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Yes. A deemed separate asset under subsection 160P(6) can qualify for the principal residence exemption under section 160ZZQ.

Under subsection 160ZZQ(12), a disposal of a dwelling that was, throughout the taxpayer's period of ownership, the sole or principal residence of that taxpayer does not give rise to a capital gain or loss.

By subsection 160ZZQ(1), a 'dwelling' includes a unit of residential accommodation constituted by, or contained in a building.

Paragraph 160ZZQ(3)(a) extends the meaning of 'dwelling' to include adjacent land up to 2 hectares used primarily for private or domestic purposes in association with the dwelling. In the context of subsection 160ZZQ(3), 'land' has its common law meaning and includes any structure attached to land so as to become a fixture on the land.

Accordingly, while an improvement to a residence can be a separate asset for the purposes of subsection 160P(6), it can still be part of a 'dwelling'. The dwelling may actually include the improvement (e.g. an extension to a house) or the dwelling may be deemed by subsection 160ZZQ(3) to include the improvement. A disposal of that separate asset as part of the dwelling may then be subject to the section 160ZZQ exemption on disposal. Example 1 In 1984 Jack buys a home. In 1987 he extends the home by adding 2 rooms. This results in a capital improvement to the home that is deemed to be a separate asset under subsection 160P(6) on disposal. Because the improvement is part of the 'dwelling' as defined in subsection 160ZZQ(1), subsection 160ZZQ(12) exempts any capital gain attributable to the capital improvement. Example 2 In 1982 Mary buys a home on 0.5 hectares of land. She has an outdoor swimming pool built and associated landscaping done in 1995 for private use. This results in a capital improvement to the house and land that qualifies as a separate asset under subsection 160P(6). Subsection 160ZZQ(3) deems Mary's home to include the pool and landscaping because they are on adjacent land, the property is less than 2 hectares, and the improvements are used privately in association with the dwelling. Subsection 160ZZQ(12) exempts any capital gain attributable to the capital improvement.