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 a six acre parcel of land on which a principal residence is situated.
Position TAKEN:
If entire property does not qualify as principal residence, the accrued capital gain on the property can probably be sheltered with the capital gains exemption and the principal residence exemption.
Reasons FOR POSITION TAKEN:
Since the property constitutes capital property, 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 be sheltered from taxation if the capital gains election is filed.
July 24, 1995
Penticton Tax Services Office Head Office
Client Services Income Tax Rulings and
Interpretations
Directorate
C. Chouinard
957-8953
5-951420
Capital Gains Election
This is in response to a taxpayer's letter (a copy of which is attached), dated March 30, 1995, which you forwarded to us on May 16, 1995 for our reply. It appears the taxpayers wrote to your office in order to obtain directions as to how to file the capital gains election in respect of their property. Since the filing deadline for capital gains elections has lapsed, and as the information provided in the letter is limited, we are providing your office, instead of the taxpayers, with our comments regarding the capital gains election as it relates to the situation described in the taxpayers' letter.
According to the taxpayers' letter, they own a property that consists of a 6 acre parcel of land on which the taxpayers' principal residence is situated. Five of the six acres are farmed by the taxpayers.
Since the property described above appears to be capital property, the capital gains election could be filed in respect thereof. In addition, since the taxpayers' principal residence is situated on the property, the property, or a portion thereof, might also qualify for the principal residence exemption. Therefore, the taxpayers may be able to shelter all, or a good portion, of the accrued gain on the property with the principal residence exemption and the capital gains election.
As indicated in paragraph 20 of Interpretation Bulletin IT-120R4, 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. In addition, 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 which you are in a better position to determine.
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 if the capital gains election is filed. 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. In order to compute the portion of the accrued gain on the property that can be sheltered with the principal residence exemption, the taxpayer must 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 Excess
Residence Land Total
$ $ $
FMV on Feb. 22/94 137,500 137,500 275,000
Adjusted Cost Base (75,000) (25,000) (100,000)
Capital Gain6 2,5001 12,5001 75,000
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 Income Tax Act (the "Act"):
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.
In addition, given that the taxpayers are farming the property, the property may meet the "qualified farm property" definition in subsection 110.6(1) of the Act and be eligible, on disposition, for the $500,000 capital gains exemption. One of the conditions that must be met for a property to be considered a "qualified farm property" within the meaning of subsection 110.6(1) of the Act, is that the property be used in the course of carrying on the business of farming in Canada. Property acquired before June 18, 1987 will qualify as "qualified farm property" provided it was used by the person claiming the capital gains exemption, a spouse, child or parent of such a person, a family farm corporation in which any of the above persons own shares, a family farm partnership in which any of the above persons have an interest or a personal trust from which the individual acquired the property, principally in carrying on the business of farming in Canada, either in the year the property is disposed of, or in at least five years during which it was owned by the individual, a spouse, child or parent of the individual, a personal trust from which the individual acquired the property or a family farm partnership.
Where property was acquired after June 17, 1987, in order to qualify as "qualified farm property", it must have been owned by the taxpayer, the taxpayer's spouse, any of the taxpayer's children or the taxpayer's parents throughout the 24 months preceding the sale. Furthermore, in at least 2 years while the property was so owned, the gross revenue from the farming business carried on by any of these individuals must have exceeded their income from all other sources for the year. In our opinion, the person meeting the gross revenue test need not be the person who owns the property and may be any of the persons described in subparagraphs (a)(i) to (iii) of the definition of "qualified farm property".
We cannot determine who actually owns the property, nor whether the property described above would qualify as "qualified farm property", by reason of the limited information provided by the taxpayers in their letter.
You should note, however, that if the taxpayers filed the capital gains election in respect of this property and the property qualified as "qualified farm property", it would be deemed to have been disposed of and immediately reacquired by the taxpayers after February 22, 1994. Therefore, the property would be considered to have been last acquired after June 17, 1987 and the post-1987 test outlined above would apply in determining whether the property continues to qualify as "qualified farm property".
R. Albert
for Director
Business and General Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch
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