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:
Whether or not properties as described in a number of scenarios would qualify for the Principal residence exemption and the resulting capital gains repurcussions upon disposition.
Position TAKEN:
No proof normally required with respect to the "use and enjoyment" requirement of section 54 provided that the land does not exceed 1/2 hectare at the time of purchase and no portion of that land was used to earn income from business or property. Where a house is constructed on subdivided lot prior to sale it can not be considered eligible for the exemption from the time of the change in use (cannot have more than one principal residence). Where an adjacent lot is purchased after the original lot purchase and the total property size is less than 1/2 hectare than the onus is on the taxpayer to show that the second adjacent lot contributes to the "use and enjoyment" of the original lot.
Reasons FOR POSITION TAKEN:
IT-120R4, previous correspondence
May 4, 1995
Vancouver Island Tax Services HEADQUARTERS
Client Assistance D. Zion
(613) 957-8953
Attention: Gwen Antaya
950960
Principal Residence Exemption and Capital Gains
We are writing in response to your correspondence of April 5, 1995 in which you request clarification of the capital gains tax repercussions resulting from a number of scenarios.
The main scenarios outlined in your enquiry are as follows.
1) A client purchases a house located on a lot which is less than 1/2 hectare in size. He later applies for subdivision and upon approval of the subdivision application he sells the lot or he builds a house on the subdivided lot and sells the subdivided lot and house.
2) A client buys a house located on a 1/4 acre lot and also buys the adjacent 1/4 acre lot, either at the time the lot with the house is purchased or at a later date.
More specifically, you have asked whether or not the properties described above would qualify for the principal residence exemption upon disposition under certain conditions.
It is a question of fact as to whether the property in question can be designated as a principal residence which can only be determined upon a review of all the relevant facts and circumstances. In order to address the issues which you have raised we have made the following assumptions:
1. The properties, upon which the houses were located, were acquired for the sole purpose of occupying the house as a principal residence.
2. The original house and property in question would otherwise meet the requirements of the definition of principal residence as contained in section 54 of the Income Tax Act (the "Act").
Pursuant to section 54 of the Act, the principal residence of a taxpayer is deemed to include the land subjacent to the housing unit and such portion of any immediately contiguous land as can reasonably be regarded as contributing to the use and enjoyment of the housing unit as a residence, provided the land does not exceed 1/2 hectare. Generally, it is the Department's position, as outlined in paragraph 20 of IT-120R4, that no proof is normally required with respect to the "use and enjoyment" requirement set out in the Act provided the land does not exceed 1/2 hectare and no portion of that land was used to earn income from business or property.
In the event the property is subdivided and individual lots sold, it is our view that, where the total originally purchased parcel of land involved does not exceed 1/2 hectare, a taxpayer, who disposes of part of the land on which his or her principal residence is situated, is entitled to claim the principal residence exemption in respect of the portion(s) disposed of, again provided the original lot was acquired for use as a principal residence and never used for business or income-producing purposes. The comments in paragraphs 23 and 24 of IT-120R4 would be applicable. A further exception to the principal residence exemption arises where the property disposed of clearly does not contribute to the taxpayer's use and enjoyment of the housing unit as a residence. In our view, this exception is inferred from the following wording in paragraph 11 of the Bulletin, "No proof of such use and enjoyment is normally required ... except ...", but would apply only in the most obvious cases.
Based on the information provided to us, the client in scenario one who sells a subdivided vacant lot would not be subject to capital gains tax on the sale by virtue of the principal residence exemption. A principal residence designation would be required to be made for the entire property that qualifies as the principal residence. The remainder of the property, when subsequently disposed of, would be recognized as the client's principal residence for the taxation years for which the original designation was made.
If the client builds a house on the subdivided lot and sells this lot and the newly constructed house together, we are of the view that he will not be eligible for the principal residence exemption after that time at which it could be considered that a change in use has occurred. The provisions of subsection 26(7) of the Interpretation Act (i.e., words in the singular include the plural) do not in our view act to pluralize words contained in a provision of the Act which obviously addresses itself solely to the singular (e.g., the provisions relating to principal residence). It is therefore our view that a principal residence can consist of only one housing unit. Whether or not the gain arising on the sale of a lot containing a newly constructed house represents income or capital is also a question of fact. With respect to the subdivision of the property and the construction of a house for re-sale on the severed lot, 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 this issue.
In the second scenario presented, including the variations thereof, two adjacent lots have a combined total area of less than 1/2 hectare. The issue of whether a principal residence can include land which does not legally form part of the property upon which the housing unit is built was examined in the case of Fourt v The Queen (91 DTC 5631). Because the total area of land did not exceed 1/2 hectare, the determination of whether the contiguous and subjacent land could be considered part of the principal residence depended upon the use to which the land was put rather than on whether such land was necessary for the use and enjoyment of the housing unit as a residence. While the Court found that the existence of two land titles did not prevent the second lot from forming part of the principal residence if it otherwise so qualified by reason of the use to which it was put, it was still necessary for the facts to show that the second parcel of land in fact contributed to the use and enjoyment of the housing unit as a residence. In order for the second parcel of land to be considered as part of the principal residence, the use of the land would need to be more than incidental i.e., "just because they wanted to buy it".
In this regard, the above cited court case as well as Rode et al. v. M.N.R. (85 DTC 272) both contain comments regarding what "... can reasonably be regarded as contributing to the use and enjoyment of the housing unit as a principal residence..." which you may find of assistance. In the Rode et al. case the Court makes a comment, although not pertinent to its decision because in the case at hand the land in question was greater than one acre in size, that was later referred to in the case of Fourt v. The Queen (discussed above). It was stated, after a discussion of the definition of a principal residence,
.... This means that the area encompassed by a principal residence is a variable depending upon the pertinent circumstances. I am also of the view that the test to be applied in determining what that area is, is flexible having particular regard to the underlined words if the taxpayer is not contending that the subjacent and immediately contiguous land comprising his principal residence exceeds 1 acre. In such cases significant weight should be attached in favour of an appellant to credible evidence that can be sensibly regarded as making the kind of contribution described....
Where a lot on which a housing unit is located and an adjacent lot are both acquired in conjunction with the acquisition of the housing unit (and the adjacent lot was not used to earn income from a business or property), it is our view that no proof would normally be required with respect to the "use and enjoyment" requirement set out in section 54 of the Act provided the land does not exceed 1/2 hectare (1.24 acres). Thus, if the adjacent lot was used as a garden and lawn area it is probable that it can reasonably be considered to have contributed to the use and enjoyment of the housing unit as a principal residence.
In contrast, if an adjacent lot was acquired subsequent to the acquisition of the original lot containing the house, the onus would then be on the taxpayer to substantiate that the adjacent lot contributed to the use and enjoyment of the housing unit, regardless of the fact that the total area was less than 1/2 hectare. In other words, the 1/2 hectare exemption is not automatic in this scenario. A possible instance where the adjacent lot could be considered not to contribute to the use and enjoyment of the housing unit would be where the additional land was acquired shortly before it is resold, particularly if the taxpayer has a history of these types of land purchases.
Accordingly, in scenario 2 situations where an adjacent vacant lot is involved and the client proceeds to sell the adjacent lot or construct a house on the adjacent lot and then sell it, whether or not the client will be eligible for the principal residence exemption upon the disposition of the adjacent lot will depend on whether or not the adjacent vacant lot can have been considered to contribute to the use and enjoyment of the original housing unit and lot. If the adjacent vacant lot can reasonably be considered to have contributed to the use and enjoyment of the housing unit, our position regarding the tax repercussions would be similar to those discussed above in the scenario one cases. If it does not meet this condition then the adjacent lot, in our view, would not be eligible for the principal residence exemption.
We trust that our comments have been of assistance.
P. D. Fuoco
Section Chief
Personal and General Section
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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