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.
Principal Issues: 1) Whether or not a trailer and land in excess 1/2 hectare would qualify as a principal residence, and 2) whether or not upgrading the trailer periodically would affect the taxpayer's ability to claim the principal residence exemption.
Position: 1) It is a question of fact. However, Windrim case shows it would be difficult to establish that the excess land was necessary for the trailer to properly fulfill its function as a residence. Objective factors and subjective factors must be considered.
2) Even if the trailer is upgraded periodically (taxpayer states 2 or 3 times over 10 years), CRA would generally allow for the taxpayer to claim the principal residence exemption provided that the housing unit is not treated as inventory.
Reasons: Various court findings, incl. Windrim v. The Queen (91 DTC 5221) and Carlile v. The Queen (95 DTC 5483)
2009-034162
XXXXXXXXXX S. Kim
(613) 952-1506
February 25, 2010
Dear XXXXXXXXXX :
We are responding to your correspondence of August 25, 2009, concerning the principal residence exemption in paragraph 40(2)(b) of the Income Tax Act (the "Act").
You described a situation where a taxpayer purchased a lot that is greater than one-half hectare in size, on which he placed a trailer that was used as a residence. The trailer is not permanently affixed to the land and can be moved off the lot at any moment in time should the taxpayer choose to do so. Due to a minimum lot restriction, the taxpayer is unable to subdivide and dispose of the land in excess of one-half hectare.
It is your understanding that, according to IT-120R6 - Principal Residence, a trailer is a housing unit that can qualify as a principal residence and land where a housing unit is located may also qualify as the taxpayer's principal residence. It is also your understanding that the meaning of "ordinarily inhabited in the year" as discussed in paragraph 5 of IT-120R6 includes the situation where a taxpayer inhabits a housing unit only for a short period of time in the year, such as in the case of a seasonal residence.
You enquired whether or not the lot and trailer together would meet the definition of a "principal residence" and, when sold, whether or not the gain from the sale of the lot will qualify for the principal residence exemption. Furthermore, you asked whether occasionally upgrading the trailer over a course of 10 years would affect the determination on whether or not the taxpayer would qualify for the principal residence exemption.
Our Comments
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. However, we are prepared to provide you with some general comments which may be of assistance.
IT-120R6 - Principal Residence, discusses the requirements for claiming the principal residence exemption, which can eliminate or reduce for income tax purposes a capital gain on the disposition of a taxpayer's principal residence.
As indicated in paragraph 3 in IT-120R6, a trailer is a housing unit that can qualify as a principal residence. To qualify, the taxpayer's housing unit must be "ordinarily inhabited" in the year by the taxpayer or by his/her spouse/common law partner, former spouse/common law partner, or child. The term "ordinarily inhabited" is not defined in the Act. As covered in paragraph 5 of IT-120R6, the question of whether a housing unit is ordinarily inhabited in the year by a person must be resolved on the basis of the facts in each particular case. As you stated, if a person inhabits a housing unit only for a short period of time in the year, this is generally sufficient for the housing unit to be considered "ordinarily inhabited in the year" by that person provided that it is reasonable. In Ennist et al v. M.N.R (TCC) (85 D.T.C. 669), the court found that spending 24 hours in a housing unit would not fulfill the requirements of the expression.
Land on which a housing unit that is ordinarily inhabited is situated can also qualify as part of the principal residence, subject to certain restrictions. Paragraph (e) of the definition of principal residence in section 54 of the Act provides that the principal residence of a taxpayer for a taxation year shall be deemed to include the land subjacent to the housing unit and such portion of any immediately contiguous land as can reasonably be regarded as contributing to the use and enjoyment of the housing unit as a residence.
As indicated in paragraph 14 of IT-120R6, the Canada Revenue Agency generally does not require that the taxpayer provide evidence to establish that any portion of the land including the area on which the housing unit stands, contributes to the use and enjoyment of the housing unit as a residence where the land in question is one-half hectare or less, provided that no portion of that land was used to earn income from business or property. This conclusion will not be affected in the case where a trailer is a taxpayer's housing unit and is occasionally replaced with an upgraded trailer, provided that the trailer is not considered to be inventory (due to trading).
However, where the total area of the land upon which a housing unit is situated exceeds one-half hectare, the excess is deemed by paragraph (e) in the definition of principal residence not to have contributed to the use and enjoyment of the housing unit as a residence, except to the extent that the taxpayer establishes that it was necessary for such use and enjoyment. In Carlile v. The Queen (FCA) (95 D.T.C. 5483) (Application for Leave to Appeal dismissed by SCC), the court acknowledged that the taxpayer's task of establishing that the excess land is necessary to the use and enjoyment of the housing unit as a residence is a formidable one. The excess land must clearly be necessary for the housing unit to properly fulfill its function as a residence and simply not be desirable.
It is a question of fact whether or not land in excess of one-half hectare is necessary for the housing unit to properly fulfill its function as a residence. To determine "necessity", one would need to consider both subjective factors and objective factors. Examples of subjective factors (e.g., where the size or character of a housing unit together with its location on the lot make such excess land essential to its use and enjoyment as a residence, or where the location of a housing unit requires such excess land in order to provide its occupants with access to and from public roads) are provided in paragraph 15 of IT-120R6. Objective factors (e.g., minimum size lot requirements, or severance/subdivision restrictions by the municipality) are described in paragraph 16 of IT-120R6. It should be noted that the mere existence of lot size restrictions such a municipal law or regulation on the date the taxpayer acquired the property does not immediately qualify the excess land for the purposes of the principal residence definition and the principal residence exemption. In short, the onus is on the taxpayer to establish that the excess land is necessary to the use and enjoyment of a housing unit as a residence.
In a situation such as yours involving a trailer, consideration should be given to the case, Windrim v. The Queen (FCTD) (91 D.T.C. 5221). In Windrim, a taxpayer who had lived in his trailer (principal residence) on a lot in excess of one-half hectare (due to a restrictive covenant) was not found to have established that the excess land (over the portion allowed by the Canada Revenue Agency) was necessary to the use and enjoyment of the housing unit as a residence when it was shown among other factors that he never even attempted to remove the restrictive covenant while residing on the property.
Even though the trailer was described as "semi-permanently emplaced" (e.g., the wheels were taken off), the court found that because it was possible for the trailer to be mobile and even to be sold separately from the land, among other factors, the taxpayer could not establish that the excess land was necessary. In this regard, the court stated:
"This evidence, such as it is, with the probabilities to be inferred from it leave the Court in no doubt that the plaintiff simply cannot establish that the excess land of 16.36 acres or 6.6622 hectares beyond one-half hectare prescribed in the Act, was necessary to the use and enjoyment of the mobile home because the mobile home as a "housing unit" simply had no identifiable subjacent or contiguous land even within the lot. That is the essence of its mobility."
It would appear that your situation is similar to the situation in Windrim and consequently similar tax consequences should apply in respect to the treatment of excess land.
We trust that our comments are of assistance to you.
Yours truly,
Sandy Parnanzone
Section Manager
For Director
Business and partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch
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