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
Position: law generally explained since all facts not available
Reasons: See files # 950960, 931679, 9703685, 9431495, 9502557, 9504376, 9725785.
XXXXXXXXXX 981848
G. Moore
October 15, 1998
Dear XXXXXXXXXX:
Re: Principal Residence Exemption
I am replying to your letter of June 30, 1998, regarding the principal residence exemption. Your letter was forwarded to us by the XXXXXXXXXX Taxation Services Office.
As we understand the situation, you and your husband purchased a one-half acre lot in 1990 (the “first lot”). In 1991, you purchased the adjoining lot (the “second lot”) because you did not want to be crowded by your neighbour. In 1991, you and your husband moved your stationary trailer over to the second lot and began building a house on the first lot. When the house was liveable (1994), you moved into it with your children. By this time, you and your husband were separated and you listed the second lot for sale in order to avoid losing your home to foreclosure. You also indicate that you moved off the second lot and did not plan to return to it after 1994, when it had to be put up for sale. The second lot was sold in 1997. We have assumed that the second lot is less than 1/2 hectare.
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.
Pursuant to the definition of “principal residence” in section 54 of the Income Tax Act (the “Act”) the principal residence of a taxpayer is deemed to include the land subjacent to the housing unit and such portion of any contiguous land as can reasonably be regarded as contributing to the use and enjoyment of the housing unit as a residence, provided that the land does not exceed 1/2 hectare. It is the Department’s position, as outlined in paragraph 20 of the enclosed interpretation bulletin IT-120R4, Principal Residence, that no proof is normally required with respect to the “use and enjoyment” requirement set out in the Act, provided that the land does not exceed 1/2 hectare and no portion of that land was used to earn income from business or property. The land in excess of 1/2 hectare on which the housing unit is situated is deemed 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. Paragraphs 21 and 22 of IT-120R4 discuss the situation where the total area of land upon which a housing unit is situated exceeds 1/2 hectare.
In order for a property to qualify as a taxpayer’s principal residence for any particular taxation year, a housing unit must be owned by the taxpayer, whether jointly with another person or otherwise in the year, and must be ordinarily inhabited in the year by the taxpayer, by the taxpayer’s spouse or former spouse, or by the taxpayer’s child. The term “housing unit” includes a house, an apartment in a duplex, apartment building or condominium, a cottage, a mobile home, a trailer or a houseboat. The property must be designated by the taxpayer as his or her principal residence for the taxation year and no other property may have been so designated by the taxpayer for that year. In addition, for taxation years after 1981, only one property per family unit can be designated as a principal residence for a given year. Paragraph 10 of IT-120R4 contains more information on the ownership of property and the designation of a principal residence by spouses. The designation of a property as a principal residence for one or more taxation years is to be made in the taxpayer’s income tax return for the taxation year in which he or she disposed of the property. Paragraph 13 of IT-120R4 describes how a taxpayer may designate a property as a principal residence in his or her income tax return for the taxation years in question.
Where a taxpayer acquires land in a taxation year and constructs a housing unit on it in a subsequent year, the property may not be designated as a principal residence for the years that are prior to the year in which the taxpayer, his or her spouse or former spouse, or child commences to ordinarily inhabit the housing unit.
In your situation, two adjacent lots are less than a 1/2 hectare each. 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 is examined in the court case of Fourt v. The Queen (91 DTC 5631). In this court case, 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 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...” . 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 the appellant to credible evidence that can be sensibly regarded as making the kind of contribution described...
If an adjacent lot (lot 2) was acquired subsequent to the acquisition of the original lot (lot 1) containing the housing unit, and then subsequently lot 2 was sold separately from the first lot, the onus would be on the taxpayer to substantiate that the adjacent lot contributed to the use and enjoyment of the housing unit. Accordingly, where an adjacent lot is involved and the taxpayer proceeds to sell the adjacent lot, whether or not the taxpayer would be eligible for the principal residence exemption upon the disposition of the adjacent lot will depend on whether the adjacent lot can have been considered to contribute to the use and enjoyment of the housing unit and lot on which the housing unit was constructed. We are of the view, based on the information available, that both lots together would likely not be considered to contribute to the use and enjoyment of the housing unit. Accordingly, the following comments are made on the premise that either lot 1 or lot 2 can be designated as a principal residence for a particular taxation year, but not both.
Based on our understanding of the facts and subject to our comments that both lots would not likely be considered to have contributed to the use and enjoyment of the housing unit, you may designate one of the two following properties as your principal residence for the following years. In 1990, it appears that you and your spouse inhabited the stationary trailer on the first lot, and accordingly, both of you may designate the first lot and the trailer as your principal residence for 1990. For 1991, as you and your spouse moved your trailer from the first lot to the second lot during the year, you and your spouse would have inhabited the trailer on the first lot for part of the year and on the second lot for part of the year. Accordingly, for 1991, you and your spouse may designate either the first or second lot, including your trailer, as your principal residence. For 1992 and 1993, as you and your spouse would have inhabited the trailer on the second lot, you and your spouse may designate this property, including the trailer as your principal residence. For 1994, as you had moved from your trailer on the second lot into the house on the first lot, you may designate either lot 1 or lot 2, including either the trailer or the housing unit, as the case may be, as your principal residence, for that year. For 1995 and subsequent years, as you inhabited the house on the first lot, you may designate this property, including the housing unit, as your principal residence. For the 1995, 1996, and 1997, the second lot would not qualify as a principal residence, even if the trailer remained on the property, because the housing unit, if any, was not ordinarily inhabited in the year by you, your spouse or your child.
Based on our understanding of the facts, no elections under subsections 45(2) and (3) of the Act are available. For example, neither lot 1 or lot 2 has undergone a change in use as described in subparagraph 45(1)(a)(i) or 13(7)(b) of the Act (i.e. no housing unit was at any time used for the purpose of gaining or producing income). Paragraphs 32 and 35 of IT-120R4 contain more information about these elections.
If you require further assistance regarding the principal residence exemption, please contact XXXXXXXXXX has been apprised of your enquiry and will be pleased to assist you.
I trust our comments will be of assistance to you.
Yours truly,
J. Wilson
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
Encl.
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