Carlile v. The Queen, 95 DTC 5483, [1995] 2 CTC 273 (FCA)

Desjardins J.A. (MacGuigan, concurring):—The key issue in this appeal relates to whether a parcel of land of 32.755 acres falls within the definition of "principal residence" of the appellant under paragraph 54(g) of the Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1 (the "Act"). In the affirmative, the product of its disposition on July 30, 1987, is free from tax on capital gains pursuant to paragraph 40(2)(b) of the Act. In the negative, the question to be addressed is whether the trial judge erred in his determination of the value of the property as of December 31, 1971 (V-Day).

With regard to the first question, the trial judge was of the view that the appellant had not met the requirements of the Act so as to qualify for the tax exemption. In doing so, he relied on the case of Augart v. M.N.R., [1992] 2 C.T.C. 412, 92 D.T.C. 6610 (F.C.T.D.), later reversed by a majority of this Court at [1993] 2 C.T.C. 34, 93 D.T.C. 5205 (F.C.A.). He then set the value of the property on V-Day at no greater than $3,000 per acre.

Grace Carlile is the third generation owner of a piece of property located in the Town of Ancaster, Ontario. Approximately three acres of the area around the house was for her personal use, 25 acres of the remaining acreage was rented to a farmer. On April 16, 1987, she entered into an agreement to sell the subject property for $1,800,000. The sale was completed on July 30, 1987.

To qualify for the favourable treatment afforded to the gains from the sale of a principal residence, her housing unit must meet the requirements of the definition of "principal residence" in paragraph 54(g) of the Act. For the taxation year 1987, the applicable portion of subparagraph 54(g)(v) provided as follows at page 42 (D.T.C. 5210):

...the "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.

A taxpayer who contends that an area in excess of a half hectare (one- acre) of the subjacent land in his principal residence must prove its necessity. The burden is on him to establish that the excess is necessary to the use and enjoyment of the housing unit as a residence.

This task, according to the case law, is a "formidable" one (Rode v. M.N.R., [1985] 1 C.T.C. 2324, 85 D.T.C. 272, at page 2326 (D.T.C. 274)). One way of establishing that land in excess of one-acre is necessary to the use and enjoyment of the housing unit as a residence is by reference to what is known as an objective test. Where land does not qualify on the objective test it may, however, qualify as part of the principal residence by recourse to a subjective test.

The meaning to be given to these tests is to be found in the leading case of The Queen v. Yates, [1986] 2 C.T.C. 46, 86 D.T.C. 6296 (F.C.A.), where our Court approved the reasons and judgment of Mahoney J., as he then was ([1983] C.T.C. 105, 83 D.T.C. 5158). In Yates, supra, the taxpayers had no choice but to acquire a ten acre parcel of land if they were to live in the area in question since ten acres were the minimum residential parcel then permitted. The zoning bylaw was subsequently amended to require a 25 acre minimum. The taxpayers continued to reside on their piece of land as legal non-conforming users. They did not need the ten acres, however, but only one-acre, so they rented the balance to a neighboring farmer who grew crops on it. In 1978, they sold 9.3 acres to the City of Guelph under threat of expropriation. They continued to reside on 0.7 acre which included the residence and acquired 0.225 acre transferred to them by the city as part of the consideration for the 9.3 acres. They successfully claimed for an exemption from capital gains. Mahoney J. stated at page 106 (D.T.C. 5159):

In my opinion, the critical time is the moment before disposition. It is possible that a subjective test, involving the actual contribution of the immediately contiguous land to the taxpayer’s use and enjoyment of the unit as a residence, may be admissible. Perhaps such factors as are commonly taken into account in applying subsection 24(6) of the Expropriation Act could be relevant in appropriate circumstances. However,whether or not a subjective test is properly to be applied, an objective test surely is and if, in its application, it is found that the taxpayer has discharged the onus on him, it is unnecessary to consider the subjective.

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]

In Augart, supra, this Court further held that the term "enjoyment", as used in subparagraph 54(g)(v) of the Act, included not only the exercise of a legal right such as that of possession, but also a landowner’s common law right of alienation. The Court was of the view that municipal zoning provisions dealing with minimum size requirements and subdivision restrictions were factors to be considered at the time of disposition and also at the time of acquisition of the land. In Augart, the taxpayer, in 1966, acquired an 8.99 acre parcel of land with a dwelling which he sold in 1980 to the City of Calgary for highway purposes. The then minimum lot size on which a building could be located was three acres. In 1980, a new zoning bylaw came into being designating the minimum site area for a single detached dwelling to be 80 acres, thus making the taxpayer a nonconfirming user. However, when the taxpayer effected its purchase of the property in 1966, the zoning bylaw in effect prohibited the subdivision of his land. So that, at no time, could he ever have bought less than 8.99 acres of land, or later retain a 3 acre parcel of land and sell the remaining 5.99 acres. In effect, he had no choice but to purchase the entire 8.99 acres of land if he wished to occupy the home situated thereon and could not effect a legal subdivision of his land before disposition. The Court concluded the whole area was deemed to be his principal residence under the Income Tax Act. It was argued, however, that the taxpayer could have legally subdivided his land had he agreed to sell five of the 8.99 acres he owned to the City of Calgary for a proposed highway interchange as the subdivision restrictions did not apply to conveyances for such a purpose. Robertson J.A., for the majority, commented thus at page 41 (D.T.C. 5210):

In my view, the fact that a sale of a portion of the property could have been effected under a pre-existing severance exemption, applicable only in the event of a conveyance to the legislative body which enacted the restriction in the first instance, must be deemed irrelevant when determining minimum lot size at the time of disposition. Whether or not the home is situated on the retained portion is equally irrelevant. The exemption was not enacted for the benefit of landowners per se, but rather to enable municipal governments to avoid the effects of their own legislation. The applicability of the exemption was dependent on whether the municipality needed the lands for the purposes set out in the by-law. Those are matters over which the appellant had no say. I hasten to add that had the zoning by-law in question prescribed a general scheme by which landowners could seek and obtain an exemption from the subdivision restrictions, the appellant’s legal argument would no longer be compelling.

In the case at bar, the bylaw effective on V-Day and at the time of disposition was bylaw 1890 of the Corporation of the Township of Ancaster adopted in 1963. The subject property was in Zone A marked "agricultural”. The bylaw read in its material part:

SECTION 8: AGRICULTURAL "A” ZONE

No person shall within any Agricultural Zone, use any land, or erect, alter or use any building or structure, except for such purposes and in accordance with such regulations as are permitted by and are in accordance with the following provisions:

8.A.1 Permitted Uses

(a) All farming uses and uses accessory thereto including a one family detached dwelling,

(b) One family detached dwellings and uses, buildings accessory thereto on lots created, by consent under the provisions of The Planning Act R.S.O. 1960 as amended,

8.A.2 Regulations for Uses Permitted in Clause (a) of subsection 8.A.1

(a) Minimum Lot Area

25 acres

8.A.3 Regulations for Uses Permitted in Clause (b) of Subsection 8.A.1

(b) Minimum Lot Area	20,000 square feet
(c) Maximum Lot Area	45,000 square feet

PLEASE NOTE: If an owner of a farm having an area of less than 25 acres has the intention of ever applying for a rezoning of part of his land to Rural Residential in order to build a dwelling, such owner would be required to have, in addition to the minimum requirements for a farm, the minimum requirements for a Rural Residential lot. This would require a minimum lot frontage of 30 feet and a minimum lot area of about 3%o acres.

In lay terms, bylaw 1890 prescribed a minimum lot area of 25 acres for farming uses including a one family detached dwelling. For residential uses, it required a minimum lot area of 20,000 square feet for a building lot with one family detached dwelling. Residential uses could only be obtained, however, by consent under the provisions of the Planning Act, R.S.O. 1960, as amended.

A planning report prepared by Paul H. Pirie MCIP, a planning consultant, indicated that the subject lands were included in the secondary development area in the original Official Plan of the Township of Ancaster. This secondary area was intended to be reclassified as a development area when the majority of lands in the primary area would have been developed. The estimate was ten years, but a subsequent decision of the Ontario Municipal Board to permit a large urban development area adjacent to the Hamilton, known as Allarco Lands, had the effect of postponing the redesignation of the second development area. [1] When the property was sold in 1987, the redesignation still had not occurred. The subject land remained in the agricultural zone. [2]

With regard to lots created by consent under the provisions of the Planning Act, Mr. Pirie testified that in 1971 ’’there [was] no assurance whatsoever that if this land had been - a lot or two had been applied for, it would have been granted". The witness added that both the Municipality and the Region were tightening up the controls very strictly with the result that "right now", he said, about the only lot one could get was in a case of infilling between two existing lots that were not more than 300 feet apart or for a bona fide farmer who had been holding land for about ten years and wanted to sell a parcel to his son or daughter to add help on the farm. [3]

Had the appellant decided she wanted to divide her property into lots of the size permitted by the regulations, [4] she would have had to request consent from the local authorities. To the questions as to what would have been her chances to obtain such consent, Mr. Pirie replied: [5]

A. That’s a very difficult question because from a planning point of view, we might have been — might give you one answer, but a political view would be another answer. And as planners we do have to respect the political decisionmaking process which at that time was tightening up to some extent. It was going against severences and it was changing towards the installation of a sewer system which would allow for further greater expansion of that urban area from say 15— 10,000 to 40,000. So there was growth at stake at that time.

I would say, on a scale of one to ten, it was probably somewhere in the middle of say at six chances of being able to get that through at that time. It certainly was better, better chances at that time than it was after the Allarco decision. By, by the time that decision was made in 1980 it became much more difficult.

Mr. Pirie added that had she applied for a severance of her property into 25 acres and the remainder to be sold, her request would have been refused. The strict requirement of the bylaw required two lots of a minimum of 25 acres each. The only way she could possibly have proceeded would have been to seek a special exemption or an exception clause written into the bylaw just for her property and then try to get some variation on that 25 acre minimum. [6]

The witness made it clear that, on December 31, 1971, one could legally have had on the subject property a house located on one-acre of land, only if consent had been obtained. He further explained with regard to bylaw 1890: [7]

A. But it’s not the traditional zoning provision that says if you have... ahm, that you could have this use by right. Like, dog kennel....

Q. No, no.

A. ...whatever, rural home, occupation, house....

Q. No, no let’s not diverge.

A. ...farm.

The following questions were put to him: [8]

Q. Let’s not diverge. My point is that at the time of the passing of this by-law if, okay, if there had been a one-acre parcel carved out of the subject property with a house on it, it would have complied with 8(a)(1)(b), because the minimum lot area would have been in excess of 20,000 square feet, isn’t that correct?

A. Yes, those are the regulations for it.

Q. Right.

A. Yes, if you could get it at all....

The witness explained that the bylaw was a conditional type of zoning, not usually seen in bylaws, and partly adopted to avoid a rezoning. [9]

The legal regime, both on V-Day and in 1987, made it uncertain as to whether the appellant could have obtained consent from the local authority for a subdivision of her lot. Mr. Pirie testified that paragraph 8.A.1(b) was unusual in drafting and that once a request was made it was not granted as of right, "[l]ike a dog kennel", for instance.

I conclude that the appellant, both on V-Day and at the time of disposition, has met the objective test not only vis-a-vis the 25 acre minimum allotment size for her property, but also for the remainder since the local authority would not have authorized a partition of her lot between 25 acres and the remainder. She should, therefore, be exempted from tax on capital gains for the whole of her parcel of land.

I would allow this appeal with costs on appeal and at trial, I would set aside the judgment of the Trial Division and I would refer the matter back to the Minister of National Revenue for reassessment on the basis that the 32.755 acres of land sold by the appellant, in 1987, was a disposition of part of her principal residence within the meaning of paragraph 54(g) of the Income Tax Act.

McDonald J.A.:—With great respect to my colleagues, I am unable to agree with the conclusions that they have reached in this matter. I do agree that the key issue in this appeal is whether a 32.755 acre parcel of land falls with the definition of "principal residence" under paragraph 54(g)(v) of the Income Tax Act. I also agree with the facts as they are set out by my colleagues. Similarly, I agree that the cases cited establish the law in this area. However, I cannot agree with the manner in which the case law has been employed. For the sake of simplicity, I will outline my understanding of the applicable case law and then apply it to the case at bar.

To qualify for the favourable treatment afforded to capital gains from the sale of a principal residence, the appellant’s housing unit must satisfy the requirements of the definition of "principal residence" in paragraph 54(g)(v) of the Act. Paragraph 54(g)(v) defines "principal residence” as:

The 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.

The onus is on the taxpayer to prove that any area in excess of one-acre is necessary to his or her use and enjoyment of the housing unit as a residence. The trial judge properly quotes The Associate Chief Justice of the Tax Court of Canada ’s description of this onus in Rode, supra, at pages 2326-27 (D.T.C. 274):

In these circumstances the law provides that the excess shall be deemed not to have contributed to the appellant’s use and enjoyment of the housing unit as a residence unless he establishes that it was necessary to such use and enjoyment. The emphasized words are key. The word "deemed" in paragraph 54(g) has this consequence. Even if an appellant establishes beyond controversy that what exceeds one-acre did in fact make an important contribution to his use and enjoyment of the housing unit as a residence, this does not assist him because the fact has been nullified by the legislation unless he proves necessity. Therefore what an appellant must do in order to establish that his principal residence exceeds one-acre is to prove that the excess was "necessary" to the use and enjoyment of the housing unit as a residence. I believe that in its context this requirement dictates that a stringent test shall be applied in determining the acreage of a principal residence.

Christie A.C.J.T.C.C. goes on to say:

Parliament has placed two things together contraposed. First, provision for the determination of variable dimensions of land which may constitute the principal residence of taxpayers in respect of which they can succeed in what they contend is the correct dimension by meeting the application of a flexible test. This applies to an area which has fixed lines of demarcation which must not exceed one-acre. Second, provision for the determination of variable dimensions of land which may constitute the principal residence of taxpayers which are in excess of one-acre and which have no fixed outer limits. I believe that in this regard it was the intention of Parliament that crossing the demarcation lines of one-acre and the process of expansion beyond them shall be a formidable task. This is the effect of the injection of the word "necessary" in determining dimensions in excess of one-acre. Among the interpretations assigned to the word "necessary" in the Oxford English Dictionary is" Indispensable, requisite, essential, needful; that cannot be done without". From this selection I believe that the phrase "that cannot be done without" best epitomizes what a taxpayer must meet in order to establish that his principal residence can properly be regarded as greater then one-acre.

[Emphasis added. I

My purpose in quoting extensively from the Rode decision is to emphasize the extremely "formidable" onus on a taxpayer to prove that his or her principal residence can properly be regarded as greater than one- acre.

I agree that a taxpayer can establish the necessity of land in excess of one-acre for the use and enjoyment of a housing unit as a residence by reference to an objective test and a subjective test. Like my colleagues, I find that the leading case of Yates, supra, defines both the objective and subjective tests. Since the majority reasons completely outline the facts in Yates, supra, I will not recite them here. However, I will repeat the following quote from Mahoney J.’s (as he then was) reasons in Yates:

In my opinion, the critical time is the moment before disposition. It is possible that a subjective test, involving the actual contribution of the immediately contiguous land to the taxpayer’s use and enjoyment of the unit as a residence, may be admissible. Perhaps such factors as are commonly taken into account in applying subsection 24(6) of the Expropriation Act could be relevant in appropriate circumstances. However, whether or not a subjective test is properly to be applied, an objective test surely is and if, in its application, it is found that the taxpayer has discharged the onus on him, it is unnecessary to consider the subjective.

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.]

It is at this point in the majority reasons that my understanding of the law differs from my colleagues. Specifically, I cannot agree with my colleagues that Mahoney J.’s above statement stands for the following proposition:

Where land does not qualify on the objective test it may, however, qualify as part of the principal residence by recourse to a subjective test.

As I read Yates, supra, Mahoney J. did not say that if land does not qualify on the objective test, there is recourse to a subjective test. Instead, he said at page 106 (D.T.C. 5159):

...whether or not a subjective test is properly to be applied, an objective test surely is and if, in its application, it is found that the taxpayer has discharged the onus on him, it is unnecessary to consider the subjective.

[Emphasis added.]

In my opinion, Mahoney J. is saying that if an objective test or factor, say a zoning by-law, unquestionably states that a taxpayer cannot legally occupy his or her housing unit as a residence on less than a set minimum number of acres, then there is no need to consider any subjective factors to determine that the taxpayer needs that minimum acreage to use and enjoy his or her housing unit as a residence. However, if the application of such an objective test, again I’ll say zoning by-laws, dictates a range of purposedependent minimum or maximum land holdings (i.e. commercial, agricultural or residential), then the court must consider subjective factors to determine the taxpayer’s position. After determining the taxpayer’s position, the Court can apply the by-law to the subject land and determine its effect on the taxpayer’s use and enjoyment of his or her housing unit as a residence.

The contents of by-law 1890 does not, in my opinion, absolutely require a landholder to occupy 25 acres. As the majority reasons indicate, by-law 1890 prescribes a minimum lot area of 25 acres for farming uses including a one family detached dwelling. However, for residential uses it requires a minimum lot area of 20,000 square feet and a maximum lot area of 45,000 square feet for a building lot with a one family detached dwelling. At the time of sale, the municipality zoned the subject property as agricultural, but under the provisions of the Planning Act, a taxpayer can apply to the Planning Area Board (the "Board”) for consent to develop the property as a residential subdivision. There is no question that the appellant was using the subject property for residential and not agricultural purposes. Nevertheless, if she requires more than 45,000 feet to use and enjoy her housing unit as a residence, than by-law 1890 requires her to own a minimum of 25 acres.

To determine the amount of land the appellant needs to use and enjoy her housing unit as a residence, I must consider a number of subjective factors. The appellant, in paragraph 9 of her memorandum of fact and law, outlines a number of subjective factors that indicate she needed more than one-acre to use and enjoy her housing unit as a residence:

She had used three acres for food, vegetables and fruit crops for her use, and trees provided protection against wind and snow storms and one-acre swale non usable land, and part of one-acre had the house and shed. The wooded area gave privacy to the house as well.

After reviewing the case law in this area, I find that the following words of Taylor J.T.C.C. in Rudeloff v. M.N.R., [1984] C.T.C. 2674, 84 D.T.C. 1548 (T.C.C.), at page 2676 (D.T.C. 1549), best describes my response to the appellant’s claim:

I am not persuaded the relevant section [54(c)] of the Income Tax Act permits of the view espoused by this taxpayer — that merely because he resided in a housing unit on the property, and used the balance of the property in one way or another to enhance the utility and attractiveness of that domestic living style, he can expand the boundaries of his housing unit to the parameters of the natural domain desired in his appeal.

Similarly, the following words of Christie A.C.J.T.C.C. in Rode also reflect my thoughts of the present situation (supra, note 2, at page 2327 (D.T.C. 275)):

The essence of the appellant’s position is that because of the particular lifestyle which they chose to pursue while residing on the property their principal residence, for the purposes of paragraph 54(g) of the Act, constituted 9.3 acres at the time of its sale in 1977, not one-acre as asserted by the respondent. While the appellants mode of existence was of course perfectly acceptable, some might say commendable, it was not something that operated to their tax advantage on the disposition of the property.

Although three acres may have contributed to the appellant’s use and enjoyment of her housing unit as a residence, it was not necessary for her use and enjoyment of the housing unit as a residence. The majority reasons do not determine whether the appellant needs more than one-acre (or 45,000 feet) to use and enjoy her housing unit as a residence. Nevertheless, I find that the trial judge was correct in stating [in Carlile v. The Queen, [1993] 2 C.T.C. 119, 93 D.T.C. 5336 (F.C.T.D.), at page 122 (D.T.C. 5338)]:

In the present case, there is simply no evidence that an area larger than one-acre was necessary to Mrs. Carlile’s use and enjoyment of the housing unit.

Since I find that the appellant requires one-acre to use and enjoy her housing unit as a residence, I can now determine the effect of by-law 1890 on the use and enjoyment of her housing unit as a residence. One-acre falls within the maximum lot area for residential purposes permitted by by-law 1890. As I note above, the by-law permits the appellant to apply to the Board for consent to divide her property into lots of the size permitted by the regulations (20,000 to 45,000 square feet lots). [10] Mr. Pirie, the expert planning witness, stated that if the appellant had applied to the Board to divide her property by way of subdivision before December 1971 the Board, on a balance of probabilities, would have consented to such an application:

I would say, on a scale of one to ten, it was probably somewhere in the middle of say at six chances of being able to get that through at that time.

The appellant did not submit any evidence indicating that this situation changed on December 31, 1971 (V-Day), or on the date of the agreement of purchase and sale or on the actual date of sale.

I repeat that an appellant carries a formidable onus to prove that she needs more than one-acre for the use and enjoyment of her housing unit as a residence. The only way she can discharge this onus is to prove that bylaw 1890 legally required her to retain 25 acres in order to occupy her housing unit as a residence. The majority reasons place a tremendous amount of weight on the Mr. Pirie’s opinion that the appellant would have had difficulty getting consent from the Board to divide her land into a one-acre lot and a 31.755 acre lot. [11] This difficulty leads my colleagues to conclude that the legal regime, both on V-Day and in 1987, made it uncertain as to whether the appellant could have obtained consent from the local authorities for a subdivision of her land. I cannot agree. The appellant’s "formidable onus" is, in my view, not discharged by simply claiming that one method of subdivision is "difficult". To successfully discharge this onus, the appellant must prove that there is no method by which she could subdivide her property. [12] Here, the appellant needed only one-acre, an amount within by-law 1890s residential range, to use and enjoy her housing unit as a residence. If the appellant had applied to the Board for consent to divide the subject property by way of a subdivision plan she would, on a balance of probabilities, have succeeded. In fact, considering the $1,800,000 that was paid for the subject land, there is little doubt that the purchaser of subject land fully intended to seek the Board’s consent to divide the property by way of a subdivision plan.

I conclude, as did the trial judge, that the appellant, both on V-Day and at the time of disposition, has failed, both objectively and subjectively, to prove that she required 25 acres for the use and enjoyment of her housing unit as a residence. Consequently, one-acre of the appellant’s property should be exempted from tax and the remaining portion should be taxed in accordance with paragraph 40(2)(b) of the Act. Similarly, I find that the appellant’s objections in respect of the market value of the subject property as of December 31, 1971 are without merit.

I would dismiss this appeal with costs.

Appeal allowed.