Eugene is a guy with problems related to his home. First, he's in a battle with his neighbours and township over his property. You see, his property is packed with six large pieces of old construction equipment, eight old rusted-out cars, more than a dozen 55-gallon drums, a two-storey shed, four large, broken satellite dishes and a three-metre fence at the back of his property. "Sure, my yard could use a little cleaning up," he said to me one day.
His other problem is that he's been told if he ever sells his two-hectare property for a profit, he won't be able to shelter the full capital gain from tax because the property is too big.
I can't help Eugene much with his junkyard battle. But his tax problem - well, I've got an idea for him. His landscaping - and yours - can make all the difference.
The rules
You're probably aware that when you sell your principal residence it's generally possible to shelter all or a portion of any capital gain on the sale from tax. Now, different types of properties can qualify here, including a house, an apartment a condominium, mobile home or houseboat, among other less common properties.
In order to call a property your principal residence it's important that the place be ordinarily inhabited each year by you, your spouse, common-law partner, former spouse or common-law partner, or a child of yours. "Ordinarily inhabiting" a residence isn't a tough test to meet. There are no hard and fast guidelines here, except that the taxman has said living there for just a short time in the year (for example, during your vacation time) should do the trick.
Keep in mind that just one residence can be designated as a principal residence for each family unit for each year. A family unit consists of spouses (those who are married, living in a common-law relationship, same-sex or not) and any unmarried children under 18.
There's another catch here: Our tax law restricts the amount of land that can qualify as part of your principal residence to half a hectare. If you own more land than this, there's some good news. If you can demonstrate that the land in excess of half a hectare is necessary for the use and enjoyment of the property as a residence, the excess may still qualify for the principal residence exemption and be sheltered from tax.
The strategy
The Canada Revenue Agency (CRA), in Interpretation Bulletin IT-120R6 (available at cra.gc.ca) provides examples of instances in which the excess land may be "necessary" for your use and enjoyment of the property as a residence. The CRA says that "land in excess of one-half hectare may be considered necessary where the size or character of a housing unit together with its location on the lot make such excess land essential to its use and enjoyment as a residence, or where the location of a housing unit requires such excess land in order to provide its occupants with access to and from public roads."
So, the way in which you landscape and lay out your property could save you tax.
Consider two neighbours with identical properties that are larger than half a hectare. Neighbour A locates his residence near the front of the property with a short driveway to the road, and has very little behind his residence except a few bushes and shrubs close to the residence. CRA could take the view that the any excess land behind the bushes and shrubs will not qualify for the principal residence exemption because it's not part of the living area and is not necessary.
Now consider Neighbour B, who occupies more of his property. His home is set back from the road further and his driveway is much longer. He has landscaping, including a pool, in the backyard which is set back from the residence and occupies more space. He has taken advantage of CRA's policy that land in excess of half a hectare may be necessary based on the location of the residence on the property and the need to use some of that land to provide access to public roads.
Now, you'd be wise to read through IT-120R6 and visit a tax pro before redoing your landscaping to increase the portion of your property that can be sheltered from tax. Having said this, a little planning could save you a lot of tax dollars later.
Tim Cestnick