30 May 1995 External T.I. 9513295 - CAPITAL GAINS ELECTION - TWO PARCELS OF LAND

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:

How to file the capital gains election in respect of two parcels of land.

Position TAKEN:

Question of fact.

Reasons FOR POSITION TAKEN:

Not clear whether two parcels of land constitute one or two properties. If one property, election must be filed in respect of the two parcels. If two separate properties, election can be filed in respect of either or both parcels.

		5-951329
XXXXXXXXXX		C. Chouinard

May 30, 1995

Dear Madam:

Re: Capital Gains Election

We are writing in response to your letter of January 26, 1995, addressed to the Surrey Taxation Centre, which was forwarded for reply and received by us on May 15, 1995. We apologize for the delay in responding.

You inquire whether the capital gains election can be filed in respect of the entire property you own or only part thereof. You indicate that you own two parcels of land, A and C. Although the two parcels were initially assessed and taxed for municipal tax purposes as one property, you presently receive separate municipal tax statements for each parcel. Your home is situated on parcel A, which consists of 6 acres. Parcel C is approximately the same size as parcel A, however, there are no buildings on parcel C. You also indicate that it is presently impossible to subdivide your property.

Our Comments

The capital gains election allows taxpayers to report a capital gain to take advantage of the unused portion of their $100,000 capital gains exemption, even though they did not actually sell their property. In order to recognize the accrued gain in respect of a property owned by a taxpayer at the end of February 22, 1994, the taxpayer is required to elect to have the provisions of subsection 110.6(19) of the Income Tax Act (the "Act") apply to the property. This election can be made in respect of any property that constitutes capital property.

We cannot determine from the information you have provided whether the two parcels of land are separate properties or whether they are one property. If they constitute one property, in that one parcel cannot be disposed of without also disposing of the other, the property owned at the end of February 22, 1994 would be considered to be the two parcels. Accordingly, the capital gains election could only be filed in respect of the two parcels. In addition, since your principal residence appears to be situated on one of the two parcels, these parcels, or a portion thereof, might also qualify for the principal residence exemption. Therefore, it may be possible to shelter all, or a good portion, of the accrued gain on the two parcels with the principal residence exemption and the capital gains election.

On the other hand, if parcels A and C constitute two separate properties, in that you could dispose of one without disposing of the other, the capital gains election could be filed in respect of each property, independently of the other. Accordingly, the capital gains election could be filed in respect of each of parcel A or parcel C or both. However, unlike the situation where the two parcels constitute one property, separate elections would have to be filed in respect of each parcel. In addition, since your home is situated on parcel A, as we indicated above, this parcel, or part thereof, may qualify for the principal residence exemption. Therefore, as regards parcel A, it may be possible to shelter all, or a good portion, of the accrued gain on parcel A with the principal residence exemption. Any part of the accrued gain on parcel A that cannot be sheltered with the principal residence exemption may be sheltered with the capital gains exemption. The accrued capital gain on parcel C, however, could only be sheltered with the capital gains exemption.

The Department's position with respect to matters concerning principal residences is set out in Interpretation Bulletin IT-120R4, a copy of which is enclosed. As you will note from paragraph 20 of the Bulletin, the principal residence of a taxpayer for a taxation year is 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 taxpayer's use and enjoyment of the housing unit as a residence. Evidence is not usually required to establish that 1/2 hectare of land or less, including the area on which the housing unit stands, contributes to the taxpayer's use and enjoyment of the housing unit as a residence. However, as indicated in paragraphs 21 and 22 of the Bulletin, the question of whether land in excess of 1/2 hectare contributes to the use and enjoyment of the housing unit, and therefore qualifies as a principal residence, is a question of fact. Should you have any queries in this respect, we suggest you contact your local Revenue Canada Tax Services office.

If the excess land is found not to qualify as a principal residence, the accrued capital gains on the excess land, or a portion thereof, may nevertheless be sheltered from taxation by filing the capital gains election. As mentioned above, by using the principal residence exemption with respect to the portion of the property that qualifies as principal residence and the capital gains election with respect to the balance of the property, a good portion of the accrued capital gain on the property may be sheltered from taxation. Please note that, in order to compute the portion of the accrued gain on the property that can be sheltered with the principal residence exemption, you will be required to determine the portion of the total accrued capital gain that is attributable to that part of the property that qualifies as principal residence.

In addition, since the 1992 budget eliminated the $100,000 capital gains exemption on the disposition after February 1992 of real property, only the capital gains accrued before March 1992 are eligible for the capital gains election. Therefore, if an election is filed in respect of real property acquired prior to March 1992, the elected capital gain must be reduced by the portion of the capital gain that does not qualify for the capital gains exemption. In order to determine the amount of the reduction, the capital gain (before reduction) must be multiplied by the following ratio: 24 (being the number of calendar months between March 1992 and February 1994) over the number of calendar months in the period that commences with the calendar month in which the property was acquired and ends with the calendar month in which the property is disposed of, which, where the capital gains election is filed, is February 1994.

We offer the following hypothetical example of a one hectare property, half of which qualifies as principal residence:

Principal Residence Excess Land Total
$ $ $

FMV on 137,500 137,500 275,000
Feb. 22/94
Adjusted Cost
Base (75,000) (25,000) (100,000)
Capital Gain 62,500 112,500 175,000

If the property described above had been acquired in January 1972 and the principal residence portion of the property was designated as a principal residence for all of the years that the property was owned, and also assuming that the taxpayer has not used any portion of the $100,000 capital gains exemption, the taxpayer could designate the following amount under subsection 110.6(19) of the proposed legislation:

110.6(19) elected amount $272,417
Minus: Adjusted cost base 100,000
Gain otherwise determined 172,417
Minus: Principal residence portion: 62,500
Capital gain $109,917

Eligible real property gain:

242 x $109,917 $100,000
266

Taxable capital gain (3/4) $75,000

In the example above, the taxpayer could shelter the taxable capital gain of $75,000 generated by the capital gains election with his unused balance of the $100,000 capital gains exemption.

If you have not yet filed your capital gains election, you may still do so, however, a penalty will have to be paid. The penalty is equal to 1/3 of 1% of the taxable capital gain resulting from the election, multiplied by the number of months that begin after April 30, 1995 and end the day that the late election is filed. For these purposes, any part of a month is considered to be a full month.

We trust that these comments will be of assistance.

Yours truly,

R. Albert
for Director
Business and General Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch

Encl.