Date: 20110930
Docket:
A-403-10
Citation: 2011 FCA 271
CORAM: SHARLOW
J.A.
LAYDEN-STEVENSON
J.A.
STRATAS
J.A.
BETWEEN:
WAYNE CASSIDY
Appellant
and
HER MAJESTY
THE QUEEN
Respondent
REASONS FOR
JUDGMENT
SHARLOW J.A.
[1]
This
is an appeal of a judgment of the Tax Court of Canada (2010 TCC 471) dismissing
an appeal by Mr. Wayne Cassidy of a reassessment under the Income Tax Act,
R.S.C. 1985, c. 1 (5th Supp.) for the 2003 taxation year. The only
issue is whether Mr. Cassidy is entitled to the benefit of the principal
residence exemption in relation to the capital gain he realized in 2003 on the
sale of his home and the 2.43 hectares of land on which it was located. For the
reasons that follow, I have concluded that Mr. Cassidy was entitled to the
exemption for the entire gain, and I would allow this appeal.
Facts
[2]
The
facts are undisputed and may be briefly summarized. In 1994, Mr. Cassidy and
his then common law spouse acquired a house on a 2.43 hectare parcel of land
near London, Ontario. In
1998, Mr. Cassidy became the sole owner of the property. He resided in the
house on the property from 1994 until 2003, when the property was sold.
[3]
In
1994 when Mr. Cassidy first acquired an interest in the property, he could not
have acquired less than the 2.43 hectare parcel because of the zoning laws then
applicable to the area in which the property was located. Those zoning laws
remained unchanged until May 2, 2003, when an “Official Plan Amendment” came
into force. Only then did it become open to Mr. Cassidy to apply to have the
property rezoned and subdivided.
[4]
In
the spring of 2003, Mr. Cassidy was approached by a real estate agent who
enquired as to whether his property was for sale. That led to an agreement
dated May 23, 2003 in which Mr. Cassidy agreed to sell the property to Urban
Properties Services (London) Inc. subject to certain conditions for
the benefit of the purchaser, including a successful application for rezoning
and subdivision. Mr. Cassidy authorized the purchaser to make the necessary
applications, which were successful. The conditions were met and the sale of
the property closed on November 27, 2003.
[5]
Mr.
Cassidy realized a capital gain on the sale but he did not report the gain when
filing his 2003 income tax return because he believed that the entire gain fell
within the principal residence exemption. The Minister disagreed. Mr. Cassidy objected
to the resulting reassessment, appealed to the Tax Court, without success, and
now appeals to this Court.
Positions of
the parties
[6]
It
is undisputed that when Mr. Cassidy sold the property in 2003, he became
entitled to the principal residence exemption in respect of the gain he
realized on the sale, at least in so far as the gain is allocable to the house
and ½ hectare of the land on which the house was located. However, because his
home was located on 2.43 hectares of land, there is an issue as to whether the
principal residence exemption applies to the remaining 1.93 hectares.
[7]
The
position of Mr. Cassidy is that the entire 2.43 hectares of land was part of
his principal residence from the date on which he acquired the property in 1994
until at least May 2, 2003, when a change to the local zoning bylaws would have
permitted him for the first time to subdivide the land. On that basis, he
argues that he is entitled to the principal residence exemption for the full
amount of the gain.
[8]
The
position of the Crown is that the principal residence exemption does not apply
to the 1.93 hectares of the land, and therefore the taxable capital gain
allocable to that 1.93 hectares is subject to income tax. To give effect to
that position, the Minister allocated Mr. Cassidy’s capital gain between the
1.93 hectares and the house plus ½ hectare, and assessed tax on the taxable
capital gain allocable to the 1.93 hectares. As I understand the record, there
is now no controversy about the computation of the gain or the allocation of
the gain in the event this appeal does not succeed.
[9]
The
Crown argues that Mr. Cassidy is not entitled to the principal residence
exemption for the 1.93 hectares case because when he sold his property in
November of 2003, he was no longer barred by local laws from subdividing the
property. That makes a difference, in the Crown’s submission, because it is
only at the date of disposition of a property that one determines whether the ½
hectare rule applies at all. The Crown argues that if the ½ hectare test is not
met on the date of disposition, then regardless of the facts on any earlier
date, the taxpayer’s principal residence cannot include more than ½ hectare of
land. The Tax Court judge accepted this argument, and on that basis dismissed
Mr. Cassidy’s appeal.
Discussion
(a)
Definition of principal residence
[10]
“Principal
residence” is defined in section 54 of the Income Tax Act for the
purposes of the provisions relating to capital gains and losses (Part I,
Division B, subdivision c). The portions of the definition that are relevant to
this appeal are its opening words and paragraph (e) (the “½ hectare
rule”). Those provisions read as follows:
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54. In this subdivision,
[...]
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54. Les définitions qui
suivent s’appliquent à la présente sous-section [...]
|
|
“principal residence” of a taxpayer for a taxation year
means a particular property that is a housing unit, a leasehold interest in a
housing unit or a share of the capital stock of a co-operative housing
corporation acquired for the sole purpose of acquiring the right to inhabit a
housing unit owned by the corporation and that is owned, whether jointly with
another person or otherwise, in the year by the taxpayer, if [...]
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« résidence principale » S’agissant de la résidence
principale d’un contribuable pour une année d’imposition, bien — logement, ou
droit de tenure à bail y afférent, ou part du capital social d’une société
coopérative d’habitation acquise dans l’unique but d’acquérir le droit
d’habiter un logement dont la coopérative est propriétaire — dont le
contribuable est propriétaire au cours de l’année conjointement avec une
autre personne ou autrement, à condition que : [...]
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|
and, for the purpose of this definition
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En outre, pour l’application de la présente
définition :
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(e) the principal residence of a taxpayer for
a taxation year shall be deemed to include, except where the particular
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 can reasonably be regarded as contributing to
the 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 ½ hectare,
the excess shall be deemed not to have contributed to the use and enjoyment
of the housing unit as a residence unless the taxpayer establishes that it
was necessary to such use and enjoyment.
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e) la résidence principale d’un
contribuable pour une année d’imposition est réputée comprendre (sauf si le
bien est une part du capital social d’une société coopérative d’habitation)
le fonds de terre sous-jacent au logement ainsi que la partie du fonds de
terre adjacent qu’il est raisonnable de considérer comme facilitant l’usage
du logement comme résidence; toutefois, dans le cas où la superficie totale
du fonds de terre sous-jacent et de cette partie excède un demi-hectare,
l’excédent n’est réputé faciliter l’usage du logement comme résidence que si
le contribuable établit qu’il était nécessaire à cet usage.
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[11]
The
definition of “principal residence” was enacted as part of the amendments that,
for 1972 and subsequent years, made capital gains subject to income tax (S.C.
1970-71-72, c. 63). With one exception, the parts of the definition that are
relevant to this appeal have not been substantially changed since 1972. The one
exception relates to what is now paragraph (e) of the definition. For
dispositions before 1982, the reference to “½ hectare” was “one acre” (S.C.
1980-81-82-83, c. 140, subsections 23(4) and (10)).
[12]
The
aspect of the definition of “principal residence” that is most relevant to this
case is the ½ hectare rule. It applies where the housing unit for which the
principal residence exemption is claimed sits on land in excess of ½ hectare.
In such a case, ½ hectare of the land is deemed to be part of the principal
residence, but the excess land is deemed not to be part of the principal
residence unless the taxpayer proves that excess was necessary to the use and
enjoyment of the housing unit as a residence.
[13]
As
stated above, the property for which Mr. Cassidy has claimed the principal
residence exemption consists of a house and 2.43 hectares of land. Mr. Cassidy
resided there from the date of its acquisition in 1994 to the date it was sold
in November of 2003. In 1994, when Mr. Cassidy acquired the property, local
zoning by-laws precluded him from acquiring less than the entire 2.43 hectares
of land.
[14]
The
Minister has not taken the position that the house and the entire 2.43 hectares
did not become Mr. Cassidy’s principal residence when he acquired it in 1994.
In my view, such a position would be untenable because Mr. Cassidy’s situation
was indistinguishable from the situation of the taxpayer in Canada v. Yates,
[1983] 2 F.C. 730, (F.C.T.D.), described as follows by Justice Mahoney:
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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.
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Justice Mahoney’s decision was affirmed by
this Court, [1986] 2 C.T.C. 46; 86 D.T.C. 6296, and has been consistently followed
by this Court in similar circumstances: see Augart v.Canada
(Minister of National Revenue), [1993]
3 F.C. 296 (F.C.A.), and Carlile v. Canada
(Minister of National Revenue), [1995]
2 C.T.C. 273. 95 D.T.C. 5483 (F.C.A.).
[15]
This
would suggest that as long as the zoning remained what it was in 1994 and there
were no other relevant facts, the entire 2.43 hectares of land would have been
Mr. Cassidy’s principal residence until May 2, 2003, when the zoning changed.
[16]
However,
as indicated above, the Crown’s position is that if the ½ hectare test is not
met on the date of disposition, then it does not matter whether it was met at
any earlier date. As I understand that argument, it raises no question as to
the interpretation of the statutory definition of “principal residence”.
Rather, it relates to the application of paragraph 40(2)(b) of the Income
Tax Act, which is discussed in the next part of these reasons.
(b)
Determining the capital gain on the disposition of a principal residence
[17]
Gains
realized on the disposition of capital property have been subject to income tax
since 1972, but there have always been numerous exceptions. One such exception is
found in paragraph 40(2)(b) of the Income Tax Act, referred to as
the “principal residence exemption”. Paragraph 40(2)(b) sets out a
special formula for determining the capital gain on the disposition of any property
that was the taxpayer’s “principal residence” at any time after its acquisition.
It reads in relevant part as follows.
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40. (2) …
(b)
where the taxpayer is an individual, the taxpayer’s gain for a taxation year
from the disposition of a property that was the taxpayer’s principal
residence at any time after the date (in this section referred to as the
“acquisition date”) that is the later of December 31, 1971 and the day on
which the taxpayer last acquired or reacquired it, as the case may be, is the
amount determined by the formula
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40. (2) […]
b) dans le cas où le
contribuable est un particulier, le gain qu’il a tiré, pour une année
d’imposition, de la disposition d’un bien qui était sa résidence principale à
un moment donné après le jour (appelé « date d’acquisition » au présent
article) qui est le dernier en date du 31 décembre 1971 et du jour où il a
acquis le bien, ou l’a acquis de nouveau, pour la dernière fois correspond au
résultat du calcul suivant :
|
|
A - (A × B/C) - D
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A - (A ×
B/C) - D
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|
where
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où :
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A is the amount that would, if
this Act were read without reference to this paragraph and subsections
110.6(19) and 110.6(21), be the taxpayer’s gain therefrom for the year,
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A
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représente le montant qui constituerait
le gain du contribuable provenant de la disposition pour l’année, compte non
tenu du présent alinéa et des paragraphes 110.6(19) et (21),
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B is one plus the number of
taxation years that end after the acquisition date for which the property was
the taxpayer’s principal residence and during which the taxpayer was resident
in Canada,
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B
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le nombre un plus le nombre d’années
d’imposition qui se terminent après la date d’acquisition pour lesquelles le
bien était la résidence principale du contribuable et au cours desquelles
celui-ci résidait au Canada,
|
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C is the number of taxation
years that end after the acquisition date during which the taxpayer owned the
property whether jointly with another person or otherwise, and
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C
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le nombre d’années d’imposition se
terminant après la date d’acquisition au cours desquelles le contribuable
était propriétaire du bien conjointement avec une autre personne ou
autrement,
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D ….
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D
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[…]
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[18]
The
opening words of this provision ask whether Mr. Cassidy realized a gain in 2003
on any property that was his principal residence at any time after he acquired
it. Whether or not his principal residence extends to the entire 2.43 hectares
of land, the answer is yes. Therefore, Mr. Cassidy is entitled to the benefit
of this provision. What the benefit is worth to Mr. Cassidy depends upon the
statutory formula.
[19]
The
formula has 4 variables of which the fourth (variable D) is not relevant in
this case and can be ignored.
[20]
Variable
A is the amount of Mr. Cassidy’s gain from sale of the property. There is no
controversy as to the amount.
[21]
The
part of the formula in parentheses, (A × B/C), is the exempt portion
of capital gain. In the factual context of this case, variable C is the number
of years from 1994 to 2003, because that is the number of years in which Mr.
Cassidy owned the property in issue.
[22]
Variable
B is 1 plus (and here I paraphrase) the number of years in which the “principal
residence” definition is met. If variable B equals variable C, then the result
of the formula would be zero, meaning that the entire gain would be exempt.
[23]
The
language describing variable B requires a determination, for each taxation year
in which the property in issue was owned by the taxpayer claiming the
exemption, whether the property met the statutory definition of “principal
residence”. That definition refers in both the opening words and paragraph (e)
to the principal residence of a taxpayer “for a taxation year”. That is
consistent with the requirement in the charging provision, paragraph 40(2)(b),
for an annual determination.
[24]
Where,
as in this case, there is an issue as to whether land in excess of ½ hectare is
part of the principal residence, it is useful to apply the formula in two
stages, first to the portion of the gain that is allocable to the sale of the
house and the ½ hectare of land that comprises the principal residence, and
then to the portion of the gain that is allocable to the excess. The allocation
for this case is not disclosed in the record but it is apparently not in
dispute. I will simply assume that the total capital gain is $100,000, the
portion of the gain attributable to the house and ½ hectare of land is $60,000,
and the portion attributable to the remaining 1.93 hectares of land is $40,000.
[25]
Not
surprisingly, the application of the formula in paragraph 40(2)(b) results
in the gain allocable to the house and the ½ hectare of land being entirely
exempt. That is because variable B is 11 (that is, 1 plus the total number of
years for which the house and the ½ hectare of land was Mr. Cassidy’s principal
residence, which was 1994 and every subsequent year to and including 2003). The
formula gives this result:
$60,000 - ($60,000
× 11/10) = – $6,000
The arithmetic result of the formula is a
negative amount, - $6,000 (which is deemed by section 257 of the Income Tax
Act to be zero). Therefore, paraphrasing the opening words paragraph 40(2)(b),
Mr.
Cassidy’s gain for 2003 from the disposition of the house and ½ hectare of land
is zero.
[26]
For
the remaining 1.93 hectares of land, the formula yields the same result. That
is because for that 1.93 hectares, variable B is 10. As explained above, the 1.93
hectares was part of Mr. Cassidy’s principal residence in 1994 when it was
first acquired, until May 2, 2003 when the zoning changed. Assuming without
deciding that 2003 should be disregarded, the number of years for which the 1.93
hectares of land was deemed to be included as part of Mr. Cassidy’s principal
residence was 9 (1994 and every subsequent year to and including 2002).
Variable B is 1 plus 9, or 10. The result of the formula is:
$40,000 - ($40,000
× 10/10) = 0
[27]
Thus,
on the interpretation of paragraph 40(2)(b) proposed by Mr. Cassidy, he is
entitled to the principal residence exemption for the full amount of the gain
realized on the sale of his house and the entire 2.43 hectares.
[28]
The
Crown argues against this interpretation and says that it is not necessary for
the purpose of paragraph 40(2)(b) to determine for each year of
ownership whether the 1.93 hectares of land is included in Mr. Cassidy’s principal
residence. Rather, the Crown argues that this determination is required only
for the date on which the property is disposed of. In support of that position,
the Crown relies on Yates (cited above), Stuart
Estate v. Canada, 2004 FCA 80, and Joyner v. Minister of
National Revenue, [1989] 1 F.C. 306 (F.C.T.D.).
[29]
The
issue in Yates was whether 9.3 acres of a 10 acre parcel of land met the
statutory definition of “principal residence”. The taxpayers had purchased a 10
acre parcel of land at a time when zoning by-laws precluded any subdivision. They
built a house on the property in 1964, and lived there at all relevant times. In
1978 they sold 9.3 acres of the land (not including the portion on which their
house was located) to a municipality under threat of expropriation. Justice
Mahoney concluded that the entire 9.3 acres met the statutory definition of
“principal residence”. In reaching that conclusion he said, “In my opinion, the
critical time is the moment before disposition.” However, it is not clear why
he said that because there was no suggestion in the case that facts relevant to
the determination of the principal residence exemption had changed at any time
between the date on which the taxpayers bought the property and the date on
which the 9.3 acres was expropriated. There was no discussion of paragraph 40(2)(b)
or its statutory predecessor (which was substantially the same).
[30]
In
Stuart Estate, Justice Malone (writing for
this Court) said at paragraph 9, “It is common ground that the relevant time
for determining how much of the land in excess of ½ hectare (1.235 acres) was
necessary to the use and enjoyment of the housing unit as a residence is the
time of the disposition.” Yates is cited for this proposition. However,
the facts in Stuart Estate that were relevant to the determination of
the principal residence exemption had not changed during the period in which
the property was owned by the taxpayer, and so there was no controversy to be
resolved except the application of the ½ hectare rule, and no consideration of
paragraph 40(2)(b).
[31]
In
my view, the statements from Yates and Stuart Estate, read in
context, do not support the proposition for which they are cited by the Crown.
Neither case involved any consideration of paragraph 40(2)(b), no doubt
because neither case involved a situation in which the facts relevant to the
application of the ½ hectare rule changed during the period in which the
property in issue was owned by the taxpayer. Therefore, neither case was
intended to determine the issue that has arisen in this case.
[32]
The
Crown mentioned, as a case favouring Mr. Cassidy, Raper
Estate v. Canada (Minister of National
Revenue - M.N.R.), [1986] 2 C.T.C. 2052, 86 D.T.C. 1513
(T.C.C.). In that case, Justice Tremblay allowed the principal residence
exemption in part, based on facts that were similar to the facts of this case
in that from 1971 to 1980, zoning laws prohibited any severance of the land on
which the taxpayer’s home was located. That changed in 1980 so that in 1982,
when the property was sold, a severance was possible. In allowing a partial exemption,
Justice Tremblay recognized that the formula in paragraph 40(2)(b)
required an annual determination of the principal residence exemption.
[33]
However,
the Crown also relies on Joyner v. Minister of National Revenue, [1989]
1 F.C. 306 (F.C.T.D.), in which Justice Reed declined to apply the reasoning in
Raper Estate. In Joyner, the taxpayer argued unsuccessfully that
he should be entitled to the principal residence exemption for part of the gain
realized on the sale of 7.9 acres of a 14 acre parcel on which his home was
located. The 7.9 acre parcel included the house, and the Minister allowed the
principal residence exemption for the house plus one acre. As to the remaining
6.9 acres, Mr. Joyner argued that although he could have subdivided the land
during most of the period of ownership (1968 to 1980), there was a four year
period in the 1970s during which subdivision was prohibited by a provincial law,
and for that period the reasoning in Yates should be applied in respect
of those four years. Justice Reed rejected that argument and found that the
principal residence exemption did not apply at all to the 6.9 acres in issue.
[34]
It
is arguable that Joyner could be taken as authority for the proposition
that paragraph 40(2)(b) does not require a determination as to whether
the definition of principal residence is met for each year of ownership. If that
is the ratio decidendi of the case, then in my respectful view the case
is wrong and should not be followed.
[35]
The
error in the interpretation of paragraph 40(2)(b) proposed by the Crown,
and perhaps implicit in Joyner, is that it fails to give effect to the
language of paragraph 40(2)(b) that defines variable B. As mentioned
above, the determination of variable B requires a determination, for each
taxation year in which the taxpayer owned the property in issue, as to whether
the property met the definition of “principal residence” of the taxpayer for
that taxation year.
[36]
On
the other hand, the interpretation of paragraph 40(2)(b) proposed by Mr.
Cassidy is consistent with its language and its purpose. In broad terms, the
purpose of paragraph 40(2)(b) is to relieve individuals from the
obligation to pay tax on the capital gain realized on the sale of their
principal residence. The annual determination mandated for variable B in the
formula in paragraph 40(2)(b) is intended to ensure that the benefit of
the principal residence exemption is allowed in part in the case of property
that, for any reason, does not meet the definition of “principal residence” for
the entire period of ownership.
Conclusion
[37]
For
these reasons, I would allow the appeal of Mr. Cassidy, set aside the judgment
of the Tax Court of Canada, allow the appeal of the 2003 reassessment, and
refer this matter back to the Minister for reassessment on the basis that Mr.
Cassidy is entitled to the benefit of the principal residence exemption for the
full amount of his capital gain realized on the sale of his house and the 2.43
hectares of land. Mr. Cassidy is entitled to his costs in this Court and in the
Tax Court.
“K.
Sharlow”
“I
agree
Carolyn Layden-Stevenson J.A.”
“I
agree
David Stratas J.A.”
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