Principal Issues: [TaxInterpretations translation] Can a taxpayer claim the capital gains deduction for a principal residence where the taxpayer sells the land and the principal residence has previously been demolished?
Position: Yes, for the years in which the taxpayer used the residence as a principal residence.
Reasons: The land could be designated as a principal residence for the taxation years in which the taxpayer ordinarily inhabited the residence if all other conditions for designating a property as a principal residence are satisfied. Thus, the number of years the taxpayer ordinarily inhabited the residence could be included in the description of B in the formula in paragraph 40(2)(b). Years when the land is vacant are not considered to be those where it was "ordinarily inhabited" by the taxpayer.
XXXXXXXXXX 2007-022460 Nancy Turgeon, CGA July 25, 2007
Dear Madam,
Subject: Application of paragraph 40(2)(b) of the Income Tax Act (the "Act")
This is further to your request of February 15, 2007, in which you asked whether a taxpayer can claim a deduction for a capital gain realized on the sale of a principal residence.
In particular, a taxpayer acquired a residence and the subjacent land in 20X1. For three years, he ordinarily inhabited that residence. In 20X4, the taxpayer completely demolished the residence and did not build another one. The taxpayer wishes to sell the vacant and subjacent land in early 20X6.
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 taxpayer's 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) is 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 satisfied. 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.
However, where the total area of the subjacent land and of that portion facilitating the use of the housing unit 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 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 residence. Consequently, if all the conditions for designating a property as a principal residence are satisfied, it is our view that only the number of years the taxpayer ordinarily inhabited the residence, excluding the years the land was vacant, could be included in the description of B in the formula in paragraph 40(2)(b).
Best regards,
François Bordeleau, Advocate
Interim Manager
Business and Partnerships Division
Income Tax Rulings Directorate.