20 September 1999 External T.I. 9923195 - PRINCIPAL RESIDENCE EXEMPTION

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: What portion of a 20-acre property qualifies as a principal residence for purposes of the principal residence capital gains exemption under paragraph 40(2)(b) of the Income Tax Act?

Position: Question of fact

Reasons: See the current version of IT-120, 950565, 982230,
980288, EM1746A, 981265, 9641685, 9728842, 942160, 950238,
952840, 951099, 950960, 950699

XXXXXXXXXX			992319
G. Moore
September 20, 1999

Dear XXXXXXXXXX:

We are replying to your letter dated August 16, 1999, in which you requested an advance income tax ruling regarding an exemption from capital gains upon the disposition of part of the land on which your principal residence is located, which is situated on property in excess of 1/2 hectare.

As discussed during the telephone conversation of September 9, 1999, (Gwen Moore/XXXXXXXXXX), your advance ruling request has been withdrawn. We will, however, provide some general comments, which are not binding on the Department, but which may be of assistance to you.

As we understand it, you own a 20 acre property on which you maintain your principal residence. The minimum lot size requirement in effect at the date of acquisition was 20 acres. The minimum lot size requirement has subsequently been relaxed and you wish to give a portion of the property (3 land parcels) to three children and retain a portion of the property (1 parcel) for your principal residence. You are asking if you can pass on the 3 parcels of land, which are approximately 4 to 5 acres each, to your 3 children while having the principal residence capital gains exemption apply to the 20 acres at the time of the transfer. You are also asking if you could apply to the municipality for permission to subdivide the property before you give the parcels to your children. As you are planning to give some of the property to your three children, you would like to know what portion of the capital gain realized on the disposition of the property would be taxable. In other words, your concern is how much of the 20 acre property qualifies as a principal residence for purposes of the principal residence capital gain exemption.

As indicated in Interpretation Bulletin IT-120R4, Principal Residence, the capital gain from the disposition of a principal residence is generally exempt from income taxation. To the extent that a portion of a property does not qualify as being part of the principal residence, the related capital gain is not eligible for the principal residence exemption. Under the definition of principal residence in the Income Tax Act, if the total area of the contiguous land upon which a housing unit is situated exceeds 1/2 hectare, the excess land is considered not to be part of the principal residence unless the client establishes that such excess land is necessary for the use and enjoyment of the housing unit as a residence. The onus is on the client to establish how much, if any, of the excess land is necessary for the use and enjoyment of the housing unit as a residence. Generally, an individual's use of land in excess of 1/2 hectare in connection with a particular lifestyle does not, in itself, mean that the excess land is necessary for the use and enjoyment of the housing unit as a residence. Where the housing unit is located on land not exceeding 1/2 hectare, usually the land qualifies as part of the principal residence, with no requirement to prove that it is necessary for the use and enjoyment of the housing unit as a residence.

A minimum lot size and a severance restriction imposed by local municipal by-laws may be factors indicating that land in excess of 1/2 hectare may be required for the use and enjoyment of the housing unit as a residence. As you indicate that there was a minimum lot size and severance restriction imposed by the municipality at the time of acquisition of your property, which has recently been lifted, it appears that, in your case, land in excess of 1/2 hectare was required for the use and enjoyment of your principal residence commencing at the time of acquisition of the property (see paragraph 22 of IT-120R4). With respect to the timing of subdividing your property into 4 parcels and giving three of these parcels to your children, in our view, although it is a question of fact, once the property is subdivided, only the parcel on which your house is located would continue to be considered to be part of your principal residence and that the other three parcels would likely not continue to be considered necessary for the use and enjoyment of the housing unit as a residence. Commencing at the time your property is subdivided into four parcels, the principal residence exemption would cease to apply to any future gains accruing in subsequent years on the three parcels that you intend to transfer to your children (see the last sentence of paragraph 23 of IT-120R4). After the property is subdivided into four parcels, with respect to the parcel on which your principal residence is located, the principal residence exemption would continue to apply to any gain arising on the sale of that parcel. In all cases, however, 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 a taxpayer has partially converted a principal residence to an income-producing use, paragraph 45(1)(c) of the Act provides for a deemed disposition of the portion of the property so converted for proceeds equal to its proportionate share of the property's fair market value. Paragraph 45(1)(c) also provides for a deemed reacquisition immediately thereafter of the same portion of the property at a cost equal to the very same amount. Vacant land that initially formed part of a principal residence may be considered to have been converted to inventory (i.e., change in use) at the earlier of the time when the owner commences or causes the commencement of improvements thereto with a view to selling it; and the time of making application to the relevant authority for approval of a plan to subdivide the land into lots for sale, provided that the taxpayer proceeds with the development of the subdivision. In this situation, it is a question of fact whether there is a partial change in use of the principal residence to an income-producing use when the property is subdivided into four parcels. If there is no change in use, then no deemed disposition occurs at that time. If there is an unreasonable period of time between the time the property is subdivided and the transfer of 3 of the parcels to your children, the Department may consider that the subdivision was for the purpose of gaining or producing income. Note that, as indicated in the paragraph above, even if there is no deemed disposition after the property is subdivided because there is no partial change in use of the property, once the subdivision has occurred, any gain accruing after that time on 3 of the 4 parcels will generally not be eligible for the principal residence exemption.

We trust that the forgoing comments are of assistance to you.

Yours truly,

J. Wilson.

for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch