Originally published on June 21, 2007


If a property qualifies as your principal residence, then you can use the principal residence exemption to reduce or eliminate any capital gain otherwise calculated.   With surging property values in much of Western Canada, anyone considering the sale of their residential farm or acreage properties should revisit their principal residence exemption as a means of minimizing or even eliminating the individual income taxes which might otherwise be calculated on its sale.

The term principal residence is defined in the Income Tax Act as a housing unit that is owned and ordinarily inhabited by you at any time during the year.  Furthermore, for 1982 and subsequent taxation years, only one property per family unit can be designated as your principal residence.  Generally when you sell your owner-occupied home, the gain on the sale of that home will be exempt from income tax if you elect it to be your principal residence.

If the land on which your home is situated is not more than one-half hectare (1.23 acres), then it will meet the default definition of a principal residence that is set out in the Income Tax Act.   The fly in the ointment is the evidence required to establish that land in excess of one-half hectare, including the area on which the housing unit stands is necessary for the use and enjoyment of the housing unit as a residence.

To illustrate, letís have a look at a few tax court cases.  The first one we will look at is the precedent case of The Queen versus Yates (F.C.T.D.) 83 DTC 5158.  In this case, Judge Mahoney made reference to both the objective and subjective tests in regards to the categorization of excess land.  The Defendants acquired a ten acre parcel of vacant land near Guelph, Ontario on which they built their home in 1964.  When they bought, the Defendants did not want ten acres; they wanted only enough land for their residence but had to buy at least ten acres.  In 1978, the Defendants sold 9.3 acres to the City of Guelph under threat of expropriation.  The 9.3 acres did not include the residence.  The Defendants continue to reside on the remaining 0.7 acre plus an adjacent 0.225 acre transferred to them by the City as part of the consideration for the 9.3 acres.



While Judge Mahoney stated that it may be possible to use a subjective test to determine the necessity of the adjacent land to the Defendantís use and enjoyment of their property as their principal residence, he concluded that it did not need to be applied.  Since the Defendants could not legally have occupied their housing unit as a residence on less than ten acres, it must be so regarded that the excess land was necessary to its own use and enjoyment.  Judge Mahoney referred to this as an objective test and went further by stating that if the taxpayer passes this test then ďit is unnecessary to consider the subjective.Ē

In the case of Carlile versus The Queen(F.C.A.) 95 DTC 5483, the Appellantís entire 32.75-acre parcel of land qualified for the principal residence exemption.  In Court, Carlile proved that she had met the objective test because the zoning by-law set a 25-acre minimum allotment size for her property, and the local authority would not have authorized a partition of her lot between 25 acres and the remainder.  Grace Carlile was sure to have smiled following the decision since it made her $1.8 million dollar sale of her property with an inherent cost of $98,000 exempt from income taxes.

In Augart versus The Queen (F.C.A.) 93 DTC 5205  the Appellant claimed the principal residence exemption on the sale of 8.9 acres of land which at the time of purchase in 1966, a zoning by-law had compelled him to buy in its entirety.  Since he was not allowed at any time to retain the minimum lot size of 3 acres prevailing in 1966 and sell the remaining acres, Judge Robertson cited the objective test and reversed an earlier courtís decision on appeal.  Mr. Augart was allowed to claim his principal residence exemption on 5 of his 8.9 acres of land which he sold to the City of Calgary for the princely sum of $899,000.

In closing the principal residence exemption doesnít often get the same glory as its more popular and prestigious cousin, the capital gains exemption.   However, if you were to speak to Yates, Carlile and Augart on this matter, it would be number one on their glory list.


Allyn Tastad, chartered professional accountant, is a partner in the accounting firm of Hounjet Tastad Harpham in Saskatoon at 306-653-5100, e-mail at or website All data and information provided is for informational purposes only. Readers are cautioned that laws and regulations are subject to change. Consult your accountant for current professional advice tailored to your situation.