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: 1. Whether a certain property in excess of 1/2 hectare is eligible for the principal residence exemption. 2. Which form must be completed to designate a property a principal residence and claim the exemption?
Position: 1. Question of fact. General comments provided. May be eligible for the principal residence exemption on the portion of the land viewed as a principal residence and for a capital gains exemption on the other portion used in a farming business where conditions are met to be a Qualified Farm Property.
2. Form T2091 (IND) is the prescribed form to be used to designate a property as a principal residence. It is CRA's practice that the form need only be completed and filed with the taxpayer's income tax return in the year of disposition, where a taxable capital gain on the disposition of the property remains after using the principal residence exemption.
Reasons: 1. Reading of the legislation. Insufficient facts provided to be conclusive.
2. Prescribed form for principal residence designation.
2008-026378
XXXXXXXXXX Joy Bertram, B.Comm.,
CGA, CPA (vt)
February 25, 2008 (613) 957-8954
Dear XXXXXXXXXX :
Re: Principal Residence Exemption
This is in response to your letter of December 14, 2007 inquiring about whether a certain property would be eligible for the principal residence exemption.
As we understand the facts, you have lived on an 8-acre XXXXXXXXXX , a property that you owned and used as your principal residence since acquisition. You indicated that a portion of the land has been used in a farming business for several years and that municipal laws require the parcels of land in your area to be a minimum of 10 acres.
Your question is whether the capital gain on disposition would be completely offset by the principal residence exemption.
Our comments
It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advanced income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular 70-6R5, "Advanced Income Tax Rulings, dated May 17, 2002. This Information Circular and other CRA publications can be accessed on the Internet at http://www.cra-arc.gc.ca. Should a situation involve a specific taxpayer and a completed transaction, all relevant facts and documentation should be provided to the appropriate Tax Services Office ("TSO") for their views. A list of TSOs is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following general comments, which may be of assistance.
The CRA's general views regarding capital gains and principal residence are contained in Guide T4037, Capital Gains 2007 and Interpretation Bulletin IT-120R6, Principal Residence. As indicated on page 39 of Guide T4037, under the heading "Disposing of your principal residence", when you sell your home or are considered to have sold it, usually you do not have to report the sale on your return or pay tax on any gain from the sale. This is the case if the home was your principal residence for every year you owned it. If your home was not your principal residence for every year that you owned it, you have to report the part of the capital gain on the property that relates to the years for which you did not designate the property as your principal residence. Page 38 of the guide explains that the land on which your home is located can be part of your principal residence. Usually, the amount of land that you can consider as part of your principal residence is limited to 1/2 hectare (1.24 acres). However, if you can show that you need more land to use and enjoy your home, you can consider more than this amount as part of your principal residence. For example, this may happen if the minimum lot size imposed by a municipality at the time you bought the property is larger than 1/2 hectare and where you were not permitted to request further severance of the property.
However, paragraph 16 of IT-120R6 explains that where any portion of the land in excess of 1/2 hectare is not used for residential purposes but rather for income-producing purposes, that portion is usually not considered to be necessary for the use and enjoyment of the housing unit as a residence. In other words, though your XXXXXXXXXX is required by law to be one parcel of land and cannot be severed, the portion of the land used in a farming business (or for any other income producing activity) would still not be viewed as part of your "principal residence". The capital gain attributable to that portion of land would not be eligible for the principal residence exemption under paragraph 40(2)(b) of the Income Tax Act ("Act") and would be taxable unless another provision of the Act applied.
To the extent that a portion of the land does not qualify for the principal residence exemption and is used in a farming business, consideration should be given as to whether the portion used for farming would meet the definition of "Qualified Farm Property" (QFP) as defined in subsection 110.6(1) of the Act. If so, you may be eligible to use the $375,000 lifetime capital gains deduction in respect to QFP provided in subsection 110.6(2) to offset the capital gain on this portion of the land. For more information on what is considered to be QFP and the related capital gains deduction, please see pages 47 to 49 of Guide T4003, Farming Income.
Form T2091 (IND) is the prescribed form to be used to designate a property as a principal residence. It is CRA's practice that the form need only be completed and filed with the taxpayer's income tax return in the year of disposition, where a taxable capital gain on the disposition of the property remains after using the principal residence exemption.
As these issues are somewhat involved, you may wish to obtain professional advice.
We trust that these comments will be of assistance.
Yours truly,
S. Parnanzone
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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