If you’ve ever sold a home, chances are you relied on the principal residence exemption (PRE) to exempt the gain on your sale from personal tax and thus didn’t report it on your tax return.
The Income Tax Act, in its definition of a principal residence, includes not only the land on which the actual home sits but also “any immediately contiguous land” that contributes to the “use and enjoyment” of the house as a residence.
There is, however, a limit of a half hectare to the amount of land that can be included in the definition of a principal residence. Any excess above the half hectare is deemed “not to have contributed to the use and enjoyment of the housing unit as a residence unless the taxpayer establishes that it was necessary to such use and enjoyment.”
This rule, which has been affectionately referred to in tax circles as the “half-hectare rule,” was the subject of recent case decided late last month in the Federal Court of Appeal involving Wayne Cassidy.
Mr. Cassidy purchased a house on a 2.43-hectare parcel of land near London, Ont., and resided in the house on the property from 1994 until he sold it in 2003.
When he bought the property in 1994, he could not have acquired less than the 2.43 hectare parcel of land because of the zoning laws applicable to the area in which the property was located. These zoning laws were only changed in May 2003, at which time Mr. Cassidy was entitled to apply to have his property rezoned and subdivided.
That May, Mr. Cassidy was approached by a real estate agent who asked if he was interested in selling the property. He ended up selling the property to Urban Properties Services (London) Inc. subject to various conditions, one of which was a successful application for rezoning and subdivision. This condition was ultimately met and the sale closed in November 2003.
Mr. Cassidy realized a capital gain on the sale of his home, but failed to report it on his 2003 personal income tax return, taking the position that the entire gain was tax exempt under the PRE.
Needless to say, the CRA disagreed, saying that the principal-residence exemption does not apply to the entire gain since the amount of land sold was 2.43 hectares and the half-hectare rule requires the gain allocable to the excess 1.93 hectares to be subject to tax.
The CRA’s position was based on the premise that, at the time of sale, Mr. Cassidy was no longer barred by local laws from subdividing the property and therefore the excess 1.93 hectares should no longer be considered integral to the use of the property.
Fortunately for Mr. Cassidy, the appellate court disagreed with CRA’s position and found that the entire gain should be tax exempt since during the years of ownership, before the zoning laws were changed, he could not have sold less than the full 2.43 hectares.