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:
What portion of a 4 hectare property qualifies as a principal residence for purposes of the principal residence capital gains exemption under paragraph 40(2)(b) of the Income Tax Act?
Position TAKEN:
Question of fact, but a large portion of property does not appear to be exempt. General comments provided.
Reasons FOR POSITION TAKEN:
See paragraph 15 of IT-120R5. Must show necessary for use and enjoyment as principal residence.
XXXXXXXXXX 2000-005940
T. Young, CA
February 28, 2001
Dear XXXXXXXXXX:
Re: Principal Residence Exemption
This is in reply to your letter of November 10, 2000, in which you requested an advance tax ruling that any capital gain realized on the disposition of the property containing your principal residence would be exempt from income tax.
As we understand it, you purchased a 1.54-hectare lot ("Lot #1") in 1976 on which you built a house. The lot was larger than one-half hectare because the vendor would not subdivide this lot, you wished to protect the ocean view, and also because a 60 by 100 foot septic disposal field situated at least 100 feet north of the well site was required. You indicate that over 40% of the land was comprised of swamp areas on unstable steep slopes. The deed included a right-of-way across the adjacent property ("Lot #2") to the nearest public highway. You later purchased Lot #2 in part to provide material to complete construction of the driveway between the Lot #1 and the public highway.
An advance income tax ruling would involve a fee and would have to be requested in the manner described in Information Circular 70-6R4, "Advance Income Tax Rulings" (copy enclosed). While we do not express opinions on specified proposed transactions other than as a reply to an advance income tax ruling, the following general comments may be of assistance to you.
As indicated in Interpretation Bulletin IT-120R5, "Principal Residence" (copy enclosed), the capital gain from the disposition of a principal residence is generally exempt from income taxation. To the extent that a portion of a property does not qualify as being part of the principal residence, the related capital gain is not eligible for the principal residence exemption. Under the definition of principal residence in the Income Tax Act, if the total area of the contiguous land upon which a housing unit is situated exceeds one-half hectare, the excess land is considered not to be part of the principal residence unless the taxpayer establishes that such excess land is necessary for the use and enjoyment of the housing unit as a residence. The onus is on the taxpayer to establish how much, if any, of the excess land is necessary for the use and enjoyment of the housing unit as a residence.
Generally, an individual's use of land in excess of one-half hectare in connection with a particular lifestyle does not, in and of itself, mean that the excess land is necessary for the use and enjoyment of the housing unit as a residence. Land in excess of one-half hectare could be necessary where the size or character of a housing unit together with its location on the lot make such excess land essential to its use and enjoyment as a residence, or where the location of a housing unit requires such excess land in order to provide its occupants with access to and from public roads. Other factors may be relevant in determining whether land in excess of one-half hectare is necessary for the use and enjoyment of the housing unit as a residence, such as, for example, a minimum lot size or a severance or subdivision restriction. In all cases, however, it is a question of fact as to how much, if any, of the excess land is necessary for the use and enjoyment of the housing unit as a residence.
We are not in a position to determine whether the land in excess of one-half hectare is necessary for the use and enjoyment of the housing unit as a residence. However, based on the information you provided, it is unlikely that we would be able to conclude your land in excess of one-half hectare would qualify as a principal residence. In particular, Lot #2 does not appear necessary to the use and enjoyment of the housing unit as a principal residence. Your letter states that it is necessary because the only access to the public highway is through the lot. However, it is our understanding that the deed to Lot #1 included a right-of-way from the lot to the public highway.
You have indicated that the driveway, swamps and slopes render much of the excess 3.47 hectares useless. It should be noted that in the event only a portion of the property (e.g., one-half hectare) qualifies as a principal residence, it will be necessary to calculate the gain on such portion separately from the gain on the remaining portion which does not qualify as the taxpayer's principal residence. As stated in paragraph 19 of the interpretation bulletin, the allocation of the proceeds of disposition and adjusted cost base of the total property between the two portions does not necessarily have to be on the basis of area - consideration should be given to any factors which could have an effect on the relative value of either of the two portions. Accordingly, if you are correct in your conclusion that much of the property in excess of one-half hectare is useless, this could possibly have an impact on its fair market value.
We trust that the forgoing comments are of assistance to you.
Yours truly,
John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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