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: A fire destroys a principal residence and insurance proceeds are received. If the land is sold in a subsequent year, can any of the gain be sheltered by the principal residence exemption?
Position: Possibly.
Reasons: See below.
XXXXXXXXXX 2017-070200
K. Robinson
July 13, 2017
Dear XXXXXXXXXX:
Re: Principal residence exemption
This is in reply to your correspondence dated May 4, 2017, wherein you requested our views on the principal residence exemption under paragraph 40(2)(b) of the Income Tax Act (“Act”).
More specifically, you have told us that you purchased a house in 2010 that you and your family ordinarily inhabited as your principal residence. In 2016, the house was completely destroyed by a fire and you have decided to move rather than rebuild. You would like to sell the vacant land in 2017.
Our Comments
This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of a particular transaction proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R7, “Advance Income Tax Rulings and Technical Interpretations.”
The CRA’s general views on claiming the principal residence exemption are set out in Income Tax Folio S1-F3-C2, “Principal Residence” (the “Folio”). If a property qualifies as a taxpayer’s principal residence, he or she can use the principal residence exemption to reduce or eliminate any capital gain otherwise occurring, for income tax purposes, on the disposition (or deemed disposition) of the property.
In general, the principal residence exemption is claimed under paragraph 40(2)(b) of the Act. Paragraph 2.20 of the Folio sets out the formula for claiming the exemption for dispositions occurring before October 3, 2016. Under proposed legislation, for dispositions occurring on or after October 3, 2016, the formula is amended so that the “one plus” factor in Element B applies only where the taxpayer is resident in Canada during the year in which the taxpayer acquires the property. Therefore, where a taxpayer was resident in Canada during the year that includes the acquisition date, Element B will be one plus the number of taxation years that end after the acquisition date for which the property is the taxpayer’s principal residence and during which the taxpayer was resident in Canada.
The term “principal residence” is defined in section 54 of the Act and provides the conditions which must be met for a property to qualify. Paragraph (e) of this definition clarifies that the principal residence of a taxpayer for a taxation year shall be deemed to include the land upon which the housing unit stands and any portion of the adjoining land that can reasonably be regarded as contributing to the use and enjoyment of the housing unit as a residence. However, where the total area of such land exceeds 1/2 hectare, the excess shall be deemed not to have contributed to the use and enjoyment of the housing unit as a residence unless the taxpayer establishes that it was necessary to such use and enjoyment.
In the situation you described, assuming the land on which your house was situated did not exceed 1/2 hectare, such land would normally be considered to form part of the property that could be designated as your principal residence provided the other conditions for claiming the principal residence exemption were met. It is important to note that you cannot designate the vacant land as your principal residence for 2017 since vacant land does not meet the conditions for claiming the exemption. However, with the one-plus rule in the formula used to calculate the exemption, it may be possible for you to eliminate any capital gain arising on the sale of the vacant land in 2017.
We trust that these comments will be of assistance.
Yours truly,
Michael Cooke, CPA, CA
Manager
Business Income and Capital Transaction Section
Business and Employment Division
Income Tax Rulings Directorate
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