Fourt v. The Queen, 91 DTC 5631, [1991] 2 CTC 311 (FCTD)

Strayer, J.: —

Relief Requested

This is an appeal against a reassessment by the defendant of the plaintiff's income tax for her 1982 taxation year, in respect of the gain realized by her in the disposition of Lot 77, Section 31, Nanaimo District, Gabriola Island, Plan 23760.

Facts

At the time of disposition, the plaintiff owned this lot as well as the adjacent Lot 76, all part of a subdivision of approximately 100 lots. Lot 76 is approximately 105 feet wide and Lot 77 is 100 feet wide. Their sides vary in length from 214 to 223 feet. Their sides run on a north-easterly/south-westerly axis, the south-west ends facing onto a road called Wild Cherry Terrace. The north-east ends commence to slope away toward the sea which is approximately one mile away, and those ends of the lot afford a splendid view over the Strait of Georgia toward the mainland of British Columbia.

The background facts are not in dispute. In 1971 the plaintiff and her husband entered into an agreement to purchase Lot 76. They initially purchased it as a campsite and they paid approximately $4,000 for it in instalment payments. In 1973 or 1974 they built a cottage on it with the help of friends. By 1975 they had completed paying for Lot 76 and they also bought Lot 77 for $10,000, acquiring title to both lots in June of that year. Up until this time they had lived in Victoria and used the Gabriola property simply as a vacation site. At about that time Mr. Fourt left his employment as a bank manager in Victoria and bought a share in a business in Nanaimo. They decided to live on Gabriola. They originally intended to build a house on Lot 77 but eventually decided to add on instead to their cottage on Lot 76. This they did by stages commencing in 1975 and continuing to build for two or three years. While the house was built entirely on Lot 76 they built a storage shed on Lot 77 to enable them to store the furniture from their house in Victoria, which they had sold in the meantime, until the house was completed. They installed an incinerator on Lot 77 and an outhouse for use during power failures and when they had an excess of visitors. They had some lawn on Lot 77 and some parking area although their principal driveway was on Lot 76. The well and a garden shed were also on Lot 76. The plaintiff testified that one of the reasons for buying Lot 77 was to preserve the quietness and privacy of Lot 76.

While both lots had originally been in the joint names of the plaintiff and her husband, in 1980 they were transferred into her name alone. Various mortgages were put on the property for the purpose of financing the business ventures of the plaintiff's husband. These were consolidated in 1982 into a mortgage on Lot 76 alone. The lots were appraised in 1982 with values being fixed at $160,000 for Lot 76 and $70,000 for Lot 77. In that year Lot 77 was transferred to Cowell Investments Ltd. in consideration of the transfer of shares in ABC Electric Ltd., a business in Victoria, to the plaintiff's husband. The value of $70,000 was given to Lot 77 for this purpose.

The plaintiff did not report any capital gain in respect of the sale of Lot 77 in her income tax return for 1982. By notice of reassessment of July 9, 1986 the defendant reassessed her 1982 income, assessing a taxable capital gain of $30,000 on the disposition of Lot 77, on the basis that the capital gain was $60,000 representing the difference between the purchase price of $10,000 of Lot 77 and its disposition price of $70,000. The plaintiff took the position that Lot 77 was part of her “principal residence" at the time of its disposition and therefore the proceeds of disposition were exempt from capital gains. She appealed to the Tax Court of Canada which dismissed her appeal on June 8, 1988 ([1988] 2 C.T.C. 2060; 88 D.T.C. 1420). She then appealed to this Court.

Issue

Paragraph 54(g) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") provides as follows:

54.(g) “Principal residence" of a taxpayer for a taxation year means a housing unit . . . owned . . . in the year by the taxpayer. . .

(v) for the purpose of this paragraph the principal residence of a taxpayer for a taxation year shall be deemed to include, except where the property consists of a share of the capital stock of a co-operative housing corporation, the land subjacent to the housing unit and such portion of any immediately contiguous land as may reasonably be regarded as contributing to the taxpayer's use and enjoyment of the housing unit as a residence, except that where the total area of the subjacent land and of that portion exceeds 1/2 hectare, the excess shall be deemed not to have contributed to the individual’s use and enjoyment of the housing unit as a residence unless the taxpayer established that it was necessary to such use and enjoyment . . . .

It is agreed that the total surface area of these two lots together would be less than 1/2 hectare. It must therefore be determined whether Lot 77 may be regarded as "contiguous" to the land subjacent to the house on Lot 76 and if so whether it "may reasonably be regarded as contributing to the taxpayer's use and enjoyment. . .” of that house as a residence.

Conclusions

With great respect, it appears to me that the learned trial judge in the Tax Court of Canada focused on the wrong issue. After reciting the facts he made the following observation at 2062 (D.T.C. 1421):

From the appellants subjective viewpoint, certainly the use and enjoyment by her of the space afforded by the adjacent Lot 77 is a matter to be considered. But was it necessary to the use and enjoyment of her home on Lot 76?

[Emphasis added.]

He then went on to consider the decision of Eric Rode and Elizabeth Rode v. M.N.R., [1985] 1 C.T.C. 2324; 85 D.T.C. 272 (T.C.C.) which was a case involving the disposition of some 9.3 acres of land where, of course, the burden was on the taxpayer to show that any amount in excess of 1/2 hectare was "necessary" to his use and enjoyment of the housing unit. After considering that case, the learned judge concluded with respect to the present set of circumstances as follows:

From the outset the appellant really dealt with Lot 77 for what it was—a legal entity. For instance, the title thereto was encumbered by a registered judgment in 1980 which was subsequently removed with the proceeds of a mortgage placed on Lot 76. The facilities placed on Lot 77 could have as easily been located on the "home lot” Lot 76. The sale of the adjoining Lot 77 did not affect the appellants use and enjoyment of Lot 76 where her residence was located. Though the use of the space provided by Lot 77 may have been convenient and enjoyable it was not necessary to the appellant’s "use and enjoyment of the housing unit as a residence" within the meaning of paragraph 54(g).

Thus it will be seen that while the learned judge considered that the use of Lot 77 may well have been convenient and enjoyable for the plaintiff he dismissed her appeal because that lot was not "necessary" to the use and enjoyment of the housing unit. He thus applied the test appropriate for the disposition of land in excess of 1/2 hectare whereas the land in question here was less than 1/2 hectare.

Counsel referred me to only one reported decision under subparagraph 54(g)(v) involving the disposition of land of less than 1/2 hectare. This was the case of Johnstone v. The Queen, [1988] 1 C.T.C. 48; 88 D.T.C. 6032 (F.C.T.D.) where my colleague Muldoon, J. decided that, in reference to a strata-title duplex built by the taxpayer, the disposition of the lower unit prior to the occupation by the taxpayer of the upper unit did not amount to the disposition of part of a "principal residence". The facts of that case were extraordinary and of little relevance to the present circumstances. The unit in question had never been used in any way by the taxpayer prior to its disposition and it had clearly been built with a view to disposition.

I must therefore seek, without much guidance from the jurisprudence, to give subparagraph 54(g)(v) an appropriate meaning in the present context. Two observations can be made. Firstly, the burden of proof on the taxpayer in respect of the disposition of land under 1/2 hectare is very considerably less than the burden of proof in respect of land of more than 1/2 hectare. There is a common thread running through both, namely that it must be shown that the land disposed of contributed to the "use and enjoyment of the housing unit as a residence". But it is sufficient in respect of the smaller dispositions to show that the land disposed of "may reasonably be regarded as contributing" to that use and enjoyment, whereas in respect of the larger dispositions the taxpayer must establish that it was “necessary to such use and enjoyment". Secondly, it appears to me that the actual use and enjoyment made by the taxpayer of the property is considerably more important in the application of the test with respect to dispositions of land of less than 1/2 hectare. I need not enter the debate as to whether the test of what is "necessary" in respect of larger dispositions is an objective or subjective test. With respect to the test for smaller dispositions, however, the only requirement is that the land disposed of “reasonably be regarded as contributing”. The word "reasonably" implies some kind of objective test in the sense that the Court is not obliged to indulge the most extravagant or fanciful views of a taxpayer as to how contiguous land contributes to the use and enjoyment of her residence. But where there is credible evidence, as there is here, of actual use and enjoyment by the taxpayer of the contiguous land in connection with her house, and such use and enjoyment is not of an exaggerated or unnatural sort, a great deal of weight must be attached to it in assessing whether such use can be reasonably regarded as contributing to the taxpayer's use and enjoyment of his residence. [1] It is not for the officials of the Department of National Revenue, nor for the courts, to be the arbiters of lifestyles chosen by taxpayers. We must resist the temptation to reject too readily the taxpayer's choice of what contributes to the use and enjoyment of his residence just because others might choose differently: in particular we are not entitled to reject the taxpayer's claim that certain land contributed to the use and enjoyment of his residence simply because in our view such land was not necessary to that use and enjoyment. The latter test is appropriate only for dispositions of holdings totalling more than 1/2 hectare.

In the present case the plaintiff gave very credible evidence that she and her husband bought Lot 77 to provide them with additional space and privacy. Although they had intended to build a house on it, they kept it and did make use of it. While its use as space for a storage shed, an outhouse, an incinerator, some lawn and parking was obviously not essential to the use and enjoyment of the house on Lot 76, it clearly contributed to that use and enjoyment. It is true, as counsel for the defendant implied, that all of these uses could have been accommodated on Lot 76. It is also true that after the sale of Lot 77 in February 1982 the plaintiff continued to live in the house on Lot 76 until early 1983 and was able to rent the house to a tenant until 1990 when it was sold. There was nothing to suggest that the plaintiff or her tenant suffered any particular hardship in being limited to Lot 76. Nevertheless, that is not the test for whether a portion of land may reasonably be regarded as contributing to the taxpayer's use and enjoyment of his or her housing unit. What is important is that Lot 77 did in the plaintiff's view contribute to her use and enjoyment of her house and that view cannot be characterized as exaggerated, fanciful or unnatural. Therefore Lot 77 can reasonably be regarded as so contributing to that use and enjoyment and I so find.

Counsel for the defendant also argued that Lot 77 could not be said to oe “immediately contiguous land" in relation to the housing unit. It will be noted that subparagraph 54(g)(v) includes as part of the principal residence

. . . the land subjacent to the housing unit and such portion of any immediately contiguous land as may reasonably be regarded as contributing . . . .

Although counsel was apparently prepared to concede that land contiguous to the land underlying the house could be contiguous up to the unit property line, namely the boundaries of Lot 76, she contended that there was no basis for regarding Lot 77 as being contiguous thereto even though it was immediately adjacent. More broadly, the argument appeared to be that for land to be contiguous to the land subjacent to a housing unit it must form part of the smallest legally divisible unit of land upon which the house sits. Elaborating on this, it was pointed out that there were some 100 lots in this subdivision, most of them approximately of the same size as Lots 76 and 77. These were sold as building sites for homes and therefore only the area of an individual lot could be considered contiguous to a house built on such a site. That is not what subparagraph (v) says, however, and I do not think that an intention can be ascribed to Parliament to limit the natural meaning of “contiguous” in this way. Such a limitation could have easily been spelled out in the Act and it would have greatly simplified the work of assessment officers and of the courts: "principal residence” could simply have been defined as including only the minimum amount of land on which local authorities would permit the housing unit to stand. I also respectfully draw support for my conclusion from the very lucid judgment of the Tax Court of Canada in Wallace Estate v. M.N.R., May 3, 1990, Court file 89-1479(IT) (unreported). That case also involved two legally separate adjacent lots, but with a total area of over 3.3 acres being more than /2 hectare. The taxpayer had to show not only that the second lot contributed to the use and enjoyment of the house which was on the first lot but that it was "necessary to such use and enjoyment". The evidence clearly showed to the satisfaction of the judge that the second lot was "necessary" in this sense, even though legally the lots could have been sold separately and physically the house would nave survived with certain modifications to the grounds. In other words the existence of two legally separate lots did not preclude the second lot from being contiguous to the lot upon which the house stood. A fortiori it should not in the present case, involving less than /2 hectare, preclude Lot 77 from being contiguous to the land subjacent to the house on Lot 76.

I am therefore allowing the appeal with costs.

Appeal allowed.