22 December 1997 External T.I. 9703685 - PRINCIPAL RESIDENCE

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:

Various aspects of principal residence legislation involved including land in excess of 1/2 hectare

Position:

Law generally explained

Reasons:

Specific facts and documentation not available

									970368

XXXXXXXXXX							M. Eisner

December 22, 1997

Dear XXXXXXXXXX:

Re: Principal Residence Exemption

This is in reply to your letter received by our office on February 11, 1997, concerning the above-noted subject. We apologize for the delay in replying.

You have outlined a situation where you purchased a 1/4 section land in 1990 for which there are two separate titles. One title is for 10 acres of the land and the other title is for the remainder of the land. The entire 1/4 section of land is zoned for agricultural use. All of the land has been held in trust for you by your corporation since 1992. You board and raise horses on about 20 acres of non-arable land while the remainder is rented to a farmer on a share crop basis and you report the income from the land.

With respect to the 10 acre portion of the land for which there is a separate title, you propose to build a home and other structures (e.g., a barn) on 2 acres, register it in your name and that of your wife, and continue to rent the remainder of that part of the land.

Your have asked whether there are any deemed dispositions, the extent that the 2 acres (approximately 4/5 of a hectare) can qualify as your principal residence, and the tax treatment in respect of the other 8 acres.

Our Comments

In certain circumstances, property held in trust by a corporation for a shareholder is considered to be beneficially owned by the shareholder. These circumstances, in which this situation will be accepted as a fact, are set out in Interpretation Bulletin IT-216 "Corporation Holding Property as Agent for Shareholder", which has been enclosed. In relation to the information you provided, it could be that you would be considered to be the beneficial owner of the 10 acres of land (even though it was registered in the name of your corporation) so that the corporation would not be considered to have disposed of the land if it were now to become registered in your own name. It is emphasized, however, that this is a question of fact.

The following general comments have been made on the assumption that you are, in fact, the beneficial owner pursuant to comments in IT-216.

When an individual transfers an interest in a property (e.g., land) to the individual's spouse by registering it in both their names, this would normally result in a partial disposition of the property. However, subsection 73(1) of the Income Tax Act (the Act) deems the disposition to occur for proceeds equal to its adjusted base so that there is no immediate capital gain or loss on the transfer.

Where an individual changes the use of all or a part of an income producing property (in your case land) to become that individual's principal residence, a deemed disposition of the converted land is triggered. Subsection 45(1) of the Act provides that the disposition takes place at fair market value and a reacquisition for the same amount occurs.

As a result of the deemed disposition under subsection 45(1) of the Act, a capital gain may, of course, occur. If the individual and the spouse were the owners at the time of the deemed disposition in the foregoing circumstances, the individual, who transferred the property to the spouse, would still have to report the full amount of the capital gain or loss pursuant to section 74.2 of the Act. However, it is the Department's position that if there is a change in use of an entire property (as opposed to a partial change in use), the individual (and the spouse if the spouse owned an interest in the property at the time of the deemed disposition) could elect to defer recognition of the capital gain under subsection 45(3) of the Act so that the change in use rules in subsection 45(1) of the Act would not apply.

The definition of "principal residence" in section 54 of the Act provides that where the total area of the contiguous land upon which a housing unit is situated, exceeds 1/2 hectare, the excess land is deemed, pursuant to the definition of "principal residence" in section 54 of the Act, not to have contributed to the use and enjoyment of the housing unit as a principal residence, except to the extent that the taxpayer establishes that it was necessary for such use and enjoyment. The onus is on you to demonstrate that any land in excess of 1/2 hectare is necessary for the use and enjoyment of the housing unit claimed to be a taxpayer's principal residence.

For your general information, we have enclosed a copy of the pamphlet entitled "Capital Gains" which provides information on capital gains and chapter 6 includes general comments on principal residences. This pamphlet also includes comments on page 35 in respect of an election made under subsection 45(3) of the Act.

The above comments are of a general nature and do not constitute a binding advance income tax ruling.

We trust that our comments will be of assistance to you.

Yours truly,

John F. Oulton
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch