Reed Estate v. MNR, 89 DTC 457, [1989] 2 CTC 2333 (TCC)

Mogan, T.CJ.:— The issue in this appeal is whether the words “capital property" in paragraph 80(1)(b) of the Income Tax Act (the "Act") includes a taxpayer's “principal residence” as those words are defined in paragraph 54(g) of the Act. The material facts may be briefly stated.

The late Mr. Reed died on April 19, 1984. Prior to his death but in 1984, his debt in the amount of $106,211.21 owing to an Alberta corporation was forgiven in circumstances which caused section 80 of the Act to apply. The amount of the debt represented principal of $90,000 and interest of $16,211.21. The parties are in agreement that section 80 applies only to the $90,000 principal amount and not to the $16,211.21 of interest.

The appellant did not have any losses of the kind described in paragraph 80(1)(a) of the Act and so the forgiven principal debt of $90,000 may possibly apply only to property described in paragraph 80(1)(b). The appellant has depreciable property to which the amount of $4,973.53 could be applied under paragraph 80(1)(b) to reduce the capital cost thereof. Also, the appellant had capital property (apparently agricultural land) to which the amount of $41,300 could be applied to reduce the adjusted cost base thereof. The respondent did not admit that the deceased had a principal residence in 1984 but, assuming that he did, the issue of law between the parties is whether that principal residence is capital property within the meaning of paragraph 80(1)(b) of the Act.

There was uncontradicted evidence that the late Mr. Reed and his wife had resided in a house at 315 Donald Street, Cupar, Saskatchewan for more than 30 years prior to 1984 and, at the time of his death, the house was registered in the names of Mr. and Mrs. Reed as joint tenants. Mr. Reed has been the sole or joint owner of the property since 1949. I have concluded that the property at 315 Donald Street was Mr. Reed's principal residence at the time of his death.

Capital property is defined in paragraph 54(b) of the Act as follows:

54 (b) Capital property of a taxpayer means

(i) any depreciable property of the taxpayer, and

(ii) any property (other than depreciable property), any gain or loss from the disposition of which would, if the property were disposed of, be a capital gain or a Capital loss, as the case may be, of the taxpayer;

Section 248 adopts this definition for the entire Act.

The appellant argues that the definition of "capital property" in paragraph 54(b) requires a reference back to paragraph 39(1)(a) to determine whether a gain from the disposition of a particular property would be a capital gain and not otherwise included in computing income if section 3 were read in a certain manner. In other words, whether a particular property is capital property to its owner depends upon the owner's actual use and intended use of the property. Paragraph 40(1)(a) provides a procedure to measure the amount of the gain and paragraph 40(2)(b) provides a formula to determine how much (if any) of the gain would be taxable if the property had been the vendor's “principal residence" during his period of ownership. The appellant also argues that a special rule like paragraph 40(2)(b) does not deprive a particular property from being “capital property" just because all or a portion of the gain resulting from its disposition is exempt from tax.

The respondent argues that the definition of "capital property" in paragraph 54(b) is a numerical definition in the sense that a particular property will not be capital property with respect to its owner if the numerical gain realized by that owner upon disposition does not have any significance for tax purposes. The respondent relies on the words "of a taxpayer" where they appear in paragraph 54(b) and submits that a special rule like paragraph 40(2)(b) could deprive a property of what would otherwise be its character as “capital property" if the owner (i.e. taxpayer) were not subject to tax on the gain which would result from its sale.

In my view, a principal residence is capital property within the meaning of paragraph 54(b) and paragraph 80(1)(b) of the Act. It certainly is capital property within traditional income tax concepts because a gain realized upon its sale would not otherwise be included in computing income if section 3 of the Act were read in the manner suggested by paragraph 39(1)(a). Also, a principal residence would not fall within the class of properties specifically excluded from being a capital property by the various subparagraphs of paragraph 39(1)(a).

The formula in paragraph 40(2)(b) which may reduce to nil the capital gain from the disposition of a principal residence does not take away the character of “capital property" from a principal residence. Indeed, paragraph 40(2)(b) appears to reinforce the concept that a principal residence is capital property because, firstly, it refers to the gain "otherwise determined" and, secondly, a portion of the gain on sale will be subject to tax if the property was not the vendor's principal residence throughout his period of ownership.

For the above reasons, the appeal is allowed with costs on the issue which was argued and the assessment under appeal is referred back to the respondent for reconsideration and reassessment. There may be a second issue concerning the value to the late Henry E. Reed at the time of his death of his interest in his principal residence. This possible second issue will, however, be the subject of further discussion between the parties.

Appeal allowed.