5 October 2012 External T.I. 2011-0401071E5 - Principal Residence Exemption

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 a property qualifies for the principal residence exemption in a particular case.

Position: Question of fact.

Reasons: No evidence that the land in excess of half a hectare was essential. The cottage was ordinarily inhabited as the principal residence while completing the construction on the house prior to selling the property.

XXXXXXXXXX 2011-040107
K.G. Weir

October 5, 2012

Dear XXXXXXXXXX:

Re: Principal Residence Exemption

We are writing in response to your letter of March 3, 2011 where you enquired whether a property you purchased in 2003 and sold in 2007 qualifies for the principal residence exemption pursuant to paragraph 40(2)(b) of the Income Tax Act (ITA).

You advised that you purchased a property, in excess of one hectare zoned RU-1 (rural) located in an Agricultural Land Reserve (ALR), in 2003. The property contained several buildings including a cottage, ordinarily inhabited by you and your family, and a foundation for a house. You also indicated that the house and the cottage on the property were constructed such that they shared the driveway, the well, the electrical, the expansion tanks and the plumbing. In addition, you stated that the property was never used for commercial purposes from the date it was purchased to the date it was sold in 2007 and that you did not own any other property during this period.

Our Comments

Written confirmation of the tax implications inherent in particular transactions may only be provided by this Directorate where the transactions are proposed and are the subject matter of an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. This Information Circular and other Canada Revenue Agency (CRA) publications can be accessed on the Internet at http://www.cra-arc.gc.ca. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following general comments.

In order for a property to qualify as a taxpayer’s principal residence for a taxation year, it must be demonstrated, among other things, that he or she owned the property, that it was “ordinarily inhabited” in the year by the taxpayer, or the taxpayer’s spouse or common-law partner, former spouse or common-law partner, or child and that the land on which the housing unit was situated was not in excess of one-half hectare.

The ownership requirement, noted above, refers to both legal ownership and beneficial ownership of the property as noted in Interpretation Bulletin IT-437R, Ownership of property (principal residence).

The question of whether a housing unit is “ordinarily inhabited” in the tax year by a taxpayer or by his or her spouse or his or her common-law partner, former partner or children must be resolved on the basis of the facts in each particular case. The CRA's position on the meaning of the term "ordinarily inhabited" is outlined in paragraph 5 of IT-120R6, Principal Residence.

Based on the information provided in this case, the cottage was the housing unit that was ordinarily inhabited as the principal residence from the time the property was purchased in 2003 until it was sold in 2007. During this same period, a larger home was under construction on the property that was completed and sold in 2007. This house was not used as the principal residence. Generally, only one housing unit per family unit can be designated as a principal residence for any particular year. As such, there could be a capital gain on the disposition of the larger newly constructed house.

With respect to land, where the total area of the contiguous land on which a housing unit is situated exceeds one-half hectare as noted under the definition “principal residence” in paragraph 54(e) of the ITA, the excess land is generally deemed not to have contributed to the use and enjoyment of a housing unit as a residence unless the taxpayer can establish that it was necessary to such use and enjoyment.

It is always question of fact whether land in excess of one-half hectare is necessary to the use and enjoyment of a housing unit as a residence. An individual’s use of the land in excess of one-half 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 as noted in the court case Rode v. The Queen, (85 DTC 272).

The word “necessary” is defined, in part, in the Oxford English Dictionary as follows:

“Indispensible, requisite, essential, needful; that cannot be done without”.

To determine “necessity”, both subjective and objective factors are considered by the CRA. However, the onus is on the taxpayer to establish how much, if any, excess land is essential to the use and enjoyment of the housing unit as a residence.

Some of the factors considered are outlined in paragraphs 15 and 16 of IT-120R6, which include the following:

• the size and character of the housing unit together with its location on the property;
• whether the extra land is necessary for access to and from public roads;
• whether extra land is required as drainage fields for septic tanks;
• whether the land has the physical characteristics feasible for subdivision; and
• whether there is a minimum lot size, severance, or subdivision restrictions associated with the property.

Finally, we note in your correspondence with GST that you and your spouse divorced in XXXXXXXXXX. Although you retained title of the property, there is no indication whether your former spouse claimed a capital gain on disposition of the property at the time of your divorce.

Therefore, it is our view that the determination of whether a capital gain resulted from the disposition of the property could only be determined after a review of all the facts and circumstances including all relevant documents by audit officials in the local tax services office. You may wish to contact your local tax services office for a determination of your specific situation.

We trust these comments will be of assistance.

Yours truly,

Ms. S. Ratnasingham
For Director
Financial Industries Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch