The Queen v. Joyner, 88 DTC 6459, [1988] 2 CTC 280 (FCTD)

Reed, J.:—The issue raised by this appeal (trial de novo) concerns the extent to which certain sums, arising out of the sale of a property, are exempt from capital gains tax as attributable to the sale of the taxpayer's principal residence. These reasons apply to file T-1369-87 and to file T-1370-87.

The facts in this case are not in dispute. During the years 1965-1968, the taxpayer and his wife (hereinafter referred to as the "defendants") acquired, as joint tenants, 14 acres of land. There was on the property a house which the defendants occupied, until it was sold in 1980. As of December 31,1971 and, indeed, when the defendants first acquired the 14-acre property, it was zoned residential and could have been subdivided into half-acre lots. The property was contiguous to a residentially developed area. The defendants' intention, at all relevant times, was to sell the property for subdivision purposes.

In 1972 and early 1973, Orders in Council were passed pursuant to section 6 of the British Columbia Environment and Land Use Act, now R.S.B.C. 1979, c. 110. These Orders in Council (4473/72 and 157/73) applied to the defendants' property. As a result, after December 21, 1972, the 14-acre property could not be subdivided, and after January 18, 1973 it could not be used for purposes other than farming, unless authorization to do either of these was given. Such authorization might be given by an Order in Council or pursuant to a provision of some other Act (i.e. other than the Environment and Land Use Act, supra): refer to Order in Council 157/73.

In 1973, the Land Commission Act, S.B.C. 1973, c. 46 was enacted. It provided for the establishment of land reserve plans. The defendants' property was designated as included in an agricultural land reserve area. As with the earlier Orders in Council, the effect of this restriction was to prevent the defendants' property from being subdivided or being used for purposes other than farming. On March 8, 1975 the defendants applied to the Provincial Land Commission, which had been established by the Land Commission Act, supra, to have their 14-acre property removed from the agricultural land reserve. On October 6, 1975, removal of 7.9 of the 14 acres was granted; the rest of the 14 acres (i.e. 6.1 acres) remained subject to the agricultural land reserve restrictions. An appeal of the decision not to exempt the whole 14 acres from the reserve was launched; that appeal was not successful.

As of the October 1975 date, then, 7.9 acres of the defendants' 14-acre property could again be subdivided into residential lots. The defendants' residence was on this 7.9-acre parcel of land. In 1980 the defendants sold their residence and the 7.9 acres. They built a new residence on the adjacent 6.1 acres, the portion of the land still subject to the agricultural land reserve restrictions.

With respect to the sale of the 7.9 acres, the Minister’s assessment exempted the defendants from paying capital gains tax on the proceeds of that sale in so far as those proceeds were attributable to the house itself and to one acre of land subjacent and contiguous thereto. (This portion of the proceeds was clearly exempt from capital gains tax under the Income Tax Act, as being proceeds arising out of the disposition of the defendants' principal residence: see paragraph 54(g) of the Income Tax Act, R.S.C. 1952,

c. 148 as amended.) Capital gains tax was assessed, however, with respect to the remaining 6.9 acres. It is this assessment which is in dispute.

The defendants argue that since during the years 1972-1975 they could not have sold their house without also selling the whole 14-acre parcel, the whole property was, during those years, necessary to the use and enjoyment of their residence and therefore part of their principal residence. Accordingly, it is argued that the Minister’s assessment of the capital gains tax payable on the 6.9 acres should be reduced by five ninths to take account of the 1972-1975 period during which the zoning restriction prevented subdivision of the property. This, it is argued, follows from applying the provisions of paragraphs 40(2)(b) and 54(b) of the Income Tax Act, infra.

I paraphrase the relevant provisions of the Income Tax Act as follows: (1) all gains arising out of the disposition of property are to be taxable; (2) those arising from the sale of a principal residence are exempt from tax; (3) a principal residence may include up to one acre of land, subjacent and contiguous to the housing unit itself, but no larger area of land shall be deemed to be part of the taxpayer's principal residence unless the taxpayer proves the excess is necessary to the use and enjoyment of the housing unit as a residence. [1]

The issue in this case relates to the time at which, for the purposes of paragraph 40(2)(b) of the Income Tax Act, the size of the area of land which will be deemed to be part of the taxpayer's principal residence (one acre maximum or some larger area) is to be determined. Is it the size at the time of the disposition; the size at the time of acquisition; varying sizes during the term of the ownership of the property?

The defendants base their argument that the size is of a varying nature and that the capital gains tax payable should be reduced, by the proportion indicated, on the decision of the Federal Court of Appeal in The Queen v. Yates et al., [1986] 2 C.T.C. 46; 86 D.T.C. 6296 affirming [1983] C.T.C. 105; 83 D.T.C. 5158, and on the Tax Court decision in Raper v. M.N.R., [1986] 2 C.T.C. 2052; 86 D.T.C. 1513.

I do not think the reasoning in the Yates decision assists the defendants. In the Yates case, the taxpayers had acquired a ten-acre parcel of land on which they had constructed their principal residence. In 1978 they sold 9.3 acres to the local municipality under threat of expropriation. At the time of acquisition and up to the date of the apprehended expropriation, the applicable zoning by-laws required that residential properties be situated on lots having a minimum size of ten acres. (Indeed at the date of disposition, the requirement was 25 acres and the taxpayers' property existed as a nonconforming use.) Mr. Justice Mahoney held that since the taxpayers could not have occupied their housing unit as a residence on less than ten acres, the land in excess of one acre was necessary for their use and enjoyment of that residence and must be considered to be part of their principal residence. He wrote, at page 106 (D.T.C. 5159):

In my opinion the critical time is the moment before disposition. . . . The defendants could not legally have occupied their housing unit as a residence on less than ten acres. It follows that the entire ten acres, subjacent and contiguous, not only "may reasonably” be regarded as contributing to their use and enjoyment of their housing unit as a residence; it must be so regarded. It also follows that the portion in excess of one acre was necessary to that use and enjoyment.

[Emphasis added.]

Mr. Justice Mahoney clearly stated that the date of the disposition of the property was the critical time for determining whether property in excess of one acre was necessary for the use and enjoyment of the residence. This reasoning is adopted by Christie, A.C.J.T.C. in Rode et al. v. M.N.R., [1985] 1 C.T.C. 2324 at 2327; 85 D.T.C. 272 at 274. It is at the time of disposition that the capital gain is realized by the taxpayer and it is in that taxation year that the gain is taxed. Therefore, as indicated above, I do not think the Yates decision assists the defendants.

In addition, in the Yates case the legal requirement that the taxpayer's residence be located on a parcel of land, having a minimum size of ten acres, existed both at the date of acquisition of the property by the taxpayers and at the date of the disposition of the property. In the present case, there were no "more than one acre" minimum requirements in existence at either the time the taxpayers acquired the property or when they sold it; nor did such limitation exist on evaluation day, December 31, 1971. In the present case, the market price of the 14-acre property when it was purchased, the evaluation of the property on Valuation Day and the sale price of the property when it was disposed of would all have been made by reference to a property free of "more than one acre" minimum size zoning regulations.

In the Raper case the taxpayer's residence was situated on a 2.46 hectare parcel (slightly more than six acres). This had previously been part of a 50- acre parcel of farm land; the rest had been sold by the taxpayer and her husband in 1961. The taxpayer maintained a rural way of life on the 2.46 hectare property (growing her own vegetables, keeping some animals) until she was hospitalized by a stroke in 1977. She never considered selling or subdividing the property. The taxpayer died in 1982 and a deemed disposition occurred on her death. The tax payable on the capital gain arising from the deemed disposition of the land in excess of one acre subjacent and contiguous to the residence was in issue.

The Tax Court found that one tenth of the capital gain attributable to the land in excess of one acre was taxable. While in 1982, at the time of the taxpayer's death, the property could have been subdivided, this had not always been the case. Prior to 1980, zoning restrictions had required that the taxpayer's house be situated on a parcel of land no smaller than 2.1 hectares (5.2 acres). The Tax Court held that, prior to 1980, the taxpayer had been unable to sever the residence from the larger parcel of land on which it stood, ownership of the entire property had been necessary up until that date for the enjoyment and use of the residence. Therefore, it was held that, since for nine of the ten years the entire property had been necessary for the use of the residence, 9/10ths of the capital gain realized on the disposition of the land should not be taxable. In coming to this conclusion, paragraphs 40(2)(b) and 54(g) of the Income Tax Act were read together. At page 2061 (D.T.C. 1519) of the Raper decision, it was stated:

It is true that the time of disposition is an important time for demonstrating the necessity to the use and enjoyment of the housing unit. In this case, it was in December, 1982. However, is it the only time?

The designation of principal residence status being made each year of ownership, it seems equitable that the critical time for demonstrating necessity would be also on a yearly basis.

The provisions 40(2)(b) and 54(g) are exemption provisions. The strict interpretation of an exemption provision requires that the wording of such a provision clearly state the exemption. Is it so in paragraphs 40(2)(b) and 54(g)?

The definition of principal residence in paragraph 54(g) includes the element of necessity to the use and enjoyment of the housing unit. The words “principal residence" are used in paragraph 40(2)(b). Its definition in paragraph 54(g) applies to paragraph 40(2)(b). Indeed, paragraph 54(g) starts by saying “In this subdivision . . . principal residence . . . means . . . "The said subdivision is subdivision (c) of Division B of Part I and covers sections 28 to 55.

Therefore “principal residence" in paragraph 40(2)(b) being taken in its entire meaning, including the necessity to use and enjoyment of the housing unit in computing the exemption, is not only equitable but, in my opinion, is clearly provided in the wording of the said provision. The critical time for demonstrating necessity would be also on a yearly basis.

[Emphasis added.]

I have difficulty applying the reasoning of the Raper case to the facts of this case. There is no doubt that the issue of statutory interpretation will only be determined by a decision of the Federal Court of Appeal. In the absence of a decision by the Federal Court of Appeal, however, indicating that the reasoning in the Raper decision applies to the facts of this case, I am reluctant to apply it. I have difficulty, as a matter of statutory interpretation in reading paragraphs 40(2)(b) and 54(g) together in the manner required to reach the result sought by the defendants. The applicable portions of section 40 provide:

40. (1) . ..

(a) a taxpayer's gain for a taxation year from the disposition of any property is the amount, if any, by which

(i) if the property was disposed of in the year, the amount. . . by which his proceeds of disposition exceeds the aggregate of the adjusted cost base to him of the property immediately before the disposition and any outlays and expenses to the extent that they were made or incurred by him for the purpose of making the disposition . . .

(2) Notwithstanding subsection (1) . . .

(b) where the taxpayer is an individual, his gain for a taxation year from the disposition of a property that was his principal residence at any time after the date ... on which he last acquired or reacquired it. . . is his gain therefrom for the year otherwise determined minus that proportion thereof that

(i) one plus the number of taxation years ending after the acquisition date for which the property was his principal residence and during which he was resident in Canada,

is of

(ii) the number of taxation years ending after the acquisition date during which he owned the property whether jointly with another person or otherwise;

The applicable portion of paragraph 54(g) provides:

S. 54

(g) . . . “principal residence" of a taxpayer for a taxation year shall be deemed to include, . . . 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 one acre, 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 establishes that it was necessary to such use and enjoyment.

As I read paragraph 40(2)(b) it seems to me it was intended to apply to the situation where a taxpayer purchases a house (housing unit) and at some time subsequent to the date of purchase, but not contemporaneous therewith, makes that housing unit his or her principal residence. It also clearly applies to the situation where a taxpayer changes his or her place of principal residence (house, housing unit) without selling that property.

It is clear that paragraph 40(2)(b) was intended to allow a taxpayer to change his principal residence from year to year as between alternative principal residences. It is clear that that paragraph applies to a change of occupation or a change of designation by the taxpayer. But, I have difficulty applying the paragraph to provide that a taxpayer's principal residence will have a varying size over the years, depending upon the applicable zoning by-laws and that the capital gains tax payable on disposition is to be calculated on the basis of that varying size.

The manner in which counsel for the defendants reads paragraphs 40(2)(b) and 56(g) means that the entity to which the words “principal residence" refers in paragraph 40(2)(b) has an elastic existence. I do not think paragraph 40(2)(b) was intended to encompass a process of calculation dependent on such elastic existence. If the taxpayers in this case had sold their property in 1973, when they would have had to sell the whole 14-acre property, would they have been required to pay capital gains tax on a proportion of the gain calculated by reference to the earlier period of time during which no zoning restrictions applied?

Counsel for the plaintiff makes an additional argument. The taxpayer, Kenneth W. Joyner, carried on the business of farming on the property in question, continuously, from prior to December 31, 1971 until disposition of the 7.9-acre parcel in 1980. The profit and loss from that farming operation (the raising of thoroughbred horses and some cattle) was reported for income tax purposes. It is argued that the property in excess of the one acre contiguous to a taxpayer's house (principal residence) cannot be considered to be necessary for the use and enjoyment of the housing unit when that land is being used for business purposes. Reference was made to the decision in: The Queen v. Mitosinka, [1978] C.T.C. 664; 78 D.T.C. 6432 (F.C.T.D.); Watson v. M.N.R., [1985] 1 C.T.C. 2276; 85 D.T.C. 270 (Tax Ct.) and Rode v. M.N.R., [1985] 1 C.T.C. 2324; 85 D.T.C. 272 (Tax Ct.) and to paragraph 40(2)(c) of the Income Tax Act. [2]

I did not find the cases referred to by counsel for the plaintiff of much assistance. The Mitosinka case deals with a situation where two housing units were found to have existed. The Watson case was decided before Yates or at least did not make reference to that decision. The Rode case dealt with taxpayers who were contending that an area of land in excess of one acre was necessary for the use and enjoyment of their principal residence because of their self-sufficient life-style. That case did not deal with the effect of zoning restrictions or restrictions of a nature similar thereto.

Counsel for the defendants referred to the decision in Saccimanno v. M.N.R., [1986] 2 C.T.C. 2269; 86 D.T.C. 1699 as authority for the proposition that income may be earned from part of a principal residence without those premises becoming any less a principal residence. She argues, in addition, that once it is determined that a certain area of land is deemed to be part of a taxpayer's principal residence because it is necessary for the use and enjoyment thereof, the actual use made of the land cannot detract from its classification as part of the principal residence. It is argued that paragraph 40(2)(c) of the Income Tax Act only applies to land which is not part of the taxpayer's principal residence, that is, that subsection only applies to land remaining after the area characterized as constituting the principal residence is carved out of the larger whole. Since in this case, the whole 14-acre parcel was, during the years in question, incapable of subdivision, counsel for the defendants argues that it must, during those years, be classified as included in the taxpayer's principal residence and it does not fall under paragraph 40(2)(c).

Counsel for the plaintiff is understandably nervous about this interpretation. While the defendants’ property in this case comprises only 14 acres, the British Columbia land restrictions, referred to above, also prohibit the subdivision of much larger acreages.

Counsel for the plaintiff is apprehensive that arguments will be made in future cases that very large acreages must be classified as part of a taxpayer's principal residence because of the provincial land use legislation. In any event, since I have come to the conclusion that it is the time of the disposition of the property which is significant for the purposes of ascertaining whether or not land in excess of one acre should be deemed to be part of taxpayer's principal residence, I do not need to consider counsel for the plaintiff's second argument. For the reasons given, it is my view the plaintiff's appeal must succeed.

Appeal allowed.