Capital Gains on Principal Residence for Large Lots

Generally people seem to know that there is no capital gains tax on the sale of your principal residence. However, one interesting, not commonly known exception relates to properties exceeding .5 hectare (1.25 acres) of land. The CRA only considers land to be your primary residence up to these parameters. Any land exceeding the .5 hectares is not considered to be required for you own personal use and enjoyment of the property. The onus is then on the taxpayer to prove to the CRA that the additional land is necessary.

One factor considered by the CRA is if your property can be subdivided. If you are not legally allowed to sever part of the property, you are more likely for your claim that the entire property is principal residence to be accepted.

Another factor is if your municipality requires minimal lot sizes that would forbid you from reducing your property to remove the excess land beyond the .5 hectares. However, if there are applications that exist for you to be excluded from this, then you are no longer automatically considered 100% principal residence if you did not try to sever the excess land.

The CRA goes as far as explicitly stating that the extra land cannot be considered necessary for needing space for pets to run around or for general ‘country living.’ They clearly state that the excess land must be needed for the house to function as a residence and not simply be an added benefit of owning a larger lot. For example, the extra land is required for access to public roads due to the geography of the property.

As well, any area of your property used to earn income is not considered part of your use and personal enjoyment. Therefore if you rent out a portion of your home, you need to carefully consider how the rules are different for you upon disposition of your property and determine whether or not you are entirely exempt for the capital gains tax.

To determine the amount of the capital gain associated with the excess land, you do not simply calculate what the entire capital gain on the property would be and divide out accordingly. Instead, you need to obtain an appraisal for the excess property to determine the specific capital gain to be attributed to the area.