31 January 1995 External T.I. 9421605 - CAPITAL GAINS ELECTION AND 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:

The issue is whether land in excess of 1/2 hectare qualifies for the principal residence exemption and a perception that this provision discriminates against rural residents.

Position TAKEN:

Comments of a general nature were provided.

Reasons FOR POSITION TAKEN:

Question of Fact. Insufficient information was provided.

					942160
XXXXXXXXXX				D. Zion

Attention: XXXXXXXXXX

January 31, 1995

Dear XXXXXXXXXX:

Re: Capital Gains & Personal Residence

We are writing in reply to your letter of August 11, 1994 which was forwarded to us by the Ottawa District Taxation Office. We apologize for the delay in responding.

In your letter you have indicated that, in your opinion, many rural residents are adversely affected by the income tax repercussions arising upon the disposition of their principal residence when that residence is located on property in excess of 1/2 hectare. Furthermore, you have made the suggestion that the Department, in the interest of equity, extend the principal residence exemption to the entire rural property without regard to the legislative requirements of the definition of principal residence found in section 54 of the Income Tax Act (the "Act"). In your view, this would place the rural resident in the same position as an urban dweller whose principal residence is located on property less than 1/2 hectare.

Our Comments

Where a housing unit is situated on a large area of land, the land in excess of 1/2 hectare will only qualify as being part of a principal residence to the extent that the individual (urban or rural dweller) establishes that it was clearly necessary in order for the housing unit to properly fulfil its function as a residence and not simply because it was desirable. Land in excess of 1/2 hectare could be necessary where the size or character of a housing unit together with its location on the lot makes excess land essential to its use or enjoyment as a residence. Land in excess of 1/2 hectare could also be necessary where the location of a housing unit requires excess land in order to provide the taxpayer with access to and from public roads. Another consideration which may be relevant in determining whether land in excess of 1/2 hectare is necessary for the use and enjoyment of the housing unit as a residence are subdivision restrictions and, a factor of which you make mention, that is, minimum lot sizes. 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.

We refer you to paragraphs 21 and 22 of Interpretation Bulletin IT-120R4 which provides a general discussion of the factors to be considered in the determination as to whether or not land in excess of 1/2 hectare qualifies as a principal residence. Paragraph 25 of this same bulletin provides the Department's position with respect to the disposition of a property where only a portion of it is found to qualify as a principal residence. This discussion also includes comments on the valuation of the excess property which could be pertinent to the rural residents to which you refer.

As you imply, where land does not qualify as part of a principal residence, it will be subject to the capital gains provisions at the time of disposition. In this respect, the Capital Gains Exemption of $100,000 was eliminated as a result of the February 22, 1994 Budget. However, individuals will have the opportunity, when filling their 1994 income tax returns, to make an election for property owned on February 22, 1994, to recognize pre-Budget Day accrued capital gains up to the remainder of their $100,000 exemption. The election will treat the properties selected by the individual to have been disposed of on February 22, 1994 and immediately reacquired at that time. The adjusted cost base of the property elected will be increased by the amount of the gain recognized. This election will also apply to real estate such as excess land on which a principal residence is situated. With respect to the election on real estate, only the pre-March 1992 gains can be recognized which is based on the proration rules established in the February 1992 Budget. For more detailed information please refer to the 1994 Capital Gains Guide and the 1994 Capital Gains Election Package.

Should you have a particular case to be examined, we suggest that you write to the local district taxation office for their comments. Upon a review of all the pertinent details and documentation, they will be in a position to provide you with a more definitive response. If the issue of subdivision restrictions or minimum lot sizes is to be considered, the details of the restrictions and zoning should be provided.

We regret that our reply could not be more definitive, but trust that our comments have been of assistance.

Yours truly,

P.D. Fuoco
for Director
Business and General Division
Rulings Directorate
Policy and Legislation Branch

c.c. A. Thibault
Business Audit
Ottawa District Taxation Office