The Canada Revenue Agency (CRA) was asked to comment on the availability of the principal residence exemption (PRE) when a previously occupied property is destroyed by fire and a decision is made to sell the property in a later year.
The taxpayer purchased a house in 2010 which was ordinarily inhabited as a principal residence. In 2016, the house was completely destroyed by a fire and the taxpayer decided to move rather than rebuild. It is the taxpayer’s intention to sell the vacant land in 2017.
The term “principal residence” is a defined term in the Income Tax Act (Canada) and provides the conditions which must be met for a property to qualify. The definition is worded in such a way to include the land upon which the housing unit stands and any portion of the adjoining land that can reasonably be regarded as contributing to the use and enjoyment of the housing unit as a residence. However, where the total area of the adjoining land exceeds 1/2 hectare, the excess is considered 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.
In their view, the CRA would not consider the vacant land (that is, after the fire and before a 2017 sale) to have met the conditions for claiming the PRE. However, with the one-plus rule in the formula used to calculate the PRE, it may be possible for the taxpayer to eliminate any capital gain arising on the sale of the vacant land in 2017.