2020-0860211E5 Principal Residence Exemption –

Principal Issues: Whether the taxpayers are eligible to claim the principal residence exemption on the portion of their land in excess of one-half hectare.

Position: General comments provided.

Reasons: It is a question of fact whether land in excess of one-half hectare will meet the definition of a principal residence in section 54 and whether paragraph 40(2)(b) will apply to exempt all or a portion of the capital gain on disposition from income tax.

Author: Foggia, Christina
Section: Paragraph 54(e) - definition of principal residence and land in excess of one-half hectare; 40(2)(b)

XXXXXXXXXX                                                                 2020-086021
                                                                                         C. Foggia, CPA, CA

January 28, 2022

Dear XXXXXXXXXX:

Re: Principal Residence Exemption – Excess Land

This is in response to your correspondence of August 4, 2020 and a subsequent telephone conversation (Couvrette/XXXXXXXXXX) of August 25, 2020, wherein you requested our views concerning the disposition of a residence where the total area of the land upon which the housing unit is situated exceeds one-half hectare. In particular, you would like to know if the taxpayers in a specific situation are able to designate the entire property as their principal residence.

More specifically, you describe a situation where, to enjoy country living, the taxpayers purchased a residence in a rural area in which they have lived since XXXXXXXXXX. The residence is situated on 5 acres of land which is partially zoned as “Greenlands,” meaning it is permitted to be used for parks or conservation purposes. As well, a portion of the land is located and zoned as part of the “XXXXXXXXXX.” Throughout the full ownership period of the property by the taxpayers, a severance restriction mandated by the province was in effect. The taxpayers used a portion of the property for farming, more specifically to grow fruits and vegetables for personal enjoyment and consumption by the taxpayers’ family and friends. The property was also used for a variety of recreational activities, such as skating, fishing, and horse riding.

Our Comments

This technical interpretation provides general comments about the provisions of the Income Tax Act (the “Act”) and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R11, Advance Income Tax Rulings and Technical Interpretations.

The CRA’s general views on claiming the principal residence exemption are set out in Income Tax Folio S1-F3-C2, Principal Residence (“Folio”). In general, if a property qualifies as an individual’s principal residence, he or she can use the principal residence exemption to reduce or eliminate a capital gain that otherwise occurs, for income tax purposes, on the disposition (or deemed disposition) of the property.

The term “principal residence” is defined in section 54 of the Act and sets out, among others, the various criteria for a housing unit and the land it is situated on to qualify as a principal residence. Paragraph (e) of the definition generally deems the principal residence to include the land upon which the housing unit stands and any portion of surrounding or adjoining land that can reasonably be regarded as contributing to the use and enjoyment of the housing unit as a residence. However, any land in excess of one-half hectare, including the area on which the housing unit stands, is deemed to not contribute 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.

Paragraphs 2.33 to 2.35 of the Folio discuss the circumstances in which land in excess of one-half hectare (“excess land”) is necessary to the taxpayer’s use and enjoyment of a housing unit as a residence. As indicated in paragraph 2.33 of the Folio, “the excess land must clearly be necessary for the housing unit to properly fulfill its function as a residence and not simply be desirable. Generally, the use of land in excess of one-half hectare in connection with a particular recreation or lifestyle (such as for keeping pets or country living) does not mean that the excess land is necessary for the use and enjoyment of the housing unit as a residence.

However, paragraph 2.34 of the Folio provides the following factors that may be relevant in determining whether excess land is necessary for the use and enjoyment of the housing unit as a residence:

* 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;

* where the location of a housing unit requires such excess land in order to provide its occupants with access to and from public roads; and

* a minimum lot size or a severance or subdivision restriction.

As set out in paragraph 2.35 of the Folio, if a minimum lot size or severance or subdivision restriction existed in any given year during which the taxpayer owned the property, the land area in excess of one-half hectare would normally be part of the principal residence for that particular year.

If it is determined that a minimum lot size or severance restriction was released in a particular year (regardless of whether the taxpayer actually took steps to sever the land), the excess land will generally no longer be considered necessary for the use and enjoyment of the housing unit as a residence for that year and any subsequent years of ownership where the restriction was no longer in place. It will then be necessary to determine, based on the formula in paragraph 40(2)(b) of the Act, the portion of the taxpayer’s capital gain that will be exempt from tax for the years that the property qualified as the taxpayer’s principal residence.

Where a portion of the property is used to earn income from a business or property, such portion will not usually be considered to contribute to the use and enjoyment of the housing unit as a residence. Notwithstanding the fact that a severance restriction may have existed in any given year, if it is determined that any portion of the property was used primarily for income-producing purposes (such as farming), then such portion of the property will not be considered to be necessary for the use and enjoyment of the housing unit as a residence. The fact that a severance restriction was in place on the portion of the property will not be relevant to the principal residence determination for that particular year.

Accordingly, the determination as to whether a particular housing unit and any excess land are considered to be a principal residence for a year requires an annual determination. Such determination is a question of fact and the onus is on the taxpayer to establish how much, if any, of the excess land is necessary for the use and enjoyment of the housing unit as a residence.

We trust that these comments have been of assistance.



Yours truly,



Sandro D’Angelo, CPA, CMA
Acting Manager
Business and Capital Transaction Section
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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