16 June 1993 Internal T.I. 9313917 F - 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.

Toronto District Office Business and General Mr. C. Ballestreri Division AssistantDirector M. Eisner Client Assistance Directorate

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-     Principal Residence Exemption

Pursuant to our telephone conversation on May 33, 1993, we are forwarding, for your consideration and reply, a request for an advance income tax ruling submitted on behalf of the above-noted individual (the Taxpayer) by XXXXXXXXXX

As indicated in the attached reply to XXXXXXXXXX, the ruling requested cannot be granted since it essentially involves a period of time that has already elapsed. We are, however, offering the following comments which may be of assistance to you.

Our Comments:

The issue addressed in the submission concerns paragraph 54(g) of the Income Tax Act and is whether the Taxpayer is able to establish that land in excess of 1/2 hectare is necessary for the use and enjoyment of a housing unit.

As indicated in the letter from the Taxpayer's representative, reliance is being placed on the decision rendered in the Yates case (83 DTC 5158) by the Federal Court - Trial Division and affirmed by the Federal Court of Appeal (86 DTC 6296).

It is the Department's position that the decision in the Yates case was based on a finding of fact peculiar to that decision. In order for this decision to be applicable to other individuals, the facts in that case should be virtually identical.

The principle that evolved from the Yates decision was that where a conveyance of residential property takes place in areas in which minimum lot sizes are imposed by municipal bylaws or provincial legislation in force at the time the property is acquired, the minimum residential parcel is considered to be the minimum amount that would be necessary for the use and enjoyment of the residence throughout the period that the property is continuously owned.

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The principle in the Yates decision relates to the type of situation involving minimum lot sizes for residential purposes. On the other hand, the severance and "no further development" restrictions would not appear to be related to the size of a lot that can be used for such a purpose (i.e.,

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The Taxpayer's representative has also made reference to paragraph 12 of Interpretation Bulletin IT-120R3 "Principal Residence". While this paragraph indicates that severance restrictions may be a relevant consideration in determining whether land in excess of 1/2 hectare is necessary to the use and enjoyment of a residence, these comments relate to residential lots. Paragraph 14 of the bulletin amplifies this point in discussing severance restrictions and distinguishes between land zoned residential and land zoned for other purposes such as agriculture. In the latter case, severance restrictions are not considered relevant for the purpose of determining whether the excess land is necessary. We also note that in paragraph 21 of IT-120R4 dated March 26, 1993, the Department has clarified its position in that regard by stating the following:

"Other factors which may in some cases be relevant in determining whether land in excess of 1/2 hectare is necessary for the use and enjoyment of the housing unit as a residence are severance or subdivision restrictions and minimum lot sizes (see 22 below). In all cases, however, it is a question of fact as to how much, if any, of the excess land is necessary for the use and enjoyment of the housing unit as a residence."

We also wish to mention that the courts have generally tended to distinguish cases from the Yates decision where the facts are not essentially identical (e.g., the Augart case (92 DTC 6610), the Joyner case (88 DTC 6459), the Beaton case (87 DTC 243), and the Watson case (85 DTC 270)). As a further comment, we note that the circumstances in the Augart case were distinguished from the Yates case on the basis that the property in the Augart case was subdividable at the time of purchase.

As a consequence of the above comments, it may be that the severance and "no development" restrictions are not to be taken into account in determining whether land in excess of 1/2 hectare was necessary for the use and enjoyment of the housing unit. However, we also note that the above comments have been based on the limited information available and that it appears necessary to obtain further information including details concerning the zoning and the related restrictions.

In connection with the above comments, we have also considered the recent decision rendered by the Federal Court of Appeal (FCA) in the Augart case (a copy of this case has been included for your reference.). In this case, severance restrictions were involved during the period of ownership. The decision of the FCA was that the gain was exempt on the basis that the circumstances paralleled those in the Yates case. Aside from the point that the severance restrictions in the case at hand may not, as indicated above, be related to the size of lot that can be used for residential purposes, the Department is in the process of considering whether to seek leave to appeal the Augart decision to the Supreme Court of Canada which needs to be done by September 23, 1993. Accordingly, until such time as the issue in the Augart case has been finally determined, the decision of the FCA in the Augart case should not be regarded as having been accepted by the Department. In addition, we note that with respect to the comment in the last sentence in the second preceding paragraph, the FCA indicated that if the land in question could have been subdivided as was thought to be the case with respect to the decision rendered by the Federal Court - Trial Division, the taxpayer's appeal would have been dismissed.

Should you require any technical assistance in dealing with the matter at hand, we would be pleased to provide our views.

P.D. Fuoco Section Chief Personal and GeneralBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch