22 November 1995 External T.I. 9528405 - PRINCIPAL RESIDENCE EXEMPTION

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Whether or not entire 10 acre property qualifies as principal residence for purposes of the principal residence exemption.

Position:

Question of Fact, however based on information provided doubtful entire property would qualify.

Reasons:

The Town has confirmed that the minimum lot sizes and severance restrictions are in place to preserve the land for agricultural uses. The Departmental's position as outlined in paragragh 22 of IT-120R4 is not applicable where this is the case.

						952840
XXXXXXXXXX					D. Zion

November 22, 1995

Dear XXXXXXXXXX:

Re: Principal Residence Exemption

We are writing in response to your recent correspondence in which you request that the Department confirm that you will be exempt from capital gains upon the sale of your principal residence which is situated upon property which is in excess of 1/2 hectare.

You will note from the enclosed Information Circular 70-6R2 and related special release on the subject of advance income tax rulings that, in addition to a charge for the service, such rulings are given only in respect of proposed transactions. Further, a ruling cannot be provided where the main issue involves a question of fact. Since there appears to be no contemplated transaction involved in your request and the determination of how much land can be considered part of a principal residence involves a finding of fact, a ruling cannot be issued. A determination of how much land can be considered part of a principal residence in any particular case, based on a review of all the relevant facts and documentation, is normally the responsibility of the Tax Services office serving the area in which the client resides. We will, however, provide some general comments which may be of assistance and have also enclosed a copy of the publications to which we specifically refer in our discussion.

As we understand the facts relating to your property, the area of the property is 10 acres which you purchased in 1984. You have provided correspondence from the XXXXXXXXXX (the "Town") that confirms that severance of the property is not permitted under the policies of XXXXXXXXXX the Town's Rural Area Plan. With a view to providing you with a more definitive response, we contacted the Town Planning Department. We were advised that your property is subject to the applicable "Rural Zone" by-laws as well as the policies of XXXXXXXXXX the Town's Rural Area Plan. We have also been advised that these minimum lot sizes and severance restrictions are in place to preserve the land for agricultural uses.

Where a housing unit is situated on a large area of land, the land in excess of 1/2 hectare (one acre) will only qualify as being part of a principal residence to the extent that the individual establishes that it was clearly necessary in order for the housing unit to properly fulfil its function as a residence and not simply because it was desirable. Land in excess of 1/2 hectare could be necessary where the size or character of a housing unit together with its location on the lot makes excess land essential to its use or enjoyment as a residence. Land in excess of 1/2 hectare could also be necessary where the location of a housing unit requires excess land in order to provide the taxpayer with access to and from public roads. Another consideration which may be relevant in determining whether land in excess of 1/2 hectare is necessary for the use and enjoyment of the housing unit as a residence are subdivision restrictions and minimum lot sizes. In all cases, however, it is a question of fact as to how much, if any, of the excess land is necessary for the use and enjoyment of the housing unit as a residence.

Part of paragraph 22 of Interpretation Bulletin IT-120R4 "Principal Residence" states that "A legally imposed minimum lot size, for residential use, exceeding 1/2 hectare that was in effect on the date the property was acquired by the taxpayer, is generally considered to be the minimum amount of land necessary for the use and enjoyment of the housing unit as a residence throughout the period that the property is continuously owned by the taxpayer after that acquisition date". We would emphasize that it is the Department's view that the position in this excerpt is not applicable to a situation where severance restrictions exist, such as those on agricultural land, to preserve land for farming use. Accordingly, it would seem to follow that only a part of the 10 acres would qualify for the principal residence exemption assuming the part otherwise so qualifies.

Where a portion of the land does not qualify for the principal residence exemption, it will be subject to the capital gains provisions effective at the time of disposition. Paragraph 25 of IT-120R4 provides the Department's position with respect to the disposition of a property where only a portion of it is found to qualify as a principal residence. This discussion also includes comments on the valuation of the excess property which could be pertinent to your situation.

If you feel you require further assistance in determining the amount of your property that would qualify for the principal residence exemption, we suggest you contact Miss Whitehead, Senior Agent, Client Assistance at the Toronto East Tax Services office, 200 Town Centre, Scarborough, Ontario, M1P 4Y3. Miss Whitehead can also be reached by calling 1-416-218-4530. Upon a review of all the pertinent details and documentation, the Tax Services office will be in a position to provide you with a more definitive response.

We regret that we could not have been of more assistance.

Yours truly,

P.D. Fuoco
for Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

c.c. Miss Whitehead, Senior Agent
Client Assistance
Toronto East Tax Services