6 October 1995 APFF Roundtable Q. 50, 5M11660 - CAPITAL GAIN ELECTION - PRINCIPAL RESIDENCE

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.

APFF - 1995

Question 50

Capital gains elections involving land of more than 1/2 hectare

An individual acquired a house located on a piece of property larger than 1/2 hectare before February 1992 and has been living in the house since then. The property adjoining the house is not used to earn income from a business or property. The value of the land has increased since it was purchased.

The individual in question feels that the land is part of his principal residence.

Nevertheless, the individual filed the capital gains election allowed under paragraph 110.6(19)(a) of the Act with regard to the property of more than 1/2 hectare to protect himself in the event that the Department should decide that the property is not needed for the principal residence. This means that if the taxpayer disposes of it at some future date he would be able to reduce the capital gain and the amount of tax payable.

When the property is ultimately disposed of, will the fact that he filed a capital gains election adversely affect the individual if he or she then claims that the property is part of the principal residence? If the Department accepts the individual’s position when the property is disposed of at some future date, this means that it was not necessary to file the election. Under these circumstances, is the Department prepared to reassess the individual for the 1994 tax year in order to remedy the negative tax consequences arising out of the election?

Answer by the Department of Revenue

In the above situation, since the property which was owned by the individual at the end of February 22, 1994 was his residence and since the land was more than 1/2 hectare and, assuming that the individual was not able to effectively dispose of the property without also disposing of the house, we assume that the capital gains election filed covered the property in its entirety, including the house and the land underlying the house.

With regard to the first question, a determination as to whether a piece of property greater than 1/2 hectare is part of the principal residence would have to be based on the facts peculiar to each case. The Department’s position in this respect is set out in Interpretation Bulletin IT-120R4.

The fact that an election was filed under paragraph 110.6(19)(a) of the Act with respect to a principal residence will be taken into consideration in determining whether property of more than 1/2 hectare is part of an individual’s principal residence. It must be remembered that an individual’s principal residence for a taxation year is deemed to include that portion of land which exceeds 1/2 hectare (the “excess land”) only where the taxpayer establishes that the “excess land” was necessary to facilitate the use of the housing unit as a residence. Whether or not a capital gains election was filed for a property which includes land of more than 1/2 hectare may be significant to the extent that it can give an indication of the opinion of the individual with regard to the eligibility of the “excess land” as the principal residence, particularly if the fact of having filed the election involved some sort of tax cost for the individual.

For example, if the individual did not own any other capital property that qualified for the capital gains exemption and he did not suffer any negative tax consequences arising out of the election, the fact that an election was filed would not significantly confirm the opinion of the individual with respect to the tax treatment applicable to the “excess land”.

On the other hand, an individual may have filed an election for a property that includes more than 1/2 hectare of land rather than for shares in publicly traded corporations where the unrealized capital gains are considerable. In this case, it could reasonably be assumed that, in the opinion of the individual, the “excess land” probably does not qualify as a principal residence. A capital gains election under these circumstances would be perceived by the Department as a significant indicator that the taxpayer felt that the “excess land” was not necessary to facilitate the use of the housing unit as a principal residence.

Similarly, the fact that the election involved negative tax consequences (such as a reduction in income-based tax credits) could be one more indication that the individual felt it necessary to file the election for the land because he felt that the “excess land” was not necessary to facilitate the use of the housing unit as a principal residence.

With regard to the second question, subsection 110.6(25) of the Act specifically states that the capital gains election may be revoked before 1998. As a general rule, after that date, the Department will not reassess an individual for the 1994 taxation year to remedy negative tax consequences arising out of an election.