9 March 1995 External T.I. 9502385 - PRINCIPAL RESIDENCE EXEMPTION - EXCESS LAND

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:

General - principal residence exemption - land in excess of 1/2 hectare.

Position TAKEN:

Question of fact. Enquiry forwarded to DO for review and reply. General comments provided to taxpayer.

Reasons FOR POSITION TAKEN:

IT-120R4 paragraphs 21 and 22, previous correspondence

				950238
XXXXXXXXXX			D. Zion

March 9, 1995

Dear XXXXXXXXXX:

Re: Principal Residence Exemption

We are writing in response to your letter of January 11, 1995, in which you request that we provide a ruling as to whether you would be eligible to claim the principal residence exemption with respect to your residence and the adjoining 20 acres of land.

You will note from the enclosed Information Circular 70-6R2 and related special release on the subject of advance income tax rulings that, in addition to a charge for the service, such rulings are given only in respect of proposed transactions. Further, a ruling cannot be provided where the main issue involves a question of fact. Since there appears to be no contemplated transaction involved in your request and the determination of how much land can be considered part of a principal residence involves a finding of fact, a ruling cannot be issued. A determination of how much land can be considered part of a principal residence in any particular case, based on a review of all the relevant facts and documentation, is normally the responsibility of the Tax Services office serving the area in which the client resides. Accordingly, we have forwarded your request to Mr. F. Ladha, Assistant Director of Client Assistance, Vancouver Tax Services. Upon their review of the details forwarded with your enquiry, they will reply to you directly. We will, however, provide some general comments which may be of assistance and have also enclosed a copy of the publications to which we specifically refer in our discussion.

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 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 rural properties such as yours.

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 do have the opportunity, when filing 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. It is important to note that the amount of taxable capital gain reported by an individual will increase one's net income for tax purposes. This in turn could effect some of your benefits or credits. For more detailed information please refer to the 1994 Capital Gains Guide and the 1994 Capital Gains Election Package.

We trust that you will find this satisfactory.

Yours truly,

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