Fedel F. Saccomanno v. Minister of National Revenue, [1986] 2 CTC 2269

Taylor, T.C.J.:—This is an appeal heard in Toronto, Ontario, on July 14, 1986, against an income tax assessment for the taxation year 1983 in which the Minister of National Revenue assessed to taxes as capital gain a portion of the profit on the sale of a real property in Toronto, Ontario. The notice of appeal read as follows:

The purchase of this property has been directly related to the nature of my employment in the Kitchener-Waterloo area. In 1978, I was employed on a probationary basis as an assistant professor at the University of Waterloo. My employment, under the terms of the appointment, would not be secured until 1983. Tenure would be granted at the discretion of the University after due consideration of my performance. Until such time my employment could be terminated, without recourse on my behalf, subject to due process. In December of 1979, my wife and I decided to purchase a home in Toronto. In the eventuality that my contract would not be renewed, it was our intention to move into our Toronto home. As a matter of common knowledge, there are no employment opportunities in the Kitchener-Waterloo area within my area of work outside the University. Again as a matter of common knowledge, homes in the Toronto area were increasing in value, and we didn't want to be isolated from the market for the next 3 to 4 years.

At no time was it our intention to use the Toronto property as an investment. In fact, over the period of my probationary appointment, we did not purchase any home in Kitchener-Waterloo, preferring to rent locally until my work was secured. Unfortunately, my income did not permit us to maintain two residences, the principal home in Toronto, and the rental accommodations [sic] in Kitchener. We were, therefore, compelled to rent out a portion (70%) of our Toronto home. The rental income on this property just barely covered the expenses. We did not wish to make money on the rent, but only to keep the property from falling into disrepair. Over the period 1979-83, we only claimed operating expenses on our Tax return. We did not depreciate the capital asset, since this was not considered a part of the rent component. Over this period, we lost money on the rent component, but we retained ownership of the home, that we intended to take over and renovate for our sole use, if tenure was not granted.

In the Spring of 1983, I was informed by the University of Waterloo, that I would be granted tenure. In the spirit of our intentions prior to tenure, we immediately sold our Toronto home, and purchased one locally. I should add that properties in the Kitchener area also increased in value over the 1978-83 period, and we paid substantially more from [sic] our new home, than we would have paid with an earlier purchase.

I prepared my 1983 Tax return to reflect in a very narrow sense the regulations concerning rented properties. I did not wish to hide any information, but rather to take the appeal route to obtain a more justified interpretation of the regulations.

In short, the spirit of the regulations, as stated in paragraph 54(g) of the Income Tax Act, seem to apply to a Capital Gain on an investment property. What is being interpreted as an investment in our case, has been in fact our sole and principal residence during the period in question. We are asking only that the regulations be applied in the spirit to which they were intended. We notified our local office of Revenue Canada early of our objections in this matter, and requested any form required for this type of appeal. Under paragraph 54(g) of the Act, a taxpayer can designate a property as a principal residence if “. .. no such housing unit, leasehold interest or share has been so designated . . .”” Our appeal is based essentially on the definition of a principal residence, as provided by the Act.

In reply the respondent noted:

A. Statement of Facts

1. The Respondent admits:

(a) the Appellant and his wife purchased property 421 Manning Avenue in Toronto (the “Property") in December of 1979 which they disposed of in August of 1983;

(b) During the 1978 through 1983 years the Appellant was employed by the University of Waterloo and resided with his wife in Kitchener;

(c) 70% of the Property was rented from the time it was purchased until it was disposed of and the expenses incurred to maintain the rented portion of the Property in excess of the rental income therefrom were claimed as rental losses in the Appellant’s Income Tax Returns for those years;

but except as is expressly hereinafter admitted, the Respondent does not admit any other allegations of fact or conclusions of law contained in the Notice of Appeal.

2. By assessment, Notice of which was dated September 4, 1984, the Respondent accepted as filed the Appellant’s calculation of his capital gain on disposal of the Property on the basis that only 30% of the Property was his principal residence and the remainder was rental property.

3. In so assessing, the Respondent relied, inter alia, upon the following findings or assumptions of fact:

(a) the facts hereinbefore pleaded;

(b) the Property comprised three housing units, two of which were rented throughout the Appellant's ownership;

(c) the rented portion of the Property was not ordinarily inhabited by the Appellant or his wife at any time;

(d) the adjusted cost base of the rented portion of the Property was $53,112.36;

(e) the rented portion of the Property was disposed of for proceeds of $85,091,07.

4. The Appellant did not file in prescribed form with his Income Tax Returns an election pursuant to subsection 45(2) or pursuant to subparagraph 54(g)(iii).

5. The Respondent relied, inter alia, upon sections 53, 54 and 54.1 and paragraphs 38(a), 39(1)(a) and 40(1 )(a) of the Income Tax Act, R.S.C. 1952, Chapter 148, as amended (the “Act").

6. The Respondent respectfully submits that as the rented portion of the Property was not ordinarily inhabited by the Appellant and his wife, that portion was not part of his principal residence within the meaning of paragraph 54(g) and therefore one-half of the capital gain received on disposition of the rented portion of the Property in 1983 was taxable in that year by virtue of paragraphs 38(a), 39(1)(a) and 40(1)(a) of the Act.

7. The Respondent states in the alternative that as an election in prescribed form was not filed with the Appellant’s Income Tax Return for the 1983 taxation year the Property could not be considered to be the Appellant’s principal residence for the 1983 taxation year by virtue of subparagraph 54(g)(iii) of the Act.

During testimony, a few additional points came out from the appellant:

(1) The property was rented when he purchased it — he just left it rented.

(2) Due to “rent control” etc., he would have had difficulty evicting the tenants, or raising the rent too much.

(3) He regards the rental income as a reduction in the cost of maintaining the property for his own eventual use and enjoyment.

(4) His wife had resided in the property from the time of purchase until sale. He had used it on weekends, and at other times during the year when not required in Waterloo.

I would note at the outset that the respondent did not pursue the "alternative” argument under subparagraph 54(g)(iii) which required filing an election form. I make no comment on whether this "technical” argument would have been effective.

The problem in this appeal comes down to whether in the circumstances, the entire property could be and should be considered as the “principal residence" (the position now adopted by the taxpayer) or whether only that portion (approximately one-third) regularly and continuously occupied by the appellant's wife and occasionally by the appellant. As I see it, either situation could be valid — depending on the circumstances and the perspective from which it is viewed. Clearly a taxpayer could acquire a property — primarily as a rental property — and use a portion thereof for a personal residence. That is the view taken by the Minister in this assessment. But I can think of no valid objection to a taxpayer doing exactly the opposite — buying a property for his own use, as a principal residence, and renting out a part of it. The property in issue here was originally built as a single family, self-contained dwelling, and prior to the acquisition by the taxpayer had been divided up, in a very informal way, to permit dwelling therein by three families. By the description given by Mr. Saccomanno, it had not been irretrievably divided into three complete, self-contained units, but rather in a practical way, using rooms, bathrooms, and entrances had been made manageable for the use of three families — albeit with some constraints and inconvenience. That is not unlike many such buildings, and as noted above, I can comprehend a taxpayer acquiring such a building — because of — its rental producing capabilities. In this instance, however, I am faced with the testimony of the appellant who claims that the task of undoing the “three-residence" accommodations which had been put together, and making the entire building into a single unit for himself and his wife was not very onerous, and that the prospect of doing so was the main reason that he had purchased the property. That he did not do so, but rather sold it and moved, may not be a positive factor in his favour, but I do not regard that as fatal to his assertion.

The essence of the Minister’s assessment must be that he is considering the property as containing three separate “housing units” (paragraph 54(g) of the Act). That is as if this taxpayer had purchased a block of three “townhouses", which happened to have certain common physical elements, such as walls, but were nevertheless distinctly separate — and then rented two, and lived in one. I do not think that is a reasonable interpretation of the circumstances in this matter. In effect the Minister is saying that it would have been necessary for Mr. Saccomanno to physically and “ordinarily" inhabit each room in the building, in order that the entire building could qualify as his principal residence. That line of reasoning, if applicable, would mean that a taxpayer owning and inhabiting a single family home (a housing unit) who rented out one room, thereby gaining rental income, would risk having that part of the home declared as outside the principal residence category.

As I perceive this situation, the entire house was a “housing unit", not three separate “housing units". It was “owned" and “ordinarily inhabited" by the spouse of the taxpayer. These are the only salient qualifications under paragraph 54(g) of the Act. That a portion of it was rented has been explained satisfactorily to the Court, and does not appear to detract from its character as a “principal residence" under the circumstances of this appeal. I can find no basis in the legislation for the Minister's assessing the taxpayer in a divided interest manner — part principal residence and part not principal residence. The sections of the Act dealing with either “personal-use property" or “change in use" do not appear to me to adversely affect this taxpayer's claim.

The appeal is allowed and the matter is referred back to the respondent for reconsideration and reassessment. The appellant is entitled to party and party costs.

Appeal allowed.