Judgments

[1993] 3 F.C. 296

A-1586-92

Elmar Augart (Appellant)

v.

Her Majesty the Queen (Respondent)

Indexed as: M.N.R. v. Augart (C.A.)

Court of Appeal, Heald, Linden and Robertson JJ.A.—Ottawa, May 11 and 26, 1993.

Income tax — Income calculation — Capital gains “Taxpayer selling 8.99 acres, including home and outbuildings, to city for proposed highway interchange — Income Tax Act exempting principal residence, including subjacent and immediately contiguous land not exceeding one acre, provided land reasonably regarded as contributing to taxpayer’s use and enjoyment of home, from capital gains tax — Three-acre minimum lot size for building under zoning by-law when taxpayer acquired property — Prior to disposition replacement by-law requiring 80-acre minimum site area for single detached dwellings — Subdivision restrictions, or minimum site requirements at date of disposition alone not determinative of how much property in excess of one acre deemed necessary for use and enjoyment of home — Appellant legally required to purchase and dispose of 8.99 acres — Entire parcel exempt from capital gains tax — That conveyance to City of portion of property could have been effected under pre-existing severance exemption applicable only to conveyance to legislative body enacting restriction irrelevant — Applicability of exemption dependent on matters over which appellant having no say.

This was an appeal from the trial judgment holding that only three of 8.99 acres were part of the appellant’s principal residence, the remaining 5.99 acres being subject to capital gains tax.

Income Tax Act, paragraph 40(2)(b) exempts a taxpayer from paying capital gains tax on the disposition of a principal residence, which, under paragraph 54(g), includes subjacent and contiguous land not exceeding one acre in area, provided that such land may reasonably be regarded as contributing to the taxpayer’s use and enjoyment of the home.

In 1966 the appellant bought 8.99 acres of land including a house. At that time the zoning by-law required a minimum three-acre lot for any building and prohibited the subdivision of any parcel of land smaller than 10 acres. A replacement zoning by-law, which came into force March 31, 1980, provided that the minimum site area for a single detached dwelling was 80 acres, but deemed any existing sites less than that as conforming. After that date the appellant could not have subdivided the 8.99-acre parcel into two or more parcels. In August 1980 the municipality offered to buy five acres for a proposed highway interchange. The subdivision restrictions did not apply to a conveyance to the city for that purpose. When the taxpayer objected because the remaining 3.99 acres did not include his home and outbuildings, the city agreed to purchase the entire parcel. The Minister reassessed the appellant on the basis that the house and contiguous three acres constituted the appellant’s principal residence. The remaining 5.99 acres did not qualify for the capital gains exemption. The Tax Court held that the entire parcel was the minimum amount required by law and qualified as a principal residence. The Trial Judge held that the capital gains exemption was limited to three acres, the minimum amount of property upon which the taxpayer was entitled to have a residence in 1980 under the previous by-law, i.e. holdings which conformed to the minimum of the previous by-law whose legality was continued by the “grandfather” provision in the 1980 by-law.

The appellant argued that the entire acreage should be deemed his principal residence. The subdivision requirements during his ownership of the property, which prevented him from subdividing and selling a section of his land meant that he was forced to purchase and own the entire 8.99 acres. The respondent argued that the appellant could have sold five of his 8.99 acres to the city, and that subdivision restrictions dictating minimum lot size are not “akin” to minimum lot size requirements found in zoning by-laws and therefore the former are irrelevant.

Held (Linden J.A. dissenting), the appeal should be allowed.

Robertson J.A. (Heald J.A. concurring): The appellant was legally required to purchase and dispose of 8.99 acres.

To conclude that after the passage of the replacement by-law the appellant was required to “occupy” a minimum of three acres of land ignores the reality that the only practical way in which the appellant could possibly breach that requirement is by effecting a sale of at least six of the 8.99 acres. The appellant could not legally subdivide his land either at the date of purchase or after enactment of the replacement by-law. For all intents and purposes, he was required to treat the 8.99 acres as an integral part of his home.

The amount of land which contributes to the use and enjoyment of a home does not depend on what can lawfully be bought and sold. Zoning by-laws prohibiting the construction of dwellings on lots having less than a minimum site area, and subdivision restrictions have been found relevant to the amount of land exceeding one acre necessary to the use and enjoyment of one’s home. The appellant’s prerogative to exercise his common-law right of alienation was subject to the provisions of the replacement by-law which required that he convey the entire 8.99-acre parcel of land. The appellant had to dispose of the entire 8.99 acres to exercise his right of alienation or to “enjoy” his residence. As to whether the right of alienation affects enjoyment of a housing unit as a residence, subdivision restrictions, or minimum site requirements, in force at the date of disposition alone are not determinative. The appellant was required to purchase a minimum of 8.99 acres in order to occupy the dwelling unit as a residence because the original by-law would not allow the parcel to be subdivided. The prohibition against subdividing remained in effect even after passage of the replacement by-law. The Trial Judge erred in presuming that prior to the enactment of that by-law the appellant could have retained three acres and sold off the remaining 5.99 acres.

That a sale of a portion of the property could have been effected under a pre-existing severance exemption, applicable only in the event of a conveyance to the legislative body which enacted the restriction, was irrelevant when determining minimum lot size at the time of disposition. Whether or not the home was situated on the retained portion was also irrelevant. The exemption was not enacted for the benefit of landowners, but to enable municipal governments to avoid the effects of their own legislation. The applicability of the exemption was dependent on whether the municipality needed the lands for the purposes set out in the by-law. Those are matters over which the appellant had no say. Had the zoning by-law prescribed a general scheme by which landowners could seek and obtain an exemption from the subdivision restrictions, the appellant’s legal argument would no longer be compelling.

Linden J.A. (dissenting): The three-acre minimum was the amount of land that was necessary for the use and enjoyment of the appellant’s housing unit as a residence. The exception in paragraph 54(g) to the one-acre standard does not apply where greater acreage merely contributes to the use and enjoyment of the housing unit. It is aimed only at situations where land beyond one acre is necessary for the use and enjoyment of the housing unit as a residence. R. v. Yates should be distinguished because there there was a legal impediment to the occupation of a residence, not to its sale or subdivision. The minimum acreage required in order to occupy the residence was 10 acres from the date of acquisition and throughout the Yates’ ownership. The initial minimum requirement herein was three acres under the zoning by-laws at the time the taxpayer acquired the property. It was not increased until 14 years later.

The subdivision requirements affecting the purchase and sale of land do not determine the tax consequences of a disposition of a principal residence. The ability to buy or sell a parcel of land and the ability to occupy that land are two different things. While the right of alienation is a feature of the right to enjoy one’s land, that cannot govern the tax consequences of selling a principal residence. According to paragraph 54(g), the tax consequences flow from whether the land is necessary for the use and enjoyment of a housing unit as a principal residence. The right of alienation of land may have to do with the enjoyment of land but it does not concern the enjoyment of the housing unit as a principal residence.

STATUTES AND REGULATIONS JUDICIALLY CONSIDERED

Income Tax Act, S.C. 1970-71-72, c. 63, ss. 40(2)(b) (as am. by S.C. 1977-78, c. 1, s. 17), 54(g) (as am. by S.C. 1973-74, c. 14, s. 14; 1980-81-82-83, c. 140, s. 23; 1985, c. 45, s. 23).

CASES JUDICIALLY CONSIDERED

APPLIED:

R. v. Yates, [1983] 2 F.C. 730; [1983] CTC 105; (1983), 83 DTC 5158 (T.D.); affd [1986] 2 C.T.C. 46; (1986), 86 DTC 6296 (F.C.A.).

CONSIDERED:

Watson (SK and T) v. MNR, [1985] 1 CTC 2276; (1985), 85 DTC 270 (T.C.C.); Joyner v. M.N.R., [1989] 1 F.C. 306; [1988] 2 C.T.C. 280; (1988), 88 DTC 6459; 22 F.T.R. 104 (T.D.); Rudeloff (C) v. MNR, [1984] CTC 2674; (1984), 84 DTC 1548 (T.C.C.); James (HM and RC) v. MNR, [1985] 2 CTC 2001; (1985), 85 DTC 290 (T.C.C.); Michael (S) v. MNR, [1985] 2 CTC 2122; (1985), 85 DTC 455 (T.C.C.); D.J. Mintenko v. Canada, [1989] 1 C.T.C. 40; (1988), 88 DTC 6537; 22 F.T.R. 300 (F.C.T.D.); Rode (E and E) v. MNR, [1985] 1 CTC 2324; (1985), 85 DTC 272 (T.C.C.); S.E. Lewis Estate v. M.N.R., [1989] 2 C.T.C. 2011; (1989), 89 DTC 291 (T.C.C.); Raper (S.J.) Estate v. M.N.R., [1986] 2 C.T.C. 2052; (1986), 86 DTC 1513 (T.C.C.); Windrim (G.M.) v. Canada, [1991] 1 C.T.C. 271; (1991), DTC 5221 (F.C.T.D.).

REFERRED TO:

J. & A. Lewis Estates v. M.N.R., [1989] 2 C.T.C. 2060 (T.C.C.); Central Jewish Institute v. City of Toronto, [1948] S.C.R. 101; [1948] 2 D.L.R. 1; Baird (EB) v. MNR, [1983] CTC 2651; (1983), 83 DTC 582 (T.C.C.).

AUTHORS CITED

Oosterhoff, A. H. and W. B. Rayner. Anger & Honsberger Law of Real Property, 2nd ed. Toronto: Canada Law Book, 1985.

Rogers, Ian MacF. Canadian Law of Planning and Zoning. Toronto: Carswell, 1973.

APPEAL from trial judgment (The Queen v. Augart, E. (1992), 92 DTC 6610 (F.C.T.D.); revg E. Augart v. M.N.R., [1989] 1 C.T.C. 2353; (1989), 89 DTC 263 (T.C.C.)) holding only three of 8.99 acres included as principal residence and exempt from capital gains tax. Appeal allowed.

COUNSEL:

H. George McKenzie for appellant.

Ian S. MacGregor and Kathleen Lyons for respondent.

SOLICITORS:

Felesky Flynn, Calgary, for appellant.

Deputy Attorney General of Canada for respondent.

The following are the reasons for judgment rendered in English by

Linden J.A. (dissenting): I am unable to agree.

The issue in this case is a simple but important one. Proceeds from the sale of a taxpayer’s principal residence are exempt from capital gains under paragraph 40(2)(b) of the Income Tax Act [S.C. 1970-71-72, c. 63 (as am. by S.C. 1977-78, c. 1, s. 17)]. The question to be decided in this case concerns the amount of land that can be included along with a taxpayer’s principal residence, pursuant to paragraph 54(g) [as am. by S.C. 1973-74, c. 14, s. 14] of the Income Tax Act.

The appellant, Elmar Augart, purchased 8.99 acres of land including a house in 1966 for $50,000. Under a zoning by-law in effect at that time, the appellant was required to own a minimum of three acres in order to occupy the residence on his land which was a modest three-bedroom bungalow. The appellant lived in the house until 1980, when he sold it to the city of Calgary for $899,000 for a highway project. In 1980, prior to the sale of the property, a new zoning by-law was enacted, requiring a minimum of 80 acres of land for a residence. The appellant, however, was exempt from this by-law because his residence was a non-conforming use, allowing him to continue to live on his 8.99-acre parcel of land. Throughout the period of his ownership of the property, the appellant was prohibited from subdividing his land.

The appellant contends that the entire 8.99 acres should be exempt from tax as part of his principal residence, whereas the Crown supports the decision of Mr. Justice Strayer [(1992), 92 DTC 6610 (F.C.T.D.)], reversing the Tax Court [[1989] 1 C.T.C. 2353], to the effect that only three acres were part of the principal residence, the remaining 5.99 acres being subject to capital gains tax. In my view, Mr. Justice Strayer was correct in concluding that only three acres were properly included as part of his principal residence and exempt from tax.

Paragraph 40(2)(b) of the Income Tax Act exempts a taxpayer from paying capital gains tax on the disposition of a principal residence. The definition of principal residence is set out in paragraph 54(g) of the Income Tax Act. The relevant part of paragraph 54(g) provides:

54.…

(g) … “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 one acre, 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;

Under this definition, the ordinary situation is one in which the taxpayer sells a principal residence with less than one acre of land. In that event, the entire property will be treated as part of the principal residence and will be exempted from capital gains tax as long as it “may reasonably be regarded as contributing to the taxpayer’s use and enjoyment of the housing unit as a residence”.

However, if the principal residence sits on more than one acre, paragraph 54(g) deems the acreage above that amount “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”. In that event, the taxpayer will be exempted from capital gains tax on the amount of the land shown to be necessary for the use and enjoyment of the housing unit as a residence. To get an exemption for more than one acre is a “difficult task”, which is subject to a “stringent test.”

The effect of paragraph 54(g) was well summarized by Christie A.C.J.T.C. in Rode (E and E) v. MNR, [1985] 1 CTC 2324 (T.C.C.), at page 2326:

… [t]he area encompassed by a principal residence is a variable depending upon the pertinent circumstances. I am also of the view that the test to be applied in determining what that area is, is flexible … if the taxpayer is not contending that the subjacent and immediately contiguous land comprising his principal residence exceeds one acre. In such cases significant weight should be attached in favour of an appellant to credible evidence that can be sensibly regarded as making the kind of contribution described [in paragraph 54(g)]. If, on the other hand, the appellant is contending that the parameters of his principal residence exceed one acre, he is faced with a significantly altered and more difficult task. In these circumstances the law provides that the excess shall be deemed not to have contributed to the appellant’s use and enjoyment of the housing unit as a residence unless he establishes that it was necessary to such use and enjoyment. The emphasized words are key. The word “deemed” in paragraph 54(g) has this consequence. Even if an appellant establishes beyond controversy that what exceeds one acre did in fact make an important contribution to his use and enjoyment of the housing unit as a residence, this does not assist him because the fact has been nullified by the legislation unless he proves necessity. Therefore what an appellant must do in order to establish that his principal residence exceeds one acre is to prove that the excess was “necessary” to the use and enjoyment of the housing unit as a residence. I believe that in its context this requirement dictates that a stringent test shall be applied in determining the acreage of a principal residence.

This is a sensible approach to deciding the amount of land that may be treated as part of a principal residence under paragraph 54(g). This provision, along with paragraph 40(2)(b), was included in the Income Tax Act primarily to protect ordinary homeowners who sell their residences. It was not intended as a tax bonanza to the owners of large estates. Parliament demonstrated this when it set the one-acre dividing line, which amount of land is more than that surrounding the vast majority of homes in Canada today. Paragraph 54(g) of the Act allows for exceptions to the one-acre standard, but only in those rare circumstances where more than one acre is necessary for the use and enjoyment of the housing unit as a residence.

This exception clearly does not apply where greater acreage merely contributes to the use and enjoyment of the housing unit (Rudeloff (C) v. MNR, [1984] CTC 2674 (T.C.C.)). Every one would enjoy their homes more if the lots were larger, but this does not mean that the capital gains tax upon sale can be reduced because of that.

The exception described in paragraph 54(g) is aimed only at situations where extra land beyond one acre is necessary for the use and enjoyment of the housing unit as a residence. One example furnished by counsel for the Crown was where more than one acre is required for a driveway to reach the house. Another supplied by him was where a house is built into the side of a hill and needs more than one acre to support it. There are certainly numerous other situations akin to these.

A further situation that has been developed in the jurisprudence is where it is impossible to occupy a residence on a parcel of land less than one acre because of a local by-law to that effect. In R. v. Yates, [1983] 2 F.C. 730 (T.D.); affd [1986] 2 C.T.C. 46 (F.C.A.), the taxpayers were forced to purchase a 10-acre parcel of land on which to build their home because of a zoning by-law which stipulated that 10 acres was the minimum residential parcel then permitted. In order to occupy a residence in that community, therefore, a property owner was required to own at least 10 acres of land. When the Yates sold the bulk of their land to the Crown to avoid expropriation, a dispute arose as to whether the proceeds of disposition were taxable as a capital gain or exempt as proceeds from the sale of a principal residence. Mahoney J., at page 732, supra, concluded:

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.

I feel obliged to observe, with respect, that I entertain doubts about the correctness of certain aspects of the Yates decision, including the so-called objective test, but, even if it is right, it does not resolve the issue in this case. In Yates, the minimum acreage required in order for the Yates to occupy their residence was 10 acres from the date of acquisition and throughout their ownership of the property to the moment before disposition. The decision alleviated the perceived injustice of the situation where there was a legal impediment to the occupation of a residence, not to its sale nor subdivision.

It should be noted that at the actual time of disposition, though, the 10-acre minimum was relaxed for the Yates who sold 9.3 acres to the Government and continued to reside on the remaining 0.7 acres. Accordingly, Mr. Justice Mahoney’s statement in Yates, supra, at page 732, that “the critical time is the moment before disposition” is meant to distinguish between the “moment before disposition”—when 10 acres was the required minimum—and the “actual time of disposition”—when only .7 acres sufficed in order to occupy the residence. In choosing between the moment before disposition and the actual time of disposition, the Yates decision did not address the implications of changes between the date of acquisition and the date of disposition of the minimum required acreage for occupying a residence. This is not surprising, since the minimum acreage required to occupy the residence in the Yates case remained constant throughout the ownership of the property.

The same is not true in this case where the initial minimum requirement of three acres under the zoning by-laws was later raised. Fourteen years after Mr. Augart purchased his property, a by-law came into force changing the zoning from RC—Residential Country to UR—Urban Reserve District, raising the minimum required acreage for occupying a residence to 80 acres. Owning only 8.99 acres, Mr. Augart was granted a non-conforming use exemption which allowed him to continue to occupy his residence. Under this exemption, the minimum acreage on which Mr. Augart was able to reside was 8.99 acres. Yet at the time when the appellant purchased his property, and throughout most of the period of his ownership of that property, Mr. Augart was only compelled to hold three acres in order to occupy his residence. This fact must be considered relevant to determining the amount of land necessary for the use and enjoyment of the appellant’s principal residence. I agree, therefore, with Mr. Justice Robertson that, while the date of disposition may be the appropriate date in most cases, it should not be considered definitive.

In argument before us, the Crown submitted that the three acres, which the appellant was required to own in order to occupy his residence at the time of acquisition and throughout most of his ownership of the property, is the amount of land necessary for the use and enjoyment of the housing unit as a residence. That was the conclusion reached by Mr. Justice Strayer in the Court below [at page 6612]:

In the present case the minimum amount of property upon which the taxpayer was entitled to have a residence in 1980, after the bylaw had been amended, was the minimum permitted by the previous bylaw. It was holdings which conformed to the minimum of the previous bylaw, namely those of 3 acres, whose legality was continued by the “grandfather” provision in the 1980 bylaw. It is true that the taxpayer here had always owned more than the minimum but the 5.99 acres in excess of that minimum would not, objectively, have been regarded as part of the principal residence prior to the adoption of the bylaw on March 31, 1980. Presumably, the taxpayer could have disposed of that remaining property for residential purposes prior to the adoption of the new bylaw. I see no reason why, with the adoption of the new bylaw, the taxpayer should suddenly become entitled to a windfall of an additional 5.99 acres of principal residence when he was quite legally entitled, by virtue of the non-conforming use provision to continue to reside on 3 acres after the coming into force of the bylaw and at the time of the actual disposition. I think this conclusion is also consistent with H.M. the Queen v. Joyner, [1988] 2 C.T.C. 280 (F.C.T.D.).

Therefore the Yates decision properly applied means that objectively the minimum amount of land associated with the principal residence would be 3 acres, the minimum amount which the owner of any residence in this area was entitled to continue to live on as a non-conforming use under the bylaw of March 31, 1980.

I agree with these reasons to the effect that the three-acre minimum is the amount of land that was necessary for the use and enjoyment of the appellant’s housing unit as a residence. Therefore, Mr. Augart should be entitled to claim three acres of land as part of his principal residence exemption, with the remaining 5.99 acres subject to capital gains tax.

It was urged upon us by counsel for the appellant that the subdivision requirements in place during the appellant’s ownership of the property, which prevented him from subdividing and selling a section of his land, meant that the appellant was forced to purchase and own the entire 8.99 acres. With respect, the authorities do not persuade me of the correctness of counsel’s position; rather they more strongly support the contrary conclusion. In Windrim (G.M.) v. Canada, [1991] 1 C.T.C. 271 (F.C.T.D.), at page 279, Mr. Justice Muldoon observed:

Finally the plaintiff … pleads that he could not subdivide the land but had to sell it en bloc, if it were to be sold. The Court asks, so what? Is the result not in sweet accord with the intent of the legislator and with the provisions of the legislation? …

That he could not sever them for separate sale … produces a result quite consonant with the better administration of this law of Canada, the Income Tax Act.

The same point was made by the Court in Watson (SK and T) v. MNR, [1985] 1 CTC 2276 (T.C.C.), at page 2278 where Bonner T.C.J. stated:

In my view the definition of “principal residence” contained in paragraph 54(g) is such that considerations as to what can lawfully and effectively be conveyed are irrelevant. The amount of land which contributes to the use and enjoyment of a housing unit is not, by paragraph 54(g) of the Income Tax Act, made to depend on what can lawfully be bought and sold.

Consequently, it is the language of the Income Tax Act that governs liability for tax, not the municipal subdivision by-laws that happen to be in force at the time.

This view was echoed in S.E. Lewis Estate v. M.N.R., [1989] 2 C.T.C. 2011 (T.C.C.) where the Court specifically distinguished Yates on the basis that the latter involved minimum requirements for occupying a residence while the former involved subdivision requirements. Similarly, in Rudeloff (C) v. MNR, [1984] CTC 2674 (T.C.C.) the Court permitted only one acre to be included with the principal residence even though the minimum parcel into which land could be subdivided was five acres.

A contrary view was entertained in Raper (S.J.) Estate v. M.N.R., [1986] 2 C.T.C. 2052 (T.C.C.) and in Michael (S) v. MNR, [1985] 2 CTC 2122 (T.C.C.), although in the latter case there was a suggestion that the limitation on severance was economic rather than legal.

A number of other cases have avoided the issue, because there were no subdivision restrictions in place either at the time of acquisition or at the time of disposition (Joyner v. M.N.R., [1989] 1 F.C. 306 (T.D.)); because there was only an economic restraint on subdivision not a legal restriction (James (HM and RC) v. MNR, [1985] 2 CTC 2001 (T.C.C.)); or, because there was no evidence of a restriction on subdividing the land in question (D.J. Mintenko v. Canada, [1989] 1 C.T.C. 40 (F.C.T.D.)).

I am, therefore, not persuaded that subdivision requirements affecting the purchase and sale of land determine the tax consequences of a disposition of a principal residence. The ability to buy or sell a parcel of land and the ability to occupy that land are two different things. And, while it is clear that the right of alienation is a feature of the right to enjoy one’s land, that cannot govern the tax consequences of selling a principal residence. According to paragraph 54(g) of the Income Tax Act, the tax consequences flow from whether the land is necessary for the use and enjoyment of a housing unit as a principal residence. The right of alienation of land may have to do with the enjoyment of the land but it does not concern the enjoyment of the housing unit as a principal residence. I am of the view, then, that subdivision requirements affecting the purchase and sale of land are not relevant for determining whether more than one acre is necessary for the use and enjoyment of the principal residence in order to avoid the capital gains tax consequences upon disposition.

Accordingly, I would dismiss the appeal, with costs.

* * *

The following are the reasons for judgment rendered in English by

Robertson J.A.: The appellant maintains that he is entitled to a tax-free capital gain on the sale of his home and surrounding lands encompassing 8.99 acres. For the most part, the legal issues to be addressed herein are of little relevance to those who have opted for the advantages associated with urban living. Under the Income Tax Act, the disposition of a family home that qualifies as a “principal residence”, composed of subjacent and contiguous land not exceeding one acre in area, is exempt from capital gains treatment provided that such land may reasonably be regarded as contributing to the taxpayer’s use and enjoyment of his or her home.[1] (The Act [as am. by S.C. 1980-81-82-83, c. 140, s. 23; 1985, c. 45, s. 23] now reads “½ hectare” (1.24 acres)).

With respect to lot size, most urban residential properties will not exceed the prescribed limit. However, in the case of rural properties, and those that would have remained as such were it not for the phenomenon of urban sprawl, lot sizes frequently exceed one acre. As a result, the intricacies of the tax legislation cannot be avoided in the event of a sale at a gain. In order to claim a capital gains exemption for land in excess of one acre the taxpayer faces the onerous task of establishing that the excess was “necessary” to the use and enjoyment of the housing unit as a residence.

Arguably, the acreage prescribed by the Income Tax Act fails to reflect the reality of rural living and also the extent to which provincial and municipal governments are able to regulate the development and use of land. The opposing policy argument is premised on the understanding that planning restrictions cannot be invoked as a legal basis to insulate substantial tracts of land from capital gains treatment.

This appeal must necessarily focus on the relevance of land use legislation when determining whether the sale of the 8.99 acres may be deemed a disposition of a principal residence or, alternatively, whether any of the lands in excess of one acre qualify for the capital gains exemption.

BACKGROUND

In 1966, the appellant acquired an 8.99 acre parcel of land on which a modest three-bedroom bungalow (30 feet x 40 feet) had been constructed. The purchase price was $50,000. At the time of purchase, the land was zoned “RC—Country Residential District”, pursuant to Zoning By-law 4916 of the City of Calgary (hereinafter referred to as the “original by-law”). With respect to minimum lot size, this by-law dictated that no building could be located on a site less than three acres in area.[2] It also prohibited the subdivision of lands if the parcel to be subdivided was less than 10 acres in size.[3]

After 1966, the appellant acquired a number of out buildings which he moved to or constructed on the property. These buildings included a barn made of two double garages, a well house, a shed to shelter livestock, a granary to store feed, a tool shed and a greenery made of two single garages with a common glass roof.

From the date of purchase until the property was sold in 1980, the appellant carried on an egg-jobbing operation out of his home and garage. He would purchase eggs from farmers, re-sort them and then sell them to commercial purchasers such as local restaurants. From time to time, the appellant kept riding horses for his personal use and that of his wife. He also carried on a small farming business which involved raising and selling from time to time pigs, horses, calves, turkeys, etc. However, the appellant’s principal source of income was derived from egg jobbing.[4]

On March 3, 1980, the city of Calgary enacted By-law 2P80, a zoning by-law, which came into effect on March 31, 1980 (hereinafter referred to as the “replacement by-law”). Pursuant to this by-law, the appellant’s lands were designated “UR—Urban Reserve District”. Under that designation the minimum site area for a single detached dwelling was 32 hectares (80 acres). The purpose of the “UR” zone was to protect against the premature subdivision of lands and future small scale developments. The replacement by-law deemed any existing sites less than 32 hectares as conforming.[5] The evidence also establishes that after March 31, 1980, the appellant could not have subdivided the 8.99-acre parcel into two or more parcels.[6]

On August 31, 1980, the city of Calgary purchased the appellant’s lands as they were needed for a proposed highway interchange. Initially, the city offered to purchase only five of the 8.99 acres. Apparently, the appellant objected to this offer because all of the outbuildings and his home were situate on the portion to be sold to the city.[7] However, the latter eventually agreed to purchase the entire parcel of land for the princely sum of $899,000. The Minister of National Revenue reassessed the appellant on the basis that the house and contiguous lands totalling three acres in area constituted the appellant’s principal residence. Hence, the remaining 5.99 acres did not qualify for the capital gains tax exemption. The appellant appealed that reassessment to the Tax Court of Canada arguing that the entire parcel was exempt.

The learned Tax Court Judge was of the view that based on actual use the appellant required only one acre for the use and enjoyment of his residence. However, in light of the decision of Mahoney J. (as he then was) in R. v. Yates, [1983] 2 F.C. 730 (T.D.), affirmed [1986] 2 C.T.C. 46 (F.C.A.), the Tax Court Judge concluded that the entire 8.99-acre parcel qualified as his principal residence and hence the sale was exempt from capital gains treatment.

The decision of Mr. Justice Mahoney in Yates was regarded as “precedent-setting”[8] and remains as such. In fact both parties are relying on the reasoning therein to support their respective positions. At this point, it is convenient to set out the facts and reasoning in that case.

In Yates, the taxpayers purchased a 10-acre parcel of vacant land on which they had constructed a home in the year of purchase (1964). At that time, the zoning by-law required that a residential lot have a minimum area of 10 acres. However, they did not use more than one acre for residential purposes. The balance was rented to a neighbouring farmer who grew crops on it. In time the by-law was amended to require a minimum of 25 acres. In 1978, the taxpayers sold 9.3 acres to the city of Guelph under the threat of expropriation. They continued to reside on the remaining .7 acre while claiming a capital gains tax exemption for the portion sold. In upholding the taxpayers’ position, Mahoney J. stated [at page 732]:

In my opinion, the critical time is the moment before disposition. It is possible that a subjective test, involving the actual contribution of the immediately contiguous land to the taxpayer’s use and enjoyment of the unit as residence, may be admissible. Perhaps such factors as are commonly taken into account in applying subsection 24(6) of the Expropriation Act could be relevant in appropriate circumstances. However, whether or not a subjective test is properly to be applied, an objective test surely is and if, in its application, it is found that the taxpayer has discharged the onus on him, it is unnecessary to consider the subjective.

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.

Against this backdrop, the Tax Court Judge in the present case concluded that when determining how much property in excess of one acre can be deemed necessary for the use and enjoyment of a home one must look to the minimum amount of property legally required for a residence at the time of its disposition. He concluded that the entire 8.99 acres was the minimum amount required by law.

The finding of the Tax Court Judge was appealed by trial de novo to the Trial Division of this Court (now reported (1992), 92 DTC 6610 (F.C.T.D.)). The learned Trial Judge held that the meaning of the ruling in Yates had been misconstrued. At page 6612, he concluded:

In the present case the minimum amount of property upon which the taxpayer was entitled to have a residence in 1980, after the bylaw had been amended, was the minimum permitted by the previous bylaw. It was holdings which conformed to the minimum of the previous bylaw, namely those of 3 acres, whose legality was continued by the “grandfather” provision in the 1980 bylaw. It is true that the taxpayer here had always owned more than the minimum but the 5.99 acres in excess of that minimum would not, objectively, have been regarded as part of the principal residence prior to the adoption of the bylaw on March 31, 1980. Presumably, the taxpayer could have disposed of that remaining property for residential purposes prior to the adoption of the new bylaw. I see no reason why, with the adoption of the new bylaw, the taxpayer should suddenly become entitled to a windfall of an additional 5.99 acres of principal residence when he was quite legally entitled, by virtue of the non-conforming use provision to continue to reside on 3 acres after the coming into force of the bylaw and at the time of the actual disposition.

It is apparent that both judges asked the same question: what was the minimum amount of land which the taxpayer was legally obliged to have in connection with his residence at the time of disposition? The basis on which their opinions differ is equally apparent. The Tax Court Judge believes that the proper response is 8.99 acres while the Trial Judge has concluded that the capital gains tax exemption must be limited to three of the 8.99 acres. On appeal, the argument also focussed on the amount of land required at the time of purchase and the relevance of subdivision restrictions affecting minimum lot sizes.

ANALYSIS

The appellant argued that the learned Trial Judge erred when he concluded that the minimum amount of property required after the passage of the replacement by-law in 1980, and at the moment before disposition, was three acres. The appellant maintains that on enactment of the replacement by-law the three-acre minimum lot size requirement, found in the original by-law, was no longer of any legal significance. There is no provision in the replacement by-law which had the effect of continuing the minimum lot size found in the original by-law. Furthermore, it was argued that the effect of the replacement by-law in relation to the appellant’s land was simply to deem it, as well as all other non-conforming properties in the municipality, as conforming. Hence, so long as the appellant continued to use and occupy his home, as he had in the past, the replacement by-law was of no consequence.

The appellant’s legal analysis of the effect of an amending by-law reflects well-accepted principles in the area of planning law.[9] In my respectful view, it is not reasonable to conclude that after the passage of the replacement by-law the appellant was required to “occupy” a minimum of three acres of land. If that were the case then one would have to ignore the reality that the only practical way in which the appellant could possibly breach that requirement is by effecting a sale of at least six of the 8.99 acres. But as the evidence clearly discloses, it was not legally permissible to effect a subdivision of the appellant’s land either at the date of purchase or after enactment of the replacement by-law. For all intents and purposes, the appellant was required to treat the 8.99 acres as an integral part of his home. Thus the appellant maintains that the entire acreage should be deemed his principal residence.

The respondent counters by emphasizing that the appellant could have sold five of his 8.99 acres to the city of Calgary, notwithstanding the subdivision restrictions. As well, it is argued that subdivision restrictions dictating minimum lot size are not “akin” to minimum lot size requirements found in zoning by-laws and therefore the former are irrelevant to the issue under consideration. I shall deal with this objection first.

In Watson (SK and T) v. MNR, [1985] 1 CTC 2276, at page 2278, the Tax Court concluded that the Income Tax Act does not require that the amount of land which contributes to the use and enjoyment of a home depend on what can lawfully be bought and sold. A similar view was expressed in J. & A. Lewis Estates v. M.N.R., [1989] 2 C.T.C. 2060 (T.C.C.), at page 2064. What was deemed relevant in those cases were the provisions of the zoning by-law which prohibited the erection of dwellings on lots having less than a minimum site area, as was the case in Yates. Yet, it is not surprising that the majority of cases have proceeded on the basis that subdivision restrictions are relevant to determining whether land in excess of one acre can be deemed necessary to the use and enjoyment of one’s home.[10] More often than not the minimum lot size on which, for example, a single-family dwelling can be erected under the site requirements of a zoning by-law will mirror that prescribed for each of the lots created by a subdivision of land. Though the reasons for judgment in Yates make no reference to the subdivision restrictions which existed at either the time of acquisition or disposition, that fact does not of itself preclude consideration of the relevance of subdivision restrictions touching on minimum lot sizes.

As Mr. Justice Muldoon noted in Windrim (G.M.) v. Canada, supra (at page 279), the meaning to be ascribed to the term “enjoyment” under the Act embraces the exercise of a legal right, such as that of possession. But it is also a basic right of a landowner to effect a transfer of all or a portion of his or her lands. The right of alienation is regarded as a fundamental tenet in the law governing real property.[11] In the instant case, the appellant’s prerogative to exercise his common law right of alienation was subject to the provisions of the replacement by-law which made it necessary that he convey the entire 8.99-acre parcel of land. In other words, a disposition of 8.99 acres was necessary in order for the appellant to exercise his right of alienation or, to trace the language of the Act, to the “enjoyment” of his residence.

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 731, 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. [Emphasis is mine.]

In the instant case, it is common ground that at the time of acquisition the original by-law would not permit the 8.99-acre parcel to be subdivided. That is to say the appellant was obligated to purchase a minimum of 8.99 acres in order to occupy the dwelling unit as a residence. Moreover, the prohibition against subdividing the land remained in effect even after passage of the replacement by-law. On this point, the learned Trial Judge was in error by presuming, as he did, that prior to the enactment of that by-law the appellant could have retained three acres and sold off the remaining 5.99 acres (at page 6612).[12] If in fact that had been the case, I would have little difficulty in dismissing this appeal. However, after examining the relevant by-law provisions and in light of the fact that counsel for the respondent conceded this point (subject to the argument outlined below), I must accept that at law the appellant had no choice but to purchase the entire 8.99 acres if he wished to occupy the home situate thereon. Thereafter and until the moment before disposition, the appellant could not effect a legal subdivision of his lands.

In summary, the appellant was required to purchase and dispose of 8.99 acres. Similarly in Yates, the taxpayers were obligated to acquire and retain 10 acres until the “moment before disposition”. In my view, the facts of the present case are, for all intents and purposes, indistinguishable from those found in Yates except in one insignificant respect. In the latter case, the lot size was addressed in terms of minimum site requirements imposed under the zoning provisions. Here, minimum lot size was addressed in terms of subdivision restrictions. Putting aside that distinction, the facts of these two cases parallel one another even to the extent that the taxpayers sold their respective properties to the municipality which had imposed the planning restrictions in the first instance. Therein lies the respondent’s final argument.

The respondent seized upon the fact that the appellant could have legally subdivided his land had he agreed to sell five of the 8.99 acres to the city of Calgary. Normally, a sale of a portion of the taxpayer’s land would be considered cogent evidence that the land sold was not necessary to the use and enjoyment of the dwelling unit: Baird (E B) v. MNR, [1983] CTC 2651 (T.C.C.). As noted earlier, the appellant was not interested in retaining the residual 3.99-acre portion because it did not include his home and out buildings. Nonetheless, it is true that the five acres needed for the proposed highway interchange could, at any time, have been validly conveyed to the city as the subdivision restrictions did not apply to conveyances for such a purpose.

In my view, the fact that a sale of a portion of the property could have been effected under a pre-existing severance exemption, applicable only in the event of a conveyance to the legislative body which enacted the restriction in the first instance, must be deemed irrelevant when determining minimum lot size at the time of disposition. Whether or not the home is situate on the retained portion is equally irrelevant. The exemption was not enacted for the benefit of landowners per se, but rather to enable municipal governments to avoid the effects of their own legislation. The applicability of the exemption was dependent on whether the municipality needed the lands for the purposes set out in the by-law. Those are matters over which the appellant had no say. I hasten to add that had the zoning by-law in question prescribed a general scheme by which landowners could seek and obtain an exemption from the subdivision restrictions, the appellant’s legal argument would no longer be compelling.

In my view, the conveyance to the city of Calgary is more akin to an involuntary sale, as was alluded to in Yates and where in fact the taxpayers did retain a portion of their “principal residence”. As is commonly known, the threat or even the possibility of expropriation often serves as an incentive for parties to reach a mutually acceptable compromise.

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.

I would allow the appeal with costs both here and in the Trial Division, set aside the judgment of the Trial Division dated November 23, 1992, and refer the matter back to the Minister of National Revenue for reassessment on the basis that the disposition of the 8.99-acre parcel of land by the appellant was a disposition of part of his principal residence for the purposes of the Act.

Heald J.A.: I agree.

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