly be necessary for the housing unit to properly fulfill its function as a residence and not simply be desirable. In our view, the word "necessary" takes its ordinary meaning of "essential" or "needed" particularly as it appears in a context of a contrasting and more restrictive description of the degree to which the land is to relate to the use and enjoyment of the housing unit. Accordingly, land in excess of 1/2 hectare must be essential (demonstrably) to the use and enjoyment of the housing unit as a residence and not merely desirable, helpful or contributory. Based on the jurisprudence, the words "can reasonably be regarded as contributing to the use and enjoyment of the housing unit as a residence" in the definition of "principal residence" in paragraph 54(e) of the Act do not include recreational uses or lifestyle uses and, in our view, excess land purchased to accommodate pets and livestock would not be considered necessary for the use and enjoyment of the housing unit as a residence. Accordingly, in our opinion, based on the information you provided us, should you dispose of the properties, the excess land would be subject to capital gains. However, the allocation of the proceeds of disposition and adjusted cost base of the total properties between the two parcels does not necessarily have to be on the basis of area; consideration can be given to any factors which would have an effect on the relative value of either of the two parcels. Thus, the fact that the back parcel has no road access, or services and is located in a ravine may have an impact on its fair market value.
We caution that our comments are not advance income tax rulings but are merely opinions based solely on the information given.
We trust that these comments will be of assistance.
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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