My wife, Carolyn, loves to work in the garden. I've never been as keen. I grew up believing that gardening was anything but macho. Just last week Carolyn took me to the local garden centre. I went reluctantly, but I enjoyed spending time looking at the mowers, tools, and other pieces of heavy equipment. You see, in the past, Carolyn would give me a job to do in the garden, and I'd do it with as much horsepower as possible. Oh, I've always appreciated beautiful landscaping. There are three or four golf courses nearby that I visit as often as I can. And I must say, Carolyn has done a wonderful job at our place.
Today, I've gained a new appreciation for proper landscaping and lot architecture. Why? Because it could actually save many Canadians tax. Let me explain.
In my last article, I spoke about the principal residence exemption. It's an exemption that may allow you to sell your home, or even a cottage or vacation property (but not a rental property) on a tax-free basis.
What type of property qualifies as a principal residence? Among less common things, a residence includes a house, apartment or unit in a duplex, condominium, cottage, mobile home, trailer or houseboat.
There are certain restrictions that could jeopardize your ability to claim the principal residence exemption in some situations. One of those restrictions is the half-hectare rule. You see, our tax law restricts the amount of land that qualifies as part of your principal residence to half a hectare (about 1.25 acres). The good news? There's an exception to this rule where 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.
In its interpretation bulletin IT-120R5, the CCRA provides some examples of where the excess land may be "necessary" for your use and enjoyment of the property as a residence. The CCRA says that "land in excess of one-half hectare could be so 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."
Hmm. Looks like a tax planning opportunity to me.
Where your property exceeds half a hectare in size, consider your landscaping and yard architecture carefully. With a little advance planning, you could save yourself significant tax dollars. Consider Lot 1, where the residence is located near the front of the property with a short driveway out to the road, and very little behind the residence but shrubs. CCRA could take the position that the area behind the shrubs does not qualify for the principal residence exemption because it's not part of the living area and is therefore not necessary for the use and enjoyment of the property as a residence. Now, consider Lot 2. This lot is different in that the living area occupies more of the property. The home is set back from the road and is located more in the centre of the property. The driveway is longer and occupies more space. The landscaping, including a pool, occupies more of the property as well. The owner of Lot 2 has taken advantage of CCRA'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.
Whaddya know? Your yard design could actually save you tax. Honey, pass me the shovel.
Tim Cestnick, CA, CFP, TEP is author of The Tax Freedom Zone and Winning the Tax Game 2003. He is managing director, National Tax Services, at AIC Ltd.
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