Principal Issues: [TaxInterpretations translation] Can a taxpayer claim the principal residence exemption on the disposition of land in a particular situation?
Position: Question of fact.
Reasons: General comments.
XXXXXXXXXX 2010-037304
I. Landry, M. Fisc.
September 22, 2010
Dear Madam,
Subject: Principal residence
This is in response to your correspondence of June 14, 2010, asking whether you can claim the principal residence exemption on the disposition of land in the following situation.
You explained in your letter that you recently sold two pieces of land adjacent to the land on which your principal residence is located to a person with whom you deal at arm's length. The total area of the land sold and of the land on which your principal residence is located is less than one-half hectare.
Unless otherwise indicated, all legislative references herein are to the provisions of the Income Tax Act (the "Act").
Our Comments
As stated in paragraph 22 of Information Circular 70-6R5, Advance Income Tax Rulings, it is the practice of the Canada Revenue Agency not to issue a written opinion regarding proposed transactions otherwise than by advance rulings. Furthermore, when it comes to determining whether a completed transaction has received appropriate tax treatment, that determination is made first by our Tax Services Offices as a result of their review of all facts and documents, which is usually performed as part of an audit engagement. However, we can offer the following general comments that we hope may be helpful to you.
Paragraph (e) of the definition of "principal residence" in section 54 deems a taxpayer's principal residence to include the land subjacent to the housing unit and such portion of any immediately contiguous land as can reasonably be regarded as contributing to the use and enjoyment of the housing unit as a residence. However, where the total area of the such land exceeds one-half hectare, the excess shall be deemed not to have contributed to the use and enjoyment of the housing unit as a residence unless the taxpayer establishes that it was necessary to such use and enjoyment.
In your situation, the total area of the immediately contiguous land and the land subjacent to your housing unit is less than half a hectare. Also, in order to sell the two immediately contiguous pieces of land without selling the land subjacent to your housing unit, you had to hold separate title to that land from the title to the land subjacent to your housing unit. The issue of whether immediately contiguous land that is held in separate title from the subjacent land and that does not exceed one-half hectare in total may form part of a taxpayer's principal residence was considered in Fourt v. The Queen (91 DTC 5631). It was held in that case that the mere fact of holding separate title to land adjacent to the title to the land subjacent to the housing unit does not preclude the entire area not exceeding one-half hectare from qualifying for the principal residence exemption to the extent that the facts demonstrate that the immediately contiguous land may reasonably be regarded as contributing to the use and enjoyment of the housing unit as a residence.
If that is your case, you may have disposed of only part of a property that qualifies as your principal residence and you may be able to designate the land as your principal residence in order to use the principal residence exemption. For more information on this subject, we refer you to paragraph 18 of Interpretation Bulletin IT-120R6 - Principal Residence which can be found on the CRA internet site at www.arc.gc.ca.
However, we are not in a position to inform you whether it is reasonable in your case to consider the immediately contiguous land sold as contributing to the use and enjoyment of the housing unit as a residence because the facts you have submitted to us are insufficient to make such a determination. The question of whether immediately contiguous land may reasonably be regarded as contributing to the use and enjoyment of the housing unit as a residence is a factual one that we cannot determine without a review and analysis of all the facts and circumstances of each situation. For example, we might consider, among other things, the timing of the acquisition of each piece of land, the purpose for which it was acquired and its use and enjoyment prior to its disposition in making this determination.
We hope that our comments will be of assistance.
Best regards,
Randy Hewlett
Manager
for the Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.