Selling Part of Your Lot in Canada: Is the Severed Land Exempt?

You own a house on a large lot, and someone wants to buy a slice of it. Maybe the municipality has approved a severance, or a neighbour wants the back yard. The question is whether the profit on that slice is tax-free because it is part of your home.

The answer turns on how much land your home needs, how the land was used, and how you report the sale. This article walks through the general federal rules from the Canada Revenue Agency (CRA) so you know what to ask your accountant or lawyer.

This article covers Canadian federal tax law, which applies in every province.

What counts as part of your principal residence

A principal residence is a housing unit that you own, alone or jointly with someone else, and that you or a spouse, common-law partner, former spouse or partner, or child ordinarily inhabited in the year. The land under and around the house can be part of it, but only up to a point.

Land of one-half hectare or less, including the area under the housing unit, is usually accepted as contributing to residential use. Land above that is generally not part of the principal residence unless it was necessary for use and enjoyment of the home as a residence, for example because municipal minimum-lot or severance rules require that much land. Land used to earn income generally does not qualify.

Sheltering a partial sale

When you sell only part of the property, such as a severed lot, the whole property can be designated to shelter that partial disposition, and any portion that does not qualify is taxed separately. In practice, the lot may be fully sheltered, partly sheltered or not sheltered, depending on the facts.

Whether the severed piece was truly needed for the home, and how a cost base is divided between the part sold and the part you keep, are matters where an accountant or lawyer can look at your survey, approvals and history.

How the gain is worked out and reported

A capital gain is the proceeds of disposition minus the adjusted cost base and the outlays and expenses of the sale, such as legal fees, transfer taxes and advertising. Half of the capital gain is taxable. Adjusted cost base generally includes the cost of the property, acquisition expenses such as commissions and legal fees, and capital expenditures such as additions and improvements, but not current expenses such as maintenance and repairs.

Since the 2016 tax year, the sale of a principal residence must be reported on Schedule 3 of the T1 return even if there is no gain or the whole gain is exempt, and CRA allows the exemption only if the disposition and designation are reported. You designate the property and calculate any gain on Form T2091(IND). If the sale is of land and building, the selling price must be split between them on Schedule 3.

Things that can change the result

• Flipping: a gain on a housing unit in Canada, or a right to acquire one, owned or held less than 365 consecutive days before disposition is deemed business income, and the exemption does not apply. This applies to dispositions after 2022. There are exceptions, such as a disposition due to death, serious illness, a marriage breakdown or an eligible relocation.
• Vacant land years: years in which the property was vacant land count in the denominator of the exemption formula but not in the numerator, so they reduce the exempt fraction.
• Co-owners: each co-owner reports their own share and designates the property separately, and each can designate only if no other property is designated for their family unit that year.
• One home per family unit: only one property per family unit can be designated for each year from 1982 onward. A spouse or common-law partner separated for the whole year under a court order or written separation agreement is not in the same family unit for that year.

What to do next

• Gather your purchase documents, survey, severance approval and any records of improvements.
• Note how many years you owned the property and whether any part was rented, farmed or used for business.
• Check whether another property was designated for your family unit in the same years.
• Confirm the timing of the sale against the 365-day flipping rule if you bought recently.
• Have an accountant or lawyer review the numbers before you file Schedule 3 and Form T2091(IND).

If you forget to designate in the year of sale, you can ask CRA to amend that year's return. CRA may accept a late designation, but a penalty may apply.

Frequently asked questions