Written on May 21, 2013 – 7:00 am | by Steven Frye
Sometime ago I wrote about the availability of the principal residence exemption to trusts for example a cottage trust under certain circumstances.
Did you know there is a limit to how much land you can include in a principal residence exemption?
Normally an exemption would include land of up to one-half hectare, roughly 1.25 acres. If the land exceeds that size, you must demonstrate that the excess land is “necessary for the use and enjoyment of the housing unit as a residence”. Generally, you would have to rely on municipal bylaws restrictions regarding the severance of land to make your case that the land cannot be severed. Using a lifestyle defense for the excess land will not normally work. Any sort of commercial activity on the excess land would certainly weaken your case in this regard as well.
If you cannot make case for the excess land as part of your principal residence, the excess land will not qualify for the principal residence exemption and it will necessary to calculate the gain on the non-qualifying portion separately and to pay tax on it.
And it gets worse. There may be HST implications to the excess land. The applicable rule in the Excise Tax Act if engaged may apply to deem that the principal residence and the excess land are separate supplies. The effect of deeming the excess land to be a separate supply may be such that, while the supply of the principal residence is an exempt supply, the supply of the excess land could be taxable i.e. subject to the applicable rate of HST.
Thanks for reading