Dec 01, 1989

Principal Residence – Calculations and Exemptions #147


By Gerry Neely
B.A. LL.B.

A taxpayer bought a home and occupied it as his principal residence for 18 months and then rented one-third of it for 46 months. He then sold the home for a gain of $52,000, which the Minister of National Revenue (MNR) taxed as a capital gain. The taxpayer appealed successfully and reduced his tax based upon the following calculations.

The total gain was divided on a straight line basis by the number of months he owned the property, to arrive at an average monthly gain of $812.84. For the first 18 months the whole of the monthly gain was: exempt. For the next 46 months, the principal residence exemption was reduced to 2/3rds of the monthly gain. The result of these calculations was to reduce the total gain to $12,460, one-half of which was taxable.1

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A taxpayer had owned 8.99 acres which he purchased in 1966 for $50,000, and resold in 1980 for $899,000. During that period, he lived in a small three bedroom house on one part of the property. He constructed several outbuildings on the rest of the property where he carried on a small farm business. Five months before the sale, the municipal bylaws were changed to require a minimum area of 80 acres for each single family dwelling.

MNR limited the principal residence exemption to the home and one acre of land, because the excess property was not required by the taxpayer for his use and enjoyment of the principal residence. Upon the taxpayer's appeal, the tax court agreed with this part of MNR's assessment. The taxpayer argued, however, that the change in the bylaw before the sale took place meant that the taxpayer at the time of the sale could not have occupied a smaller parcel than the one he owned. This argument was based upon the Yates case discussed in Column 42.

The Judge concurred that it is the facts at the moment immediately before the sale takes place which are significant for the purpose of deciding whether land in excess of one acre should be deemed to be part of a taxpayer's principal residence. He accepted the taxpayer's argument and applied the principal residence exemption to the whole of the gain.3

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Must a principal residence be permanent or can it be mobile? This question arose in the case of a taxpayer who owned a lakefront lot in the Shuswaps. He was unable to build a permanent structure on it because of high water and the lack of additional land for the required septic system.

From the time he bought the lot in 1973 until its sale in 1982, the taxpayer spent all his spare time and holidays on the lot, averaging at least 30 days each year. During this period, he added fill to raise the lot three feet, and bought an additional lot for the septic system. He first lived in a trailer on the lot, and later a van. In addition, he would erect a tent on the land from time to time. He never occupied the trailer or the van in Vancouver, where he parked or stored them. He lived in rented premises in Vancouver during this period and therefore had no other housing which he could have designated as his principal residence.

The partial definition of a principal residence is that it is a housing unit ordinarily inhabited in the year by the taxpayer and includes the land upon which it sits. MNR argued that a trailer, van, or tent was not a housing unit. The Judge decided that, merely because the trailer or van are mobile, or lack the services normally provided to a home, they are not prevented from being a housing unit entitled to the principal residence exemption. Depending upon the facts, a seasonal residence may be a taxpayer's principal residence. In the particular facts of this case, the Judge decided that MNR was wrong in holding that a housing unit must be a building, and granted the principal residence exemption on the lakefront lot.3

  1. Robitaille v. MNR, 89 DTC 593.
  2. Augart v. MNR, 89 DTC 263.
  3. Flanagan v. MNR89 DTC 619.

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