Principal Issues: Whether the principal residence exemption would apply to a property where the land was in excess of one-half hectare.
Position: Question of fact. General comments given.
Reasons: Land in excess of one-half hectare may be considered necessary if the taxpayer was required by municipal law to purchase a minimum lot size or if the law imposed a severance or subdivision restriction for residential lots. See IT-120R6.
Signed on November 2, 2006
XXXXXXXXXX
Dear XXXXXXXXXX:
Thank you for your correspondence received on August 25, 2006, concerning your mother's principal residence exemption. I apologize for the delay in responding.
The Income Tax Act indicates that if a property is ordinarily inhabited and qualifies as a principal residence, the owner of the property may claim an exemption to reduce or eliminate any capital gain that would be otherwise realized on the disposition of the property. "Principal residence" is defined in section 54 of the Act. According to the definition, land of one-half hectare or less is generally part of the principal residence. Any portion in excess of the one-half hectare may be considered part of the principal residence if the taxpayer establishes that that portion was necessary for the use and enjoyment of the housing unit as a residence.
Land in excess of one-half hectare may be considered necessary if the taxpayer was required by municipal law to purchase a minimum lot size or if the law imposed a severance or subdivision restriction for residential lots. The tax treatment of capital gains on the sale of a principal residence is discussed in Interpretation Bulletin IT-120R6, Principal Residence. I am attaching a copy of the bulletin, for your reference. This publication is also available on the Canada Revenue Agency (CRA) Web site at www.cra.gc.ca.
The CRA is responsible for administering tax legislation as enacted by Parliament. Your suggestions to raise the exemption to cover the capital gain on more land and on any principal residence selling for less than $500,000 or that individuals making under $20,000 a year should not have to pay income taxes relate to tax policy, which is the responsibility of the Department of Finance Canada. I am therefore forwarding a copy of your correspondence to the Honourable James M. Flaherty, Minister of Finance, for his consideration.
Thank you again for bringing your concerns to my attention.
Sincerely,
The Honourable Carol Skelton, P.C., M.P.
Attachment
c.c.: The Honourable James M. Flaherty, P.C., M.P.
Minister of Finance
House of Commons
Ottawa ON K1A 0A6
Gwen Moore
October 16, 2006
957-9232
2006-020411