Principal Issues: [TaxInterpretations translation]
The individual acquires a cottage and the subjacent land. He ordinarily inhabits the cottage as his principal residence. Four years later, the individual demolishes the cottage and builds another cottage that he ordinarily inhabits as his residence. If the individual sells the second cottage and the land, will he be able to include in the description of B in the formula in paragraph 40(2)(b) the number of years he ordinarily inhabited the first cottage?
Position:
Possibly.
Reasons:
The land could be designated as a principal residence for the taxation years in which the taxpayer ordinarily inhabited the first cottage if all other conditions for designating a property as a principal residence are satisfied. Thus, the number of years the taxpayer ordinarily inhabited the first cottage could be included in the description of B in the formula in paragraph 40(2)(b).
XXXXXXXXXX 2006-021572 Nancy Turgeon, CGA May 23, 2007
Dear Sir,
Subject: Application of paragraph 40(2)(b) of the Income Tax Act (the "Act")
This is further to your letter of November 23, 2006, in which you asked whether a taxpayer can avail himself of the exemption for the gain on a principal residence in the situation below.
A taxpayer acquired a cottage and the subjacent land in 1998. For four years he ordinarily inhabited the cottage. In 2002, the taxpayer completely demolished the cottage and built a new one. The second cottage was ordinarily inhabited by the taxpayer for all taxation years following the time of such construction, i.e. from 2002 onwards. The taxpayer wishes to sell the second cottage and the subjacent land.
Unless otherwise indicated, all statutory references herein are to the provisions of the Act.
Our Comments
The situation you have indicated in your letter appears to relate to an actual situation involving a specific taxpayer. As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, it is our practice not to issue written opinions on proposed transactions otherwise than by way of 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. These comments may, however, under certain circumstances, not apply to your particular situation.
Paragraph 40(2)(b) generally allows the gain otherwise computed from the disposition of any property that was the taxpayer's principal residence at any time after the date of acquisition to be eliminated or reduced by the number of years the property was the taxpayer's principal residence. The description of B in the formula in paragraph 40(2)(b) refers to one plus the number of taxation years that end after the acquisition date for which the property was the taxpayer’s principal residence and during which the taxpayer was resident in Canada.
The term "principal residence" is defined in section 54 and indicates the conditions that must be met. Paragraph (e) of that definition provides that the principal residence of a taxpayer for a taxation year shall be deemed 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, except that where the total area of the subjacent land and of that portion exceeds 1/2 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 our view, in the above situation, the land could be designated as a principal residence for the taxation years in which the taxpayer ordinarily inhabited the first cottage as well as the second cottage. Consequently, if all the conditions for designating a property as a principal residence are met, we are of the view that the number of years the taxpayer ordinarily inhabited both the first cottage and the second cottage could be included in the description of B in the formula in paragraph 40(2)(b).
Best regards,
Louise J. Roy, CGA
Interim Manager
Business and Partnerships Division
Income Tax Rulings Directorate