7 February 1991 Income Tax Severed Letter - Disposition of Principal Residence - Timing of Disposition, Taxation of Interest

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.

Subject: XXX (the “taxpayer”) Disposition of Principal Residence, Timing of Disposition, Taxation of Interest

We are writing in reply to your memorandum of November 15, 1990, wherein you requested our views regarding the above noted issues with specific reference to the arguments set out in the taxpayer's representative's submission dated September 17, 1990.

As we understand it, you are primarily concerned with the question as to whether or not the XXX of land, expropriated along with the taxpayer's principal residence, could be considered as part and parcel of his principal residence for 54(g) purposes. You are also concerned as to whether or not interest awarded and paid in connection with the disposition of the property would be taxed as ordinary interest or could be included in total proceeds of disposition for capital gains purposes.

Our Comments

We have reviewed your detailed submission and that of the taxpayer's representative in conjunction with the appropriate IT bulletins, legal jurisprudence, and our head office research material. Our comments and observations are as follows:

Principal Residence Exemption

The taxpayer's representative appears to place a great deal of emphasis on the decision of the Federal Court of Appeal in the case of The Queen v. Yates, [[1986] 2 C.T.C. 46] 86 DTC 6296.

The decision in this case, was based on a particular finding of fact peculiar to that decision. In order for the Yates decision to be used by an individual in claiming, as a principal residence, subjacent and contiguous land in excess of one-half hectare (one acre) in area, the facts in his/her case should be virtually identical with that decision.

The principal that evolved from the Yates decision was that where there is a conveyance of residential property in an area in which minimum lot sizes are imposed by municipal bylaws or provincial legislation in force at the time the property is acquired, the minimum residential parcel is considered to be the minimum amount that would be necessary for the use and enjoyment of the residence throughout the period that the property is continuously owned.

In our view, XXX case is not identical to the Yates case (i.e. there was no minimum lot size required by legislation at the time the entire property was acquired). Therefore, the Yates decision does not apply to allow XXX as being part of the disposition of a principal residence for 54(g) purposes.

The question of what part, if any, of the contiguous land was necessary for the personal use and enjoyment of the dwelling is one of fact that can be best determined by your office.

Date of disposition

Pursuant to the guidelines set out in paragraph 9 of IT-271R, it is our opinion that the property in question XXX Despite the arguments put forward by the taxpayer's representative, we see no reason to digress from the position stated in IT-271R.

Interest as proceeds of disposition

Paragraph 25 of IT-271R sets out the Department's position regarding when interest is considered to be proceeds of disposition rather than interest income. In essence, this paragraph states that if a taxpayer has a right to receive compensation for expropriated property, even though the final amount is indeterminate, amounts paid by the expropriating authority for the use of monies retained by them until the settlement, is considered to be interest income to the recipient. In situations, where paragraph 33(3)(b) of theFederal Expropriation Act(or similar provisions in relevant provincial jurisdictions) applies, interest paid is considered to be proceeds of disposition only where the original offer for the property is less than a specified percentage of the amount finally determined. XXX In view of the foregoing, it is our opinion that the interest received by the taxpayer would be interest income in the year of receipt under paragraph 12(1)(c).

The decision in Fisher v. The Queen, [[1986] 2 C.T.C. 114] 86 DTC 6364, in our view clearly delineates between the penalty interest and ordinary interest computed under theExpropriation ActXXX it is our view that the Fisher decision provides support for the taxation of these amounts as ordinary interest income.

We are returning the files in this case and trust that our comments are of assistance to you.