By Wilson Wong
The Income Tax Act of Canada (“ITA”) provides for an exemption on sales of a principal residence, otherwise referred to as the Principal Residence Exemption (“PRE”). But, as with most things, the devil is in the details. There are occasions where a sale of your primary residence is not eligible for the PRE and property owners will be required to pay taxes on any gains on the sale. Owners of large properties in particular, for example, farmers, should take note.
Properties in Excess of 0.5 Hectares (1.24 acres)
When the property on which your home sits is greater than 0.5 hectares, the tax law governing the disposition of the property becomes increasingly complex, very quickly.
According to section 54, paragraph (e) of the ITA:
“Where the total area of the land upon which a housing unit is situated exceeds one-half hectare (1.24 acres), the excess land is deemed not to have contributed to the use and enjoyment of the housing unit as a residence and thus will not qualify as part of a principal residence, except to the extent that the taxpayer establishes that it was necessary for such use and enjoyment.”
Immediately, you as a property owner need to be concerned with what is “necessary” for “use and enjoyment”. Determinations of this sort quickly pull in elements of municipal zoning law, specifics about the use of your property, and prior Tax Court of Canada case histories. For example, a municipal or provincial law may require a minimum lot size in a particular area. Or, it may bar property owners from subdividing already existing large lots. Alternatively, the property owner may be running a hobby farm or community business on the property, requiring certain portions, or may be otherwise sustaining themselves from the “fruits” of the property.
Considerations for Determining What is “Necessary” for Use and Enjoyment
The main questions here are: can the taxpayer establish that the excess land is “necessary” for use and enjoyment? And, what actions are allowable in respect of the property, according to local laws and regulations?
Reporting the sale of a principal residence improperly can result in CRA tax assessments (potentially arbitrary), interest on taxes owing, and penalties for improper reporting, to say the least of additional professional fees to get the matter resolved. As with most things related to tax, planning is the key.
For a free discussion on these matters or to receive any background information on this topic please contact Shawn Bausch, Senior Tax Manager with Sloan Partners LLP, by email or by telephone at 416-665-7735 x. 335.