Sarchuk,
T.C.J.:—The
appeal
of
Jacob
Zemlak
is
from
a
reassessment
of
tax
with
respect
to
his
1983
taxation
year.
Beverly
Zemlak
appeals
from
reassessments
of
her
1982
and
1983
taxation
years.
The
appeals
were
heard
together
on
common
evidence
by
consent.
The
matters
in
issue
arise
out
of
the
disposition
by
the
taxpayers
of
their
house
and
18.04
acres
of
land
in
1981.
In
filing
their
returns
of
income
for
that
taxation
year
the
appellants
reported
no
capital
gain
from
the
disposition.
Subsequently
the
appellants
each
filed
an
amended
return
in
which
they
claimed
the
house
and
five
acres
as
their
principal
residence
and
reported
a
taxable
capital
gain
on
that
basis.
By
notices
of
reassessment
dated
July
25,
1984
with
respect
to
Jacob
Zemlak
and
August
9,1984
with
respect
to
Beverly
Zemlak
the
respondent
determined
that
the
appellants'
principal
residence
did
not
comprise
more
than
the
house
and
one
acre
of
land
and
assessed
a
capital
gain
of
$78,807.20
in
taxation
year
1981.
The
respondent
further
allowed
a
reserve
under
section
40
of
the
Income
Tax
Act
("the
Act")
in
the
amount
of
$58,375
resulting
in
a
taxable
capital
gain
in
1981
of
$10,216
respectively.
By
notice
of
reassessment
dated
July
25,
1984
the
respondent
included
the
1981
reserve
in
Jacob
Zemlak's
1982
income
and
allowed
a
1982
reserve
in
the
amount
of
$39,119
resulting
in
a
taxable
capital
gain
in
taxation
year
1982
of
$9,628.
By
notice
of
reassessment
dated
December
11,
1984
the
respondent
included
the
1981
reserve
of
$58,375
in
Beverly
Zemlak's
1982
income
and
allowed
a
1982
reserve
in
the
amount
of
$5,341
resulting
in
a
taxable
capital
gain
in
taxation
year
1982
of
$6,517.
By
notice
of
reassessment
dated
October
25,
1984
the
respondent
included
in
the
appellants’
incomes
for
1983
a
taxable
capital
gain
in
the
amount
of
$10,010
respectively,
being
the
1982
reserve
of
$39,119
less
a
1983
reserve
of
$19,099.
The
appellant
Jacob
Zemlak
did
not
file
notices
of
objection
to
the
reassessments
of
his
1981
and
1982
taxation
years
while
the
appellant
Beverly
Zemlak
failed
to
file
a
notice
of
objection
to
the
reassessment
with
respect
to
her
1981
taxation
year.
These
reassessments
therefore
are
not
under
appeal.
In
reassessing
as
he
did
the
respondent
relied
upon
the
following
assumptions:
(a)
land
in
excess
of
one
acre
was
not
necessary
to
the
use
and
enjoyment
of
the
appellants’
house
as
a
residence;
(b)
the
formula
in
paragraph
40(2)(b)
of
the
Act
is
to
be
applied
only
to
the
capital
gain
for
a
taxation
year
in
which
an
individual
disposed
of
its
principal
residence;
that
is,
the
appellants
can
apply
the
formula
in
paragraph
40(2)(b)
only
to
the
capital
gains
for
their
respective
1981
taxation
year
and
only
to
the
amount
of
gains
applicable
to
their
principal
residence;
(c)
the
formula
in
paragraph
40(2)(b)
is
not
to
be
applied
to
a
reserve
brought
into
income
from
a
previous
year
with
respect
to
a
prior
disposition
of
a
principal
residence;
that
is,
the
formula
in
paragraph
40(2)(b)
is
not
to
be
applied
to
reserves
brought
into
Beverly
Zemlak's
1982
and
1983
income
with
respect
to
a
prior
disposition
of
her
principal
residence.
The
issue
before
me
relates
to
the
respondent's
inclusion
in
the
income
of
each
of
the
appellants
for
the
taxation
years
in
question
of
a
taxable
capital
gain
in
the
form
of
a
reserve
carried
over
from
prior
taxation
years
pursuant
to
section
40
of
the
Act.
The
respondent
contends
that
the
appellants’
taxable
capital
gains
with
respect
to
their
disposition
of
property
in
1981
were
properly
determined
in
accordance
with
subparagraphs
40(1)(a)(ii)
and
40(1)(a)(iii)
of
the
Act.
The
respondent
further
submits
that
the
formula
in
paragraph
40(2)(b)
of
the
Act
is
not
to
be
applied
to
reduce
the
taxable
capital
gains
in
the
taxation
years
in
issue.
The
following
facts
are
not
in
dispute.
The
appellants
had
been
the
registered
owners
of
lands
located
in
the
Municipality
of
Coldstream,
British
Columbia
("the
Municipality”)
since
1971.
This
property
consisted
of
18.04
acres
of
land
with
a
residence
and
outbuildings
located
on
the
property.
At
all
relevant
times
the
appellants
utilized
the
acreage
for
grazing
livestock
as
part
of
their
hobby
farm
use
of
the
property.
On
July
20,
1981
the
appellants
disposed
of
the
entire
property
including
the
residence.
Prior
to
the
disposition
the
property
was
zoned
“rural”
which
zoning
designation
had
a
minimum
lot
size
of
five
acres.
As
well,
for
some
period
of
time
prior
to
the
date
of
disposition,
the
Municipality
had
a
community
plan
in
place
permitting
further
rezoning
of
the
property.
On
June
25,
1981
the
appellants
applied
to
have
the
zoning
changed
to
Small
Holdings
Residental,
a
change
which
would
allow
subdivision
of
the
property
into
one-half
acre
lots.
This
application
for
rezoning
received
approval
from
the
Municipality
on
August
11,
1981
and
on
September
28,
1981,
by
way
of
By-law
822,
the
Municipal
Council
rezoned
the
appellants’
property
as
requested.
Evidence
as
to
when
and
by
whom
the
application
for
rezoning
was
made
was
not
entirely
clear.
Beverly
Zemlak
was
aware
that
from
October
1979
at
the
very
least,
the
area
had
been
redesignated
as
future
residential
and
the
Municipality
was
entertaining
rezoning
applications
to
permit
small
holdings
of
one-half
acre.
It
was
her
recollection
that
the
property
adjacent
to
theirs
had
already
been
rezoned
by
a
developer.
This
developer
later
approached
the
appellants
and
they
agreed
to
develop
their
property
with
him.
She
stated:
"Then
of
course
we
had
our
property
rezoned
to
small
holdings,
such
as
it
is
now.”
To
the
best
of
her
recollection
this
occurred
in
July
1981.
According
to
Jacob
Zemlak
after
the
developer
approached
them
they
incorporated
a
company,
and
transferred
their
property
to
it,
resulting
in
the
disposition
in
issue.
It
was
this
company
which
had
an
arrangement
with
the
developer.
Zemlak
described
the
agreement
as:
“If
we
let
him
put
his
road
through,
.
.
.
he
would
give
us
some
serviced
lots."
Both
appellants
testified
that
they
believed
that
all
of
the
acreage
they
owned
was
necessary
to
the
use
and
enjoyment
of
their
property
as
a
hobby
farm
and
that
in
any
event
immediately
prior
to
the
sale
of
their
property
the
zoning
requirements
of
the
Municipality
required
them
to
retain
a
minimum
of
five
acres.
The
appellants’
position
is
somewhat
convoluted
and
does
not
lend
itself
readily
to
synopsis.
Three
interrelated
propositions
are
being
put
forward,
each
of
which
must
be
resolved
in
favour
of
the
appellants
if
they
are
to
succeed.
These
propositions
are:
1.
The
provisions
of
paragraph
40(2)(b)
of
the
Act
may
be
applied
on
an
annual
basis
so
that
a
taxpayer
is
entitled
to
a
determination
on
an
annual
basis
of
the
allowable
deduction
for
a
prior
disposition
of
a
principal
residence
property;
2.
This
Court
has
discretion
to
determine
for
each
of
the
1982
and
1983
taxation
years
which
lands
are
to
be
included
as
part
of
the
appellants'
principal
residence,
and
the
Court
is
not
bound
for
the
purposes
of
subsequent
taxation
years
by
the
respondent's
determination
of
principal
residence
for
the
1981
taxation
year,
or
by
the
fact
that
there
was
no
appeal
of
that
assessment;
3.
The
appellants
have
established
that
their
principal
residence
consists
of
the
housing
unit
together
with
five
acres
of
adjacent
land,
all
being
necessary
to
their
use
and
enjoyment
of
the
housing
unit
as
a
residence.
With
respect
to
the
first
proposition
counsel
submitted
that
in
the
1981
taxation
year
the
appellants
claimed
a
reserve
pursuant
to
subparagraph
40(1)(a)(iii)
of
the
Act,
which
reserve
represented
their
gain
for
the
1982
taxation
year
pursuant
to
subparagraph
40(1)(a)(ii)
of
the
Act.
Beverly
Zemlak
was
entitled
to
claim
a
further
reserve
in
1982
but
instead
requested
a
deduction
pursuant
to
paragraph
40(2)(b)
of
the
Act.
The
substance
of
this
request
was,
as
counsel
put
it:
.
.
.
that
her
gain
from
the
disposition
of
the
principal
residence,
to
the
extent
that
the
gain
on
four
acres
had
not
been
allowed
in
1981,
be
deducted
from
her
gain
arising
from
the
reserve.
The
same
proposition
was
put
forward
with
respect
to
both
appellants
in
the
1983
taxation
year.
Counsel
further
submitted
that
the
rejection
by
the
respondent
of
this
"request"
was
in
error.
He
argued
that
paragraph
40(2)(b)
overrides
subsec-
tion
40(1)
as
the
operative
provision
for
determining
the
appellants’
taxable
gain
for
the
1982
and
1983
taxation
years.
Paragraph
40(2)(b)
provides
that
the
gain
is
subject
to
a
deduction
which
in
this
case
is
equal
to
the
total
amount
of
such
gain
arising
from
the
disposition
of
the
principal
residence.
Since
a
portion
of
the
reserve
being
carried
forward
into
the
1982
taxation
year
by
the
appellant
Beverly
Zemlak
arose
from
the
prior
disposition
by
her
of
the
principle
residence,
counsel
submitted
that
the
provisions
of
paragraph
40(2)(b)
are
applicable
in
assessing
her
gain
for
1982
and
in
a
similar
fashion
are
applicable
in
assessing
both
appellants'
gains
for
taxation
year
1983.
Counsel
for
the
appellant
concedes
that
the
success
of
his
argument
will
depend
on
whether
the
words
in
paragraph
40(2)(b)
".
.
.
his
gain
for
a
taxation
year
from
the
disposition
of
a
property
that
was
his
principal
residence
.
.
.
”
are
applicable
only
in
the
year
of
actual
disposition
or
whether
they
are
also
applicable
in
subsequent
years
when
the
reserve
carry
over
arising
out
of
a
prior
disposition
is
brought
into
income
as
a
taxable
gain
for
each
subsequent
year.
He
submitted
that
the
word
“arising”
can
be
implied
in
the
interpretation
of
paragraph
40(2)(b)
so
that
the
paragraph
would
read
”.
.
.
his
gain
for
a
taxation
year
arising
from
the
disposition
of
a
property
that
was
his
principal
residence
.
.
”
Based
on
the
foregoing
he
contends
that
the
gain
from
the
disposition
of
the
appellants’
principal
residence,
less
that
portion
of
such
gain
allowed
in
the
respondent's
assessment
for
their
1981
taxation
year,
should
be
allowed
as
a
deduction
under
paragraph
40(2)(b)
for
taxation
year
1982
thereby
reducing
Beverly
Zemlak's
taxable
gain
for
that
year.
The
same
submission
applies
for
both
appellants
for
the
1983
taxation
year.
I
do
not
agree.
The
provisions
of
paragraph
40(2)(b)
read
as
follows:
40.
(2)
Notwithstanding
subsection
(1),
(b)
where
the
taxpayer
is
an
individual,
his
gain
for
a
taxation
year
from
the
disposition
of
a
property
that
was
his
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
he
last
required
or
reacquired
it,
as
the
case
may
be,
is
his
gain
therefrom
for
the
year
otherwise
determined
minus
that
proportion
thereof
that
.
.
.
.
The
language
of
this
paragraph
is
clear:
the
amount
of
gain
that
is
eligible
for
exemption
is
the
”.
.
.
gain
for
a
taxation
year
from
the
disposition
of
a
property
that
was
his
principal
residence
.
.
.
”.
The
Act
requires
that
the
gain
for
a
taxation
year
be
from
the
disposition
of
the
principal
residence.
The
disposition
is
the
event
that
gives
rise
to
the
gain
in
that
taxation
year.
I
am
satisfied
that
the
only
time
paragraph
40(2)(b)
can
apply
is
the
actual
year
of
disposition.
On
any
analysis
of
the
appellants'
argument
the
event
giving
rise
to
the
inclusion
of
a
gain
in
their
incomes
in
1982
and
1983
as
requested
is
the
taking
of
a
reserve
under
subparagraph
40(1
)(a)(iii)
in
the
prior
year(s).
As
counsel
for
the
respondent
noted,
the
scheme
of
the
Act
is
to
exempt
capital
gains
arising
from
the
sale
of
a
principal
residence.
The
only
logical
interpretation
of
paragraph
40(2)(b)
is
that
the
exemption
of
the
capital
gain
occurs
in
the
year
of
disposition.
There
is
nothing
in
the
wording
of
that
paragraph
that
would
indicate
that
a
taxpayer
has
a
choice
of
taking
the
exemption
in
years
other
than
the
year
of
disposition.
The
interpretation
of
paragraph
40(2)(b)
suggested
by
counsel
for
the
appellants
is
both
illogical
and
ignores
the
scheme
of
the
Act.
The
submission
that
the
word
“arising”
can
be
implied
in
paragraph
40(2)(b)
is
not
well
founded
and
to
so
read
that
paragraph
would
be
to
strain
the
language
of
the
provision.
With
respect
to
the
second
proposition
counsel
argued
that
the
determination
of
a
principal
residence
pursuant
to
paragraph
54(g)
of
the
Act
is
not
a
matter
of
a
one-time
designation
by
the
taxpayer
or
by
the
respondent
by
way
of
his
determination.
Counsel
contended
that
paragraph
54(g)
was
a
deeming
provision
which
operates
on
an
annual
basis
provided
that
there
is
evidence
that
the
property
in
question
was
"necessary
to
such
use
and
enjoyment".
This
argument
was
based
on
the
evidence
of
the
appellants'
accountant,
E.F.
Estergaard.
He
stated
that
notwithstanding
the
respondent's
previous
determination
of
the
appellants’
principal
residence
in
taxation
year
1981,
which
determination
denied
the
appellants
the
additional
four
acres
of
land
claimed,
a
further
gain
from
disposition
occurred
in
1982
and
1983
based
"on
a
maximum
further
applicability
of
40(2)(b)
for
that
four-acre
portion
that
had
been
valued
by
Revenue
Canada”.
He
was
adamant
in
his
view
that
the
determination
of
a
principal
residence
was
an
annual
determination
and
that
all
of
the
calculations
he
made
flowing
from
that
conclusion
were
correct
and
ought
to
be
accepted
by
the
Court.
To
bring
the
appellants
within
the
framework
of
this
subparagraph
Estergaard
proceeded
on
the
basis
that
even
though
the
housing
unit
had
been
sold
in
1981
the
four
acres
of
land
which
had
been
denied
treatment
as
a
"principal
residence”
by
the
respondent
could
nonetheless
be
deemed
to
be
a
principal
residence
separate
and
apart
from
the
housing
unit
in
1982
and
1983.
That
interpretation
flies
in
the
face
of
the
provisions
of
paragraph
54(g)
which
provides:
54.
(g)
“principal
residence”
of
a
taxpayer
for
a
taxation
year
means
a
housing
unit
.
.
.
owned
.
.
.
in
the
year
by
the
taxpayer,
if
the
housing
unit
was
..
.
.
(i)
ordinarily
inhabited
in
the
year
by
the
taxpayer
.
.
.
and
for
the
purposes
of
this
paragraph
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
'/2
hectare,
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
legislators
have
clearly
and
unequivocally
stated
that
“principal
residence"
is
a
housing
unit
which
was
ordinarily
inhabited
in
the
taxation
year
by
the
taxpayer.
That
was
not
the
case
in
1982
and
1983.
Furthermore
it
is
not
possible
to
read
paragraph
54(g)
as
permitting
a
taxpayer
to
treat
the
housing
unit
and
the
land
subjacent
to
the
housing
unit
as
separate
“principal
residences".
I
am
satisfied
that
the
determination
required
by
paragraph
54(g)
of
the
Act
with
reference
to
a
principal
residence
is
a
one-time
determination.
That
determination
was
made
by
the
respondent
in
taxation
year
1981
and
it
was
not
appealed.
With
respect
to
the
1982
and
1983
taxation
years
I
find
that
the
respondent
was
correct
in
his
reassessments.
The
formula
in
paragraph
40(2)(b)
cannot
be
applied
to
reserves
brought
into
the
appellants'
1982
and
1983
incomes
with
respect
to
a
prior
disposition
of
their
principal
property.
In
view
of
this
conclusion
it
is
not
necessary
for
me
to
determine
whether
the
Court
can
make
or
direct
the
respondent
to
make
a
fresh
determination
in
those
years
as
to
the
property
comprising
the
taxpayer's
principal
residence
for
the
purposes
of
paragraph
40(2)(b).
It
is
also
not
necessary
to
determine
whether
or
not
the
appellants’
principal
residence
was
comprised
of
the
housing
unit
plus
five
adjacent
acres
of
land
as
contended
by
the
appellants.
The
appeals
are
dismissed.
Appeals
dismissed.
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