XXXX
R. B. Day (613) 957-2136
DEC 1 1987
Dear XXXX
We are writing in reply to your letter of September 10, 1987, wherein you requested our opinion regarding the application of the capital gains exemption for dispositions of a principal residence in paragraph 40(2)(b) of the Income Tax Act (the "Act").
As we understand it, you are concerned with the disposition of two lots where the aggregate area does not exceed one-half hectare and the second lot is adjacent to the one on which the housing unit is situated. On the assumption that the separate lot is immediately contiguous land that has been used exclusively for the taxpayer's use and enjoyment of the housing unit as a residence, it is your view that the adjacent lot would qualify as part of the "principal residence". Since there is no distinction in paragraph 54(g) of the Act, relative to the legal description of the contiguous land, it is also your view that when the "housing unit" is designated to be the principal residence for the year under subparagraph 54(g)(iii) of the Act, the adjacent lot could effectively be considered to be designated as a result of meeting the tests in subparagraph 54(g)(v) of the Act. Thus, the second lot would qualify for the exemption in paragraph 40(2)(b) of the Act.
It is our view that it would involve a finding of fact in each particular case as to whether or not less than one-half hectare of land, "may reasonably be regarded as contributing to the use and enjoyment of the housing unit".
Assuming, for example, that the lot subjacent to the housing unit and the lot adjacent thereto were both acquired in conjunction with the acquisition or construction of the housing unit (and the adjacent lot was not used to earn income from a business or property) it is our view that no proof would "normally" be required with respect to the "use and enjoyment" requirement.
However, if the adjacent lot was acquired subsequent to the acquisition or construction of the housing unit on the subjacent lot, the onus would then be on the taxpayer to substantiate that the adjacent lot contributed to the "use and enjoyment of the housing unit".
With respect to the filing of form T2091, it is our view that if the taxpayer is convinced that the entire proceeds of disposition from his principal residence, including the housing unit, subjacent and adjacent lots are not subject to income tax, paragraph 10 of IT 120R3 could be followed and form T2091 need not be filed.
Should your situation involve an actual taxpayer and a completed transaction you may wish to contact the local District Taxation Office for their views in this regard.
Yours truly,
for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch