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: Whether the Taxpayer can claim more than 1/2 hectare of land as her "principal residence" by reason of minimum size restrictions in the current municipal bylaw.
Position: No.
Reasons: The minimum size restrictions in the previous bylaw were below the 1/2 hectare mark.
September 29, 2008
Toronto North Tax Services Office HEADQUARTERS
Audit Division André M. Gallant
(613) 957-8961
Attention: Mr. Subramaniam Kankesan
2008- 028635
Principal Residence - Greater than 1/2 Hectare
This is in response to your email of July 14, 2008, and is further to our telephone conversation and subsequent emails, regarding the amount of land that should be considered to be part of a principal residence in a case under audit.
Our understanding of the facts is as follows:
1. XXXXXXXXXX (the "Taxpayer") died in XXXXXXXXXX .
2. XXXXXXXXXX
3. A housing unit located on property owned by the Taxpayer at XXXXXXXXXX (the "Property") was declared as her principal residence. The Property was a XXXXXXXXXX . The Property was purchased by the Taxpayer in XXXXXXXXXX .
4. The Property is zoned XXXXXXXXXX under the current municipal bylaw XXXXXXXXXX (the "current Bylaw"). The minimum lot size requirement under the current Bylaw is XXXXXXXXXX
XXXXXXXXXX
The current Bylaw has been in effect since XXXXXXXXXX .
5. The Property was zoned Residential (R) under the previous municipal bylaw XXXXXXXXXX (the "previous Bylaw"). The minimum lot size requirement under the previous Bylaw was XXXXXXXXXX
According the municipality, the Taxpayer could have only used XXXXXXXXXX acre, and nothing appears to have prevented the Taxpayer from severing and selling the remaining XXXXXXXXXX acres under the previous Bylaw.
6. The Property was not used to earn income from business or property during the period of ownership by the Taxpayer.
7. The accountant who prepared the Taxpayer's terminal T-1 return reported a capital gain of $XXXXXXXXXX on the deemed disposition of the Property, based on a fair market value of $XXXXXXXXXX on the date of death in XXXXXXXXXX and an adjusted cost base of $XXXXXXXXXX . No supporting documents were provided regarding the fair market value.
8. An appraisal officer from the Canada Revenue Agency (the "CRA") estimated the fair market value at the Taxpayer's death in XXXXXXXXXX to be $XXXXXXXXXX for the whole property and $XXXXXXXXXX for what was thought to be the residential portion of XXXXXXXXXX acres. We presume that the residential portion of XXXXXXXXXX acres, which includes the housing unit, satisfies the XXXXXXXXXX requirement of the current Bylaw.
Your question concerns whether, for purposes of the principal residence exemption pursuant to paragraph 40(2)(b) of the Income Tax Act (the "Act"), the whole XXXXXXXXXX acres or only a portion thereof should be considered as part of the Taxpayer's "principal residence" pursuant to the definition of this term in section 54 of the Act.
Position of the Toronto North TSO
You propose to only allow XXXXXXXXXX acres of land as being part of the "principal residence" of the Taxpayer based on the minimum acreage in the current Bylaw. You cite in support paragraphs 16 and 17 of Interpretation Bulletin IT-120R6.
Position of the Taxpayer
The Taxpayer's representative made a written submission to the effect that all of the XXXXXXXXXX acres should be part of the "principal residence" based on the minimum frontage (but not the minimum acreage) requirements in the current Bylaw. In the submission, the representative did not refer to the previous Bylaw, nor did he address the relevancy of the bylaw in effect at the time the Property was acquired.
The representative suggests that only the minimum lot size requirement and severance or subdivision restriction applicable at the time disposition are relevant for the purpose of determining if the land exceeding 1/2 hectare was "necessary for use and enjoyment" of the housing unit on the Property as a residence, as stipulated in paragraph (e) of the definition of principal residence in section 54 of the Act. To support this conclusion, the representative relied on the following cases from the Federal Court of Appeal: The Queen v. Yates, 86 DTC 6296; Augart v. The Queen, 93 DTC 5205; and Carlile v. The Queen, 95 DTC 5483. The representative also made reference to a Tax Court of Canada decision where the judge seemed to have only relied on the minimum frontage restriction (without considering the minimum acreage requirement) in the applicable municipal bylaw as the only indicia of the minimum lot size restriction: see Sendher v. The Queen, 98 DTC 1250.
Under the definition of "principal residence" in section 54 of the Act, if the total area of the contiguous land upon which a housing unit is situated exceeds 1/2 hectare, the excess land is considered not to be part of the principal residence unless the client establishes that such excess land is necessary for the use and enjoyment of the housing unit as a residence. The onus is on the client 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 1/2 hectare in connection with a particular lifestyle does not, in itself, mean that the excess land is necessary for the use and enjoyment of the housing unit as a residence.
A minimum lot size and a severance restriction imposed by local municipal by-laws may be factors indicating that land in excess of 1/2 hectare may be required for the use and enjoyment of the housing unit as a residence (see e.g. IT-120R6, paragraph 16). In the present case, however, the Taxpayer's representative only referred to the zoning/severance restrictions applicable at the time of disposition of the Property in order to determine what amount of land forms part of a taxpayer's principal residence. The representative did not consider the restrictions applicable at the time of acquisition of the Property. The comments in paragraph 16 of IT-120R6 refer to lot size restrictions at acquisition and the jurisprudence on the question further confirms that the minimum lot size and a severance restriction imposed at the time of acquisition are not only important but even determinative, in some cases.
The role of lot size and subdivision restrictions was at issue in Augart. Although the majority of the Federal Court of Appeal (the "FCA majority") sided with the taxpayer in Augart in overturning the Federal Court Trial Division, the FCA majority did state that it would have sided with the Crown if the facts were indeed as described by the court below.
In Augart, the taxpayer had acquired 8.99 acres of land in 1966 upon which a residence was already constructed. At the time of acquisition, the city by-law provided that there could be no building on a piece of land that was less than 3 acres in area ("lot size restriction"), and that no subdivision of property could occur if the parcel of land was less than 10 acres in size ("subdivision restriction"). In 1980, a new by-law came into effect requiring a minimum lot size of 80 acres for a single dwelling, and requiring that subdivision was only permitted if the parcel of land was at least 10 acres (whereas the taxpayer's property was 8.99 acres). The FCA majority found that the entire 8.99 acres should be part of the "principal residence" of the taxpayer based on the minimum lot size and subdivision restrictions imposed at the time of acquisition.
At the Trial Division level, the judge had concluded that the taxpayer could have retained 3 acres and disposed of the remaining 5.99 acres based on the by-law applicable at the time of acquisition in 1966. The FCA majority's only problem with the Trial Division's decision was that the Trial Division had missed the fact that the taxpayer could not have subdivided the 8.99 acres of land into two or more parcels under the by-law in force in 1966 (i.e., the subdivision restriction). As admitted by the taxpayer's counsel before the FCA, the original by-law had not been fully addressed before the Federal Court Trial Division. Had it been possible to subdivide the 8.99 acres into two or more parcels under the original by-law in 1966, the FCA majority did state that it would have found against the taxpayer (i.e., by considering only 3 acres of land to be part of the principal residence). Here are the words of the FCA majority to this effect:
"I would agree with the respondent, but only to the extent that subdivision restrictions, or for that matter minimum site requirements, in force at the date of disposition cannot be determinative of the issue under consideration. A determination regarding the area of land to be deemed a principal residence should not, in my opinion, be resolved by the mechanical application of a single criterion such as a minimum lot size on the date of disposition. Certainly, the reasoning in Yates does not support such an approach. In fact, minimum lot size at the time of acquisition was specifically addressed. At page 5188, Mr. Justice Mahoney stated:
When they bought, the Defendants did not want ten acres; they wanted only enough land for their residence but had to buy at least ten acres. They did not use more than an acre for residential purposes. [Emphasis is mine]
In the instant case, it is common ground that at the time of acquisition the original by-law would not permit the 8.99 acre parcel to be subdivided. That is to say the appellant was obligated to purchase a minimum of 8.99 acres in order to occupy the dwelling unit as a residence. Moreover, the prohibition against subdividing the land remained in effect even after passage of the replacement by-law. On this point, the learned Trial judge was in error by presuming, as he did, that prior to the enactment of that by-law the appellant could have retained 3 acres and sold off the remaining 5.99 acres (at p. 6612).[footnote 12 omitted] If in fact that had been the case, I would have little difficulty in dismissing this appeal. However, after examining the relevant by-law provisions and in light of the fact that counsel for the respondent conceded this point (subject to the argument outlined below), I must accept that at law the appellant had no choice but to purchase the entire 8.99 acres if he wished to occupy the home situate thereon. Thereafter and until the moment before disposition, the appellant could not effect a legal subdivision of his lands." [Emphasis added]
We are of the view that the acreage included in minimum lot size and subdivision restrictions cannot be ignored and must be taken into account in determining how much land in excess of 1/2 hectare is necessary for the use and enjoyment of a housing unit. Acreage restriction was in fact relied upon in the Yates, Augart and Carlile decisions.
In the present case, the minimum lot size requirement under the previous Bylaw was XXXXXXXXXX . Since it is our understanding that the previous Bylaw, which was in effect at the date of acquisition of the Property in XXXXXXXXXX until XXXXXXXXXX , did not prevent the Taxpayer from severing and selling XXXXXXXXXX acres out of the XXXXXXXXXX acres originally acquired and retaining only XXXXXXXXXX acre (XXXXXXXXXX ) where the housing unit was located, in our view only XXXXXXXXXX acre can be considered part of the Taxpayer's principal residence. For this, we rely on the FCA majority's comment in Augart mentioned above.
However, since you have already proposed to the representative to allow XXXXXXXXXX acres as being part of the Taxpayer's principal residence (presumably based on the lot size restriction in the current Bylaw), we would not object to such proposal for settlement purposes in the case at hand, considering also that XXXXXXXXXX acres is reasonably close to the 1/2 hectare referred to in paragraph (e) of the definition of principal residence in section 54 of the Act (1/2 hectare is approximately equal to 1.24 acres).
We trust that these comments will be of assistance.
For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the CRA's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the electronic library version, or they may request a severed copy using the Privacy Act criteria, which does not remove client identity. You should make requests for this latter version to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
Yours truly,
S. Parnanzone
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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, 2008
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, 2008
Email this Content