Principal residence exemption denied for sale of “wood lot” adjacent to home
The principal residence exemption generally exempts part or all of the capital gain from the sale of your home, depending on how many years it was your “principal residence”. In addition to your home, the land surrounding the building is included as your principal residence for this purpose if it can “reasonably be regarded as contributing to the use and enjoyment of the housing unit as a residence”. Typically, your driveway and front and back yards qualify as part of your “principal residence”.
However, if the surrounding land exceeds one-half hectare (about 1.24 acres), the excess will be considered part of your principal residence only if you can establish that the excess was necessary to contribute to your use and enjoyment of the housing unit.
In the recent Makosz case, the taxpayer bought a house on some land, and subsequently bought more of the surrounding land. The total land she owned exceeded one-half hectare. One part of the land, described as a “wood lot”, contained trees which were cut down to provide wood. The taxpayer claimed that wood from the wood lot was necessary for heating her house, which had a wood heating system, an electrical system and a gas fireplace. She subsequently sold the wood lot at a gain and attempted to shelter the gain using the principal residence exemption.
The CRA denied the principal residence exemption. The CRA was of the view that the taxpayer had not established that the wood lot was necessary for her use and enjoyment of the house. Upon appeal to the Tax Court of Canada, the Court agreed. They determined that the lot was not necessary for her use and enjoyment since the wood could have been obtained elsewhere.