J Berkovic v. Minister of National Revenue, [1983] CTC 2378, 83 DTC 335

The Chairman:—The appeal of Joseph Berkovic is from an assessment with respect to the 1977 taxation year by which the Minister, in computing the capital gain realized by the appellant from the disposition of an apartment building in which he had his principal residence, allowed an exemption of /9 of the total gain as representing that part of the capital gain that was attributable to the disposition of the appellant’s principal residence, within the meaning of paragraph 54(g) of the Income Tax Act, SC 1970-71- 72, c 63, as amended.

The evidence is that the land component of the property had a total area of 11,616 sq ft, 3615 sq ft of which was occupied by the building, / of the remaining area was lawn and /3 was a paved driveway and parking area. The apartment building contained 9 housing units: 6 two-bedroom apartments each measuring 800 sq ft and 3 three-bedroom apartments of 1000 sq ft each. The appellant occupied a three-bedroom apartment as his principal residence prior to the sale of the property in 1977.

The respondent suggested that the appellant may have moved from his principal residence in December 1976, giving rise to a change of use of the property, a deemed disposition and reacquisition of the property at a fair market value in 1976. If those were the facts, then there would be no exemption for the principal residence on the disposition of the property in 1977 — all of the capital gain would have been with respect to rental properties. However, as stated by the respondent, that was not the basis of the Minister’s assessment. The Minister in 1977 did allow the appellant a principal residence exemption to the extent of / of the total capital gain realized in that year. Had the facts suggested by the respondent warranted it, the Minister should have reassessed the appellant on a different basis but, in my Opinion, it would be beyond the jurisdiction of the Board to alter the basis on which the appellant was assessed for the 1977 taxation year.

In his notice of appeal and at the hearing, the appellant claimed to have wrongly computed his capital gain by allocating 8/9 of gain to the area occupied by the rental units whereas his principal residence occupied at least 1 / of the total area of the building.

Counsel for the respondent pointed out that for the years prior to 1977 the appellant had in his returns considered his personal residence as occupying 1/9 of the total area of the building and in 1976 his personal use of the building was considered as being 1 / of its area (Exhibits R-2, R-3 and R-4). The Minister in his reassessment used the 1 / fraction as being a reasonable allocation of the capital gain for purposes of exemption of the appellant’s principal residence under paragraph 54(g) of the Act. From the figures given in evidence by the appellant, which were not challenged by the respondent, it appears obvious that the appellant’s principal residence occupied roughly 1 / of the total area of the building and that is the figure which I propose to retain for purposes of this appeal.

The only issue in this appeal, as I see it, arises from the appellant’s claim that the totality of the land component subjacent to the apartment building can reasonably be regarded as contributing to his use and enjoyment of the apartment unit occupied by him as his personal residence.

Findings

When the subject was acquired by the appellant in 1973 the cost price and the subsequent expenditures on the building as well as on landscaping were incurred with respect to a rental building. By making one of the apartment units his personal residence, the appellant in effect shared the rental building with other tenants. The sharing of the building with tenants applies also to the land immediately surrounding the building.

On the basis of the evidence, the appellant did not have the exclusivity of use or enjoyment of the land component that he could normally have expected if his principal residence had been a single family dwelling.

With respect to the objective test of use of the land component, the tenants had full use of the driveway and the parking area which took up a considerable portion of the land surrounding the apartment building. There were no restrictions to the tenants’ use of the patio; they enjoyed a good view of the landscaped surroundings and used the lawn for sunbathing.

Turning now to the subjective test of the appellant’s enjoyment of the land component, the cedar hedges, the maple trees, the willow tree, the flower beds and the lawn did contribute to the appellant’s enjoyment of his apartment unit as principal residence. However, the landscaping also served a business purpose in enhancing the whole property and providing all the tenants with pleasant and enjoyable surroundings — the cost of which was deductible by the appellant with respect to the rental area of the building.

In Betty Madsen v MN Ft, [1980] CTC 3022; 81 DTC 1, cited by counsel, the Madsen residence was a single family dwelling situated on 11 acres of land. The appellant contended that not only one acre of the land component formed part of her principal residence but the 11 acres were necessary for the use and enjoyment of her home. The presiding member on the evidence found that there was no relationship between the activities carried out by the appellant on the additional 10 acres and the use and enjoyment of her house as a residence and he dismissed the appeal.

In the appeal now being considered, the building is a multiple family dwelling and the appellant is claiming a principal residence exemption on all the subjacent land. In fact, the relationship between the appellant’s use and enjoyment of the land in relation to his residence is but a fraction of the purpose and general use of the land component of an apartment building serving also as the residence of other tenants.

In Her Majesty the Queen v Mitosinka, [1978] CTC 664; 78 DTC 6432, Mr Justice Collier made the point clearly at 667 and 6435 respectively:

While the building was not quite a duplex in its construction, it served, to my mind, the same practical function. It could, and did, house separate families, who had separate facilities, and paid for separate services. Paragraph 54(g) uses the expression “housing unit”. The portion of the building ordinarily inhabited by the defendant and his family was, in my opinion, one housing unit. The portion ordinarily inhabited by his tenant was another housing unit. The first housing unit was the defendant’s principal residence. The other housing unit was not.

In respect of the land, the evidence indicates it was common to both housing units. Each family had the use of the whole of the land. It would, however, be unreasonable to assign or allocate the whole of the land to one housing unit, or to the other. The Minister’s equal apportionment has not, as I see it, been shown by the defendant to be unrealistic or unreasonable.

Applying Mr. Justice Collier’s reasoning to the facts of this appeal, it would be unreasonable to allocate the whole of the land component to any one of the housing units including that of the owner of the building, the appellant.

Although the apportionment of land to several housing units of an apartment building on an area ratio is not necessarily the only or the best criteria for purposes of this appeal, that appears to have been the method adopted in the Minister’s assessment. On that basis, the fraction of / is a mathematically more accurate expression of the ratio and, in my opinion, the apportionment of not more than / of the land adjacent to the building can be reasonably regarded as contributing to the use and enjoyment of the apartment unit occupied by the appellant as his principal residence.

For these reasons, judgment will go allowing the appeal and referring the matter back to the Minister for reconsideration and reassessment on the basis that a reasonable allocation of the capital gain for purposes of exemption of the appellant’s principal residence under section 3 and paragraph 54(g) of the Act is one seventh ( / of the total gain. In all other respects, the appeal is dismissed.