When does a principal residence qualify for the Capital Gains Tax Exemption?
A seller’s principal residence includes the land on which the home sits, as well as any additional land that contributes to the use and enjoyment of the principle residence. Sounds easy enough on the surface but read on.
The 1/2 Hectare Rule
Where a home is on land that is ½ hectare (1.24 acres) or less, the land is deemed by Canada Revenue Agency to contribute to the use and enjoyment of the residence and no evidence is required to establish that the capital gains exemption applies to the property as a principle residence. This is not a given with land in excess of 1.24 acres.
Land Larger than ½ Hectare May Trigger Tax
A residence, for example, may be situated on a 3-acre parcel. The common misconception is that because the home and the land it sits on are part and parcel of the principle residence, no capital gain applies to the entire property.
Yet under CRA rules any land in excess of ½ hectare “is deemed not to have contributed to the use and enjoyment” of the home. For the excess land to qualify for tax exemption, the home owner must verify to CRA that the surplus land must clearly and out of necessity contribute to the use and enjoyment of the home. To merely be a desirable component of the home is not enough.
When is Excess Land Considered Essential to its Use and Enjoyment? CRA gives following conditions:
- Where the home’s “ size or character…together with its location on the lot make such excess land essential to its use and enjoyment as a residence,”
- Where excess land is needed for “access to and from public roads,”
- Where by law a minimum lot size larger than ½ hectare is required.
In certain areas, municipal bylaws or provincial regulations may restrict how small a lot size can be. For various reasons, some zoning bylaws may not allow land severances. Even a subdivision may require minimum land sizes above ½ hectare. As well, if a size restriction were to be lifted, then the tax exemption would only apply for the year(s) the restriction was in force. CRA provides a formula for such circumstances.
Seek Expert Advice. The capital gains exemption can at times be complex and requires the expert advice of a certified accountant. (Source: CRA Income Tax Folio: S1-F3-C2: Principal Residence.)