Elmo B Baird v. Minister of National Revenue, [1983] CTC 2651, 83 DTC 582

Taylor, TCJ:—This is an appeal heard in St John’s Newfoundland, on July 5, 1983 against income tax assessments for the years 1978, 1979 and 1980. I heard this appeal in my capacity as a member of the Tax Review Board but this judgment is rendered in my present capacity as a judge of the Tax Court of Canada.

There were two points at issue in the appeal — one regarding the area of land which should be properly considered as the appellant’s “principal residence” since a portion of the total acreage upon which his house was built was sold by the appellant in the year 1978. The application of the general averaging provisions of the Income Tax Act, SC 1970-71-72, c 63, as amended, had a subsequent impact on the taxation years 1979 and 1980 by virtue of the gain arising out of this sale. The second issue was one of the valuation of the property involved. On the second issue, there was no reasonable evidence provided by the appellant, nor any valuation report upon which the Court could question the valuation placed thereon by the Minister. At the hearing, the parties were informed that the appeal would be dismissed on that issue, leaving only the question of the amount of land to be included as the “principal residence” to be determined. Obviously, if the Court agreed with the appellant — that the parcel of land which he sold was indeed his “personal residence” or a portion thereof — then the substance of the appeal in effect would be allowed, irrespective of the valuation question.

On the “principal residence” question, the information provided by the taxpayer in the notice of appeal is basic to an understanding of his contention:

STATEMENT OF OF FACTS

1. Sometime prior to my purchasing property in Gander, Newfoundland, the Director, Veterans’ Land Act, developed a subdivision consisting of 14 lots in Gander, which lots were available for purchase by veterans who were certified by the Director to be qualified to participate in the benefits under the Act. On June 7, 1951 I purchased Lot #7 under an unregistered Agreement of Sale, for which I paid $4,600.00.

2. At the time of my purchase the regulations pertaining to the Act (the Veterans’ Land Act Regulations, 1948 SOR/48-87) specified that a veteran, to receive financial assistance, must acquire a minimum of 3 acres, subject to a reduction of 20% (in the discretion of the Director) to meet local conditions. (See Part I, Regulation 22A(i) ).

3. The size of land which I purchased from the Director was 2.41 acres of land, being 3 acres (150 feet X 871.2 feet) less 20%, or 104,544 square feet (150 feet X 696.96 feet). Shortly after acquiring the land I built a house and some outbuildings on the land which I have occupied as my principal residence since 1951. Since that time I have used the property as my principal residence, and have cultivated a vegetable garden, as required under the terms of the Purchase Agreement with the Director, Veteran’s Land Act, and until recently kept small farm animals on the land. I have maintained this small farming operation up until the present time, although not to the same extent, since I sold a portion of the land in 1978.

4. Sometime in 1974 a road was constructed along the depth of my land, thus opening up the rear of my land and land of adjacent owners.

5. In 1978, at the request of an interested party, I sold approximately 1.66 acres of land (484 feet X 150 feet) for $50,000. As a result of this sale Revenue Canada, Taxation reassessed my taxable income for the years 1978, 1979 and 1980 on the basis of a determination that this sale resulted in a capital gain to me.

2. Dealing with the Income Tax Act first, it defines a principal residence by what it is included. Section 54(g) deems that land subjacent and contiguous land reasonably regarded as contributing to the use and enjoyment are included in the meaning of principal residence. The Act intends to be liberal in determining what constitutes a principal residence, and this is clear by the exception provided. In other words, anything not excepted must by definition be included. The exception set out in 54(g) does not mean that a principal residence cannot exceed 1 acre, only that where it does, the excess is deemed not to have contributed to the individual's use and enjoyment, and not that it is deemed not part of the principal residence. All that the taxpayer must do is establish that the excess was necessary to “such use and enjoyment” ie use and enjoyment of the individual.

3. The Income Tax Act requires then, that if I can establish that the excess was for my use and enjoyment then it follows that the excess is included as part of my principal residence. In interpreting a provision of a tax statute the general intention of the statute, gathered from the grammatical and ordinary sense of the words used, is important.

4. Taxpayers cannot expect to be guided in their present actions by future Interpretation Bulletins of Revenue Canada, Taxation, even if those future interpretations were the law, which they are not. To have a retrospective effect legislation, in very clear language, is required. Therefore, IT-120R2 issued on February 23, 1981 Cannot equitably be applied to a transaction which took place in 1978. If any reliance is to be placed on Interpretation Bulletins, then only IT-120, issued on September 14, 1973, can be reasonably applied.

5. IT-120, Paragraph 10 sets out some relevant factors which would permit a taxpayer to own a principal residence in excess of 1 acre. In addition this Paragraph states that the purpose of the provision, ie in respect of the excess over the 1 acre limit, is to prevent taxpayers from claiming principal residence status on speculative land purchases. Further, the Paragraph states that the purpose of the provision was not to preclude a taxpayer from having a principal residence in excess of 1 acre.

6. Applying the relevant factors set out in IT-120 to my situation, I wish to make the following assertions:

(i) At the time of purchasing the land I had no intention other than to make it my home. There was no speculative intent whatsoever, nor could there have been. First, the Veterans’ Land Act required that I purchase the size of lot which I did acquire. Second, under the Sale Agreement with the Director I could not sever or sell the land. Third, an intention should be determined at the time of purchase, and at that time I had no intention, nor the means to speculate.

(ii) As for the use of the land, shortly after I acquired the land I constructed a home on it as well as other out-buildings. The full extent of the land was used to maintain small farm animals, to cultivate a small farming operation for my use, as required by the Veteran’s Land Act, and to provide for a septic tank disposal field.

(iii) The size of my lot was not unusual in relation to the size of the community of Gander. The Director, Veterans’ Land Act recognized this in setting down the minimum size requirements of land which would be sold under the Act.

(iv) At the time of my purchase the land could not be severed as it adjoined land owned by others.

Surely I should not now be prejudiced by circumstances which existed some 30 years ago and to which I was required to comply.

While not disagreeing on the major facts presented, the Minister took the position that:

— In 1978 the subjacent and immediately contiguous land to the Appellant’s house which was necessary for the Appellant’s use and enjoyment of his house as a residence did not exceed one acre;

— In 1978 the Appellant disposed of 1.41 acres of land which were not necessary for the use and enjoyment of his house as a residence;

— In 1978 the disposal of the 1.41 acres of non-principal residence land resulted in the Appellant’s receiving a taxable capital gain in the amount of $16,618.51 calculated as follows:

Capital Gain on 1.666 acres	$39,271.53
Less: Portion Attributable to Principal
Residence (.256 acre)	6,034.51
Adjusted Capital Gain	$33,237.02
Taxable Capital Gain ( / = $33,237.02)	$16,618.51

I would refer to certain comments to be found in D Fraser v MNR, [1983] CTC 2522; 83 DTC 448 at 2528 and 452:

Also, I would emphasize that the Act is perfectly clear — the principal residence is the housing unit — and only the housing unit — anything beyond that is apparently a concession to practicality and reasonableness.

...it comes down to whether the area of the additional 18,338 square feet described as the “garden and play area” fits into the term “necessary to such use and enjoyment” (of the housing unit as a residence). I can think of no rational argument (comparable to that of “access”) which would substantiate its necessity to the “use” of the housing unit as a residence. I consider “necessary” in this context to be virtually synonymous with “vital” or “essential”. Certainly the family could reside in the house without even setting foot on the garden and play area.

One must then look at the total term “necessary” to such use and enjoyment (italics mine). The term is not “use or enjoyment” and, accordingly, is aptly described in Betty Madsen v MNR, [1980] CTC 3022; 81 DTC 1 at pages 2 and 3024 respectively:

For an Appellant to succeed in a case such as this he must show that the land exceeding one acre was necessary not only to his use, but also to his enjoyment of the housing unit as a residence.

.. .for this appellant to bring himself within the strict limits of the exception provision “necessary to such use and enjoyment”, it is important to perceive of the excess area in dispute as indispensable in its direct relationship to the residential properties of the housing unit, not merely in its utility and value to the inhabitants thereof.

In the Fraser case, (supra), the Minister had already allowed an area of some 1.5 acres as the “principal residence” of the appellant, and the Board dismissed the appellant’s contention that even more area should be allowed. In the instant case, the net portion retained by Mr Baird for his residence was something slightly less than one acre, but the Minister in assessing only included as “excess” that portion of the property sold which was greater than one acre — thereby, in effect, providing to Mr Baird the benefit of any argument which might be made that he was entitled, at a minimum, to consider one acre as his principal residence whether or not he retained it all. As will be seen later in the rationale for this judgment, this Court is not taking any position on the merit or demerit of that perspective of the Minister. It may be that the legislators left that much discretion up to the Minister in the words of the Act — simply, that the “use and enjoyment” provision could be construed as extending up to one acre, without too much opposition from the assessors.

The “use and enjoyment” of the grounds surrounding the housing unit are not the criteria upon which the term “necessary” is founded. As I see it, the circumstances under which a taxpayer may properly claim an area greater than one acre for a “principal residence” must be rare indeed. One may perceive some of these exceptional circumstances in The Queen v William Yates, [1983] CTC 105; 83 DTC 5158 and a cursory review of that judgment could lead to a decision in this appeal in favour of the taxpayer. Counsel for this appellant would have the Court accept that in circumstances where the taxpayer is virtually forced to take a parcel of property, he is automatically entitled to consider the sale of any part of it as a sale of part of his principal residence. My reading of Yates, (supra), does not lead me to that conclusion. I am struck by the warning recited by the learned judge at 106 and 5158 respectively:

It was not argued that, by its very nature, a principal residence cannot be subject of a partial disposition.

In the instant case, counsel for the respondent specifically argued that such a “partial disposition” was not possible and that, had that argument been made at the Yates trial, (supra), the judgment might have been different. This argument of counsel for the respondent is very persuasive, as I see it. I fail to see that an entire parcel of property (eg 25 acres) must necessarily be designated as a “principal residence” because of a zoning regulation, or subdivision requirement in force at acquisition. Counsel for the appellant also argued that the changed circumstances and life style of Mr Baird permitted the view that the 1.41 acres sold were “necessary” for some 25 years and therefore that acreage remained “necessary” at the time of disposition. I doubt it was necessary at any time during tenure, but the critical time in any event would be the time of disposition. It may be possible to conceive of some property which could be defined as “necessary” during tenure, but not so at disposition, but that possible interpretation was not supported in this matter.

In my view, “principal residence” for income tax application is not a perception or a concept such as the “spatial bounds” referred to in the jurisprudence dealing with “residence” alone. “Principal residence” is a physical location definable within fixed parameters, the ultimate extensions of which are limited to the direct and necessary habitable relationship of the ares so circumscribed to the housing unit itself.

In summary, as I read Yates, (supra), it is open to this Court to decide that the total parcel of property described as the “principal residence” by this taxpayer does not permit of division into a parcel available for sale termed a portion of the principal residence, and a parcel retaining the vital characteristics of a residence. Such intrinsic and vital characteristics do not permit of internal division. If they are allegedly so divided as a result of a physical division of the property, that must raise a question regarding their original inherent nature. I am also satisfied that the critical element is the necessity, at disposition, of any portion of more than one acre in size, “for the use and enjoyment of the housing unit as a residence”.

The appeal is dismissed.

Appeal dismissed.