23 February 1998 External T.I. 9726465 - 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:

Principal Residence - land in excess of 1/2 hectare - Timing of conversion of part of land adjacent to residence to inventory

Position:

Law generally explained

Reasons:

Specific facts and documentation not available

972646
XXXXXXXXXX M. Eisner

February 23, 1998

Dear XXXXXXXXXX:

Re: Principal Residence Exemption

This is in reply to your letter of October 1, 1997, concerning the above-noted subject. We apologize for the delay in replying.

You have described a situation where an individual purchased 5 acres of land, which included his residence (the Property). You have indicated that it was not possible for the land to have been less than 5 acres at the time of purchase. In 1995, the individual applied to have the property rezoned. In 1997, the individual’s 5 acre property was rezoned. The new zoning permitted the 5 acres of land to be subdivided into 1/4 acre lots. The individual still resides on the Property.

You have asked us whether there is a deemed disposition in 1995 or 1997 and whether the individual can claim the principal residence exemption at the time of the disposition.

Our Comments

Since your request for a technical interpretation appears to relate to a completed transaction, we will only provide the following general comments. Further assistance on the income tax consequences of the above situation, should be sought from officials in the nearest Revenue Canada tax services office, by presentation of all the relevant facts and documentation.

The definition of "principal residence" in section 54 of the Income Tax Act (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 the taxpayer to establish that the excess land was necessary in that regard.

As indicated in paragraph 21 of Interpretation Bulletin IT-120R4, “Principal Residence”, which has been enclosed for your convenience, severance restrictions and minimum lot sizes may be relevant in determining whether land in excess of 1/2 hectare is necessary to the use and enjoyment of a residence. In addition, paragraph 22 of IT-120R4 indicates that a legally imposed minimum lot size exceeding 1/2 hectare at the time of acquisition, which is zoned as being residential, is generally considered to be the minimum amount of land necessary for the use and enjoyment of the housing unit as a principal residence throughout the period that the property is continuously owned by the individual after that acquisition date. However, in any particular case, there may be other considerations. In all cases, 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.

Where an individual changes the use of all or a part of real estate, that is personal use property, to inventory, a deemed disposition of the converted land is triggered under subsection 45(1) of the Act. The determination of when a change of use occurs involves a question of fact. However, we would refer you to the general comments in paragraphs 12, 23 and 24 of Interpretation Bulletin 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” (copy enclosed), which may assist you in that regard.

We trust that our comments will be of assistance, but caution you that they do not constitute an advance income tax ruling and, accordingly, are not binding on the Department with respect to any particular transaction.

Yours truly,

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