The Queen v. Augart, 92 DTC 6610, [1992] 2 CTC 412 (FCTD)

Strayer, J.:—This is an appeal by Her Majesty the Queen of a decision of the Tax Court of Canada mailed on March 7, 1989 in which the Tax Court held that the whole of an 8.99 acre property upon which the plaintiff had his residence, and which he sold on August 31, 1980, constituted part of his principal residence and therefore none of the proceeds was subject to capital gains taxation.

Facts

The defendant bought a parcel of 8.99 acres on the southwestern outskirts of Calgary in 1966. The property had a house on it and he and his wife resided there until 1980 when the property was sold. At the time he purchased it the property was in an area designated ''Country Residential" under a Calgary zoning by-law which required for dwellings in areas of this designation a minimum lot size of three acres.

Apart from the house there were other buildings on the property built or acquired by the defendant. These included a barn, a greenhouse, and some sheds. There was a paddock on the east side of the property of one to two acres where the defendant from time to time kept riding horses for the personal use of himself and his wife. Approximately the western half of the property consisted of a pasture which was used in part for the defendant's personal horses and in part for temporarily accommodating horses boarded by the defendant for Calgary owners. According to the evidence of the defendant, he carried on the business of an egg jobber on his property. This consisted of buying eggs from producers and wholesalers, sorting them and selling them to large purchasers such as restaurants, stores and farmers' markets. He also said that he carried on farming business on the property. According to him, his farming business consisted of raising and selling, from time to time, pigs, horses, turkeys, etc. and boarding horses. By the calculations of counsel for the plaintiff, based on the claimant's statement of farming income and losses for 1980 and 1981, some 92 per cent of his gross income in 1980 and 94 per cent in 1981 came from egg jobbing. Counsel for the defendant did not dispute these calculations. The evidence was also clear that virtually all activity on the property involved with egg jobbing occurred in the garage attached to the house.

On March 31, 1980, a new bylaw came into effect redesignating this area as "Urban Reserve" requiring that thereafter detached dwellings would have to be on 80 acres of land. However it permitted non-conforming uses to continue where dwellings had been lawfully built on less land prior to March 31, 1980.

In 1980, the city of Calgary, needing a portion of this land for highway purposes, purchased the whole of the 8.99 acres for $899,000. In that same year the claimant purchased two other properties, a four acre parcel in or near Calgary on which he still resides and a parcel of 196 acres west of the city. Throughout this period he also owned 640 acres at Raven, Alberta, and leased other lands including, at the time he occupied the 8.99 acres, land immediately adjacent to it. These other lands were used for grazing animals. Some of these animals were, apparently his own, being breeding stock or raised for sale, as well as the horses which he boarded for Calgary people.

In his income tax return for 1980, the defendant claimed with respect to the proceeds of sale of the 8.99 acre parcel that his principal residence consisted of the house and one acre of immediately contiguous land and that the remainder of that parcel had been used for his farming business. He elected under subsection 44(1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72,

c. 63) (the "Act") to treat the four acre and 196 acre parcels acquired in 1980 as replacement properties for the remaining 7.99 acres sold to the city of Calgary which he said had been used primarily for farming. After several reassessments, the position taken by the Minister in a reassessment of April 14, 1987, was that the three acres of land immediately contiguous to the house should be treated as part of the defendant's principal residence (the proceeds thus not being subject to capital gains tax) but that the rest should be subject to tax. In effect, the Minister rejected the claim that the remaining portion of the 8.99 acre parcel was a“ "former business property” as defined in subsection 248(1) for the purposes of paragraph 44(1)(b) of the Act. The Minister also rejected the claim that the four acre or 196 acre parcels were replacement properties in respect of the operation of that business within the meaning of paragraphs 44(5)(a) and (b) of the Act.

On appeal to the Tax Court of Canada, it was held, on the basis of the Federal Court decision in The Queen v. Yates, [1] that in determining how much property in excess of one acre is necessary for the use and enjoyment of a housing unit as a residence for the purpose of defining a" principal residence” as provided in paragraph 44(g) of the Income Tax Act, one must look to the minimum amount of property legally required for a residence at the time of its disposition. As the bylaw at the time of disposition required new dwellings in this area to have 80 acres, it was held that the whole of the 8.99 acres must be regarded, objectively, as part of the principal residence. The plaintiff appeals from that decision.

Issues

It is agreed that the issues are as follows:

1. Does the objective test as set out in Yates require that the whole of the 8.99 acres be treated as part of the principal residence?

2. If not does it require that some lesser amount be treated as part of the residence?

3. By applying a subjective test based on the use actually made of the property, is it established that the whole or part of the property was necessary to the use and enjoyment of the housing unit?

4. If not, was all the parcel beyond the three acres conceded by the Minister to be the principal residence primarily used in the defendant's business?

and

5. If so, was the 196 acre parcel acquired by the defendant in 1980 a replacement property for that portion of the 8.99 acre parcel? (There was no suggestion at this stage that the four acre parcel was a replacement property).

Conclusions

With respect I believe that the learned judge of the Tax Court misconstrued the meaning of the Yates decision in holding that it required treating the whole of the 8.99 acres here as part of the principal residence. My understanding of the principle in Yates is that the minimum amount of land which the taxpayer is legally obliged to have in connection with his residence at the time of disposition of the property establishes objectively the amount of land associated with the "principal residence". As it happened, in that case the taxpayer had never owned more than the ten acres required as a minimum for a residence when he acquired it. When the bylaw was later amended to raise the minimum to 25 acres it preserved the legality of non-conforming use of those properties which conformed to the earlier bylaw. Therefore at the time of disposition the minimum amount upon which the taxpayer could have resided was ten acres and the determination of the amount of property constituting the principal residence was Calculated on that basis.

In the present case the minimum amount of property upon which the taxpayer was entitled to have a residence in 1980, after the by-law had been amended, was the minimum permitted by the previous bylaw. It was holdings which conformed to the minimum of the previous by-law, namely those of three acres, whose legality was continued by the” grandfather” provision in the 1980 by-law. It is true that the taxpayer here had always owned more than the minimum but the 5.99 acres in excess of that minimum would not, objectively, have been regarded as part of the principal residence prior to the adoption of the by-law on March 31, 1980. Presumably, the taxpayer could have disposed of that remaining property for residential purposes prior to the adoption of the new by-law. I see no reason why, with the adoption of the new by-law, the taxpayer should suddenly become entitled to a windfall of an additional 5.99 acres of principal residence when he was quite legally entitled, by virtue of the non-conforming use provision to continue to reside on three acres after the coming into force of the by-law and at the time of the actual disposition. I think this conclusion is also consistent with The Queen v. Joyner. [2]

Therefore the Yates decision properly applied means that objectively the minimum amount of land associated with the principal residence would be three acres, the minimum amount which the owner of any residence in this area was entitled to continue to live on as a non-conforming use under the bylaw of March 31, 1980.

One may still look to see whether by a subjective test — i.e., in terms of the use actually made by the taxpayer of the property — he is entitled to claim more than three acres as necessary to the use and enjoyment of the housing unit. I am satisfied that the taxpayer has not met the burden of proof placed on him by paragraph 54(g) of the Income Tax Act to show that a larger area was "necessary to such use and enjoyment". There is really nothing to suggest that the house could not have been lived in quite conveniently on a property of three acres. [3] Counsel for the taxpayer conceded that to establish a need for use of more property one would have to argue that it was necessary to a“ life style” of the taxpayer and his family. More specifically, the taxpayer kept riding horses for the use of himself and his wife and this required extra space for paddocks and perhaps a shed or two. No jurisprudence was brought to my attention supporting the requirements of a "life style” not directly connected to the use of a house as being necessary to the use and enjoyment of the principal residence. I do not accept that one can extend by this means the amount of property necessary for the use and enjoyment of a dwelling.

With respect to the taxpayer's claim that the remainder of the land was being used primarily in the defendant's farming business, I do not find this substantiated. Virtually all the meaningful economic activity carried on by the defendant on this land, from which over 90 per cent of his gross income was earned, consisted of egg jobbing. This was all done at the house itself in the attached garage. The rest of the activity on the land, together with all the taxpayer's other farming activities, carried on for the most part on more substantial holdings elsewhere, seemed to have yielded very little by way of gross income and it is difficult to see that they yielded any net income. The taxpayer has wholly failed in my view to demonstrate that he carried on any significant farming business on the remainder of the 8.99 acres beyond the three acres recognized as principal residence. Therefore he is not entitled to treat the 196 acre parcel acquired by him in 1980 as a replacement property for a "former business property" since the former property in question was not used by him ” primarily for the purpose of gaining or producing income from a business "as required by the definition in subsection 248(1).

The appeal is therefore allowed with costs.

Appeal allowed.