22 March 1995 External T.I. 9505655 - PRINCIPAL RESIDENCE EXEMPTION AND CAPITAL GAINS

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.

Principal Issues:

1) Bylaws which required a minimum lot size (type of zoning not provided) changed so that subdivision approval has been applied for and received. When does deemed disposition occur of the subdivided lots.

2) Eligibility of respective subdivided parcels of land for the principal residence exemption, both at time of deemed disposition and subsequent disposition

Position TAKEN:

Question of Fact.

Reasons FOR POSITION TAKEN:

Unable to give definitive reply with limited information received.

		950565
XXXXXXXXXX	D. Zion

Attention: XXXXXXXXXX

March 22, 1995

Dear Sirs:

Re: Eligibility of Capital Gain for Principal Residence Exemption

We are writing in response to your letter of February 28, 1995, in which you request our interpretation regarding the eligibility of a capital gain for the principal residence exemption in a particular situation.

The specific issues which you have raised in your request appear to relate to a factual situation involving specific taxpayers. The tax implications inherent in such a transaction can be determined only by reviewing all the relevant facts and documentation. Such review should be made by the relevant District Tax Services office and, accordingly, the following comments are of a general nature.

XXXXXXXXXX

The taxpayers plan to retain the 8-acre lot which contains the buildings and continue their farming operations. The three 4-acre lots, which the taxpayers plan to sell, were converted to inventory at the time of subdivision approval. You have asked when the deemed disposition of the 4-acre lots will occur and whether the taxpayers will be able to claim the principal residence exemption for these particular lots upon the deemed disposition and their later actual disposition. Finally, you have enquired as to whether, upon the future disposition of the 8-acre lot, the resulting gain will be eligible for the principal residence exemption, assuming all other principal residency requirements are met.

In relation to the above circumstances, part of paragraph 22 of Interpretation Bulletin IT-120R4 "Principal Residence" states that "A legally imposed minimum lot size, for residential use, exceeding 1/2 hectare that was in effect on the date the property was acquired by the taxpayer, is generally considered to be the minimum amount of land necessary for the use and enjoyment of the housing unit as a residence throughout the period that the property is continuously owned by the taxpayer after that acquisition date".

It is unclear whether the comments in this excerpt from paragraph 22 are applicable to the above scenario where the zoning at the time of acquisition has not been provided. There is insufficient information provided to determine whether the zoning by-law in question sets out minimum lot size restrictions, severance restrictions or both. We would emphasize that it is the Department's view that the position in that excerpt is not applicable to a situation where severance restrictions exist, such as those on agricultural land, to preserve land for farming use. The position in the excerpt is also not considered to be relevant if, at the time of acquisition, an application could have been made to the municipal authority to subdivide the land into smaller parcels. If any of these comments is applicable, it would seem to follow that only a part of the 20 acres would qualify for the principal residence exemption assuming the part otherwise so qualifies.

Where a housing unit is situated on a large area of land, the land in excess of 1/2 hectare will only qualify as being part of a principal residence to the extent that the individual establishes that it was clearly necessary in order for the housing unit to properly fulfil its function as a residence and not simply be desirable. Land in excess of 1/2 hectare could be necessary where the size or character of a housing unit together with its location on the lot makes excess land essential to its use or enjoyment as a residence. In addition, land in excess of 1/2 hectare could be necessary where the location of a housing unit requires excess land in order to provide the taxpayer with access to and from public roads. 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.

With respect to the subdivision of the property and questions regarding the conversion of the 4-acre lots to inventory, we would bring your attention to paragraphs 10 to 15, 23 and 24 of IT-218R, "Profit, Capital Gains and Losses from the Sale of Real Estate, Including Farmland and Inherited Land and Conversion of Real Estate from Capital Property to Inventory and Vice Versa", which discuss in detail the Department's position regarding these issues.

As the issues pertaining to the principal residence exemption are dependent on the facts particular to each situation, we suggest you contact XXXXXXXXXX Tax Services office. Upon a review of all the pertinent details and documentation, they will be in a position to provide you with a more definite response. We also note that if the issue of subdivision restrictions or minimum lot sizes is to be considered, the details of the restrictions and zoning should be provided.

We trust our comments will be of assistance to you.

Yours truly,

P.D. Fuoco
for Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch