Sendher v. R., [1998] 1 CTC 2709, 98 DTC 1250

Teskey T.C.J.:

The Appellant appeals his assessment of income tax for the year 1990.

Issue

The sole issue before me is whether a sale of a parcel of property containing approximately 3.03 acres, upon which the Appellant’s principal residence was situated thereon, can be characterized as a sale of his principal residence which would reduce his capital gain to nil.

Facts

The Appellant purchased a parcel of land having a frontage of 209 feet on the south side of what is now known as 64th Avenue having a depth of 628 feet, more or less containing approximately 3.03 acres or 1.226 hectares, upon which was situated his principal residence. The property is municipally known as 12274-64th Avenue, Surrey, British Columbia. When the parcel of land was purchased, the Appellant did not want the whole parcel but had to purchase the whole parcel.

At the time of purchase and right up to the date of sale, the property was zoned as such that the minimum lot size was 1 acre and the minimum required frontage was 165 feet. I am satisfied an application to sever the property or subdivide the property in any manner, prior to 1988, would have been refused. By the end of 1987, the normal municipal services such as sanitary sewer, storm sewer and water had been installed up to or very near the Appellant’s property.

In November of 1988, the Appellant caused to be filed with the municipality an application to subdivide the property into 6,000 square feet lots and to rezone the property for this size of lot. The services of an engineering firm were retained, which services were paid for as invoices were rendered, as well as all the required municipal fees. The plan of subdivision subdivided the Appellant’s lot into 12 full size (6,000 square feet) lots, and a four part lots which combined with other property of the Appellant, which is immaterial to this appeal.

Preliminary approval was granted for this change on March 9, 1989. Bylaw 10042 effecting the requested change was read a first and second time on May 1, 1989. A public hearing was held on the 5th day of June 1989. The by-law was read a third time on the 13th day of June 1989. Between June 13, 1989 and June 28, 1989, the engineering was completed, a subdivider’s agreement was executed and the required financing was put in place. On June 28, 1989, the Appellant knew for all intents and purposes everything had been completed for the proposed subdivision and the rezoning was a mere formality. On this date in a non-arm’s length sale, the property was conveyed for $700,000. On July 13, 1989, by-law 10042 was reconsidered and finally adopted allowing the plan of subdivision to be registered and zoning the property to allow lot sizes of 6,000 square feet.

Analysis

The Income Tax Act (the “Art”) provides an exemption from capital gains tax on a principal residence. Section 54(g)(v) deals with the amount of land to be included with the principal residence, the pertinent portion thereof reads:

(v) ..the principal residence of a taxpayer for a taxation year shall be deemed to include, except where the property consists of a share of the capital stock of a co-operative housing corporation, 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 that use and enjoyment...

The evidence before me does not establish actual use of the lands in excess of '/2 hectare (1.23 acres) as being required for the use and enjoyment of the residence. The question of the excess land over the '/2 hectare, where the zoning of the lands in question prevents a disposition of the excess land, has been dealt with by the Federal Court of Appeal on three different occasions, namely:

R. v. Yates (1986), 86 D.T.C. 6296 (Fed. C.A.)

Augart v. Minister of National Revenue (1993), 93 D.T.C. 5205 (Fed. C.A.)

Carlile v. Canada (1995), 95 D.T.C. 5483 (Fed. C.A.)

Re R. v. Yates

The Federal Court of Appeal herein agreed that Mahoney, J., the Trial Judge did not err in concluding that the disposition of 9.5 acres (3.7 hectares) was a disposition of a principal residence. The trial decision is reported at (1983), 83 D.T.C. 5158 (Fed. T.D.). Mahoney, J., stated that the critical time is the moment of disposition and he stated at page 5159:

The Defendants could not legally have occupied their housing unit as a residence on less than ten acres. It follows that the entire ten acres, subjacent and contiguous, not only “may reasonably’’ be regarded as contributing to their use and enjoyment of their housing unit as a residence; it must be so regarded. It also follows that the portion in excess of one acre was necessary to that use and enjoyment.

Re Augart v. Minister of National Revenue

Robertson, J.A. with Heald, J.A. concurring, said at page 5209:

Counsel for the respondent argued that that approach had the effect of “collapsing” the definition of principal residence prescribed by the Income Tax Act. Therein, the exemption is premised on the excess land being necessary to the individual’s use and enjoyment of the housing unit as a residence. The respondent maintains that the right of alienation and of severance might have a bearing on whether a housing unit can be enjoyed, but not on whether a housing unit can be enjoyed as a residence.

I would agree with the respondent, but only to the extent that subdivision restrictions, or for that matter minimum site requirements, in force at the date of disposition cannot be determinative of the issue under consideration. A determination regarding the area of land to be deemed a principal residence should not, in my opinion, be resolved by the mechanical application of a single criterion such as a minimum lot size on the date of disposition. Certainly, the reasoning in Yates does not support such an approach. In fact, minimum lot size at the time of acquisition was specifically addressed. At page 5188, Mr. Justice Mahoney stated:

When they bought, the Defendants did not want ten acres; they wanted only enough land for their residence but had to buy at least ten acres. They did not use more than an acre for residential purposes.

and at page 5210, he said:

In conclusion, the minimum amount of property, zoned for residential use, that the appellant was legally required to have both at the time of purchase and at the moment before disposition was 8.99 acres.

Re Carlile v. Canada

In this case, Desjardins, J.A. with MacGuigan, J.A. concurring, concluded that the taxpayer (whose total parcel was 32.75 acres) therein both on V-day or at the time of disposition had met the objective test, not only vis-à-vis the 25-acre minimum allotment size for his property, but also for the whole property since the local authority would not have authorized a partition of her lot between 25 acres and the remaining portion. She therefore concluded that the Appellant therein should be exempt from capital gains for the entire 32.75-acre parcel.

The facts herein are quite similar to the Carlilefacts. Herein, the area the Appellant only needed was 1 acre. However, the property was subjected to the further restriction that each parcel required a frontage of 165 feet. I am satisfied that the municipality would not have allowed at any time a severance allowing the Appellant to sell or create a lot with him retaining only 1 acre with a 165-foot frontage, as the severed parcel would only have had a 44-foot frontage. The creation of this type of panhandle lot in the circumstances of the location of the property herein would have been against the municipal policy as expressed in a report dated February 29, 1988 (Exhibit A-4).

The Respondent accepts that $700,000 was the fair market value of the whole parcel (municipally known as 12274-64th Avenue) at the time of disposition. The Appellant did not take issue that if there was excess acreage, it had a fair market value of $397,300.

Although there is no evidence before me, I believe that I can safely conclude that the reason this 3.03-acre parcel was worth $700,000, was because of the subdivision approval and the imminent rezoning of the land to allow 6,000 square feet lots.

I see no difference herein than a taxpayer who buys a run down poorly kept single family residence on a '/2 hectare lot and where the landscaping is a complete mess. The new purchaser taxpayer in his or her spare time, paints the house, cares for the lawn and gardens and that by the time three years have elapsed, what was an eyesore has now become a place of beauty with lush trim lawns and well cared for gardens and shrubbery. This property is worth more, the gain which is a direct result of the taxpayer’s efforts is tax free.

Herein the large value was because of the taxpayer’s efforts but the lot size and frontage restriction were in place at all times. The Appellant herein moved with due dispatch as soon as it was practical to ask for a rezoning and a plan of subdivision. Neither of which he delayed in any way.

The decision I must make is whether the overt actions of the Appellant and his agents to obtain a rezoning of the lands and approval to register a plan of subdivision changes the fact that at the time of the conveyance, he had to sell the entire parcel of land. Obviously, in November 1988, the Appellant started in business or at the least in an adventure in the nature of trade.

Because of the frontage restriction which is as relevant as the size restriction, the Appellant from the time of purchase right up to the sale she was required to maintain the whole parcel, pay municipal taxes thereon and sell the whole parcel as a single parcel which he did. Surely, the date a taxpayer can legally convey part of his holdings has to be the appropriate date and not when he or she starts to obtain approval to convey part of the holding.

The appeal is allowed with costs and the matter is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the entire 3.03-acre parcel of land was a disposition of his principal residence within the meaning of paragraph 54(g) of the Act.

Appeal allowed.