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 5-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 992809
G. Moore
December 16, 1999
Dear XXXXXXXXXX:
We are replying to your letter dated October 20, 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 clients' principal residence is located, which is situated on property in excess of 1/2 hectare.
As we understand it, your clients jointly own a 5-acre property on which they maintain their principal residence. The minimum lot size requirement in effect at the date of acquisition was 2.5 acres. The residential buildings are located at the bottom end of the property on the first 2.5 acre parcel and the remaining 2.5 acre parcel has a pond, creek and is treed. The lots on either side of the property are of approximately the same size and are privately owned. In order for your clients to have access to a road, a driveway was built right across the property. In your view, the driveway, pond, creek and trees render the remaining 2.5 acre parcel useless except for the enjoyment of the dwellings. You have enclosed a survey plan of the property. As indicated during a telephone conversation (Jim Wilson/XXXXXXXXXX), the municipal by-laws are unclear as to whether your clients can subdivide their lot and there have been no cases where the municipality has approved a subdivision application.
As discussed in the telephone conversation with Mr. Wilson, an advance income tax ruling would involve a fee and would have to be requested in the manner described in Information Circular 70-6R3, Advance Income Tax Rulings, (copy enclosed). While we do not express opinions on specified proposed transactions other than as a reply to an advance income tax ruling, the following general comments may be of assistance to you.
As indicated in Interpretation Bulletin IT-120R4, Principal Residence, (copy enclosed) 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 and by 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 with respect to residential lots 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. You indicate that there was a minimum lot size of 2.5 acres imposed by the municipality at the time of acquisition of the property. To the extent that a taxpayer, in order to acquire a property as a residence, is required because of such a law or resolution to acquire land that exceeds one-half hectare, the land that must be so acquired is generally considered to be necessary for the use and enjoyment of the housing unit as a residence throughout the period that the property is continuously owned by the taxpayer after the acquisition date. Although you have indicated that the by-laws are unclear as to whether your clients can subdivide their lot and there have been no cases where the municipality has approved a subdivision application, the Canada Customs and Revenue Agency would generally not accept this factor, in and by itself, as sufficient evidence to accept that the additional 2.5 acres was necessary for the use and enjoyment of the housing unit as a residence.
You have indicated that the driveway, pond, creek and trees render the remaining 2.5 acre parcel useless; however, we note that if the municipality approves subdivision of the lot, it may be possible to build another dwelling near the transportation road if trees were cleared. In any event, we are not in a position to determine whether, in your clients' case, the land in excess of 1/2 hectare is necessary for the use and enjoyment of the housing unit as a residence. However, it should be noted that in the event only a portion of the property (e.g., 2.5 acres) qualifies as a principal residence, it will be necessary to calculate the gain on such portion separately from the gain on the remaining portion which does not qualify as the taxpayer's principal residence. The allocation of the proceeds of disposition and adjusted cost base of the total property between the two portions does not necessarily have to be on the basis of area; consideration can be given to any factors which would have an effect on the relative value of either of the two portions. Accordingly, if your are correct in your conclusion that the trees, the pond and the creek render the remaining 2.5 acres useless, this should then have an impact on its fair market value.
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
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