T-1370-87
The Queen (Plaintiff)
v.
Kenneth W. Joyner (Defendant)
INDEXED AS: JOYNER v. M.N.R.
Trial Division, Reed J.—Vancouver, September 6
and 14, 1988.
Income tax — Income calculation — Capital gains — Sale
of principal residence — Land necessary to use and enjoyment
of principal residence within Act s. 54(g) — Relevant time for
determination of land area to be deemed part of principal
residence, for purposes of Act s. 40(2)(b) — Determination not
to take into account zoning by-laws in effect between acquisi
tion and disposition.
The taxpayer and his wife lived in a house on a 14-acre
property acquired during the years 1965 to 1968. In 1980, they
sold their residence and 7.9 acres of land. The Minister
assessed capital gains tax with respect to 6.9 acres. The part of
the proceeds attributable to the house itself and to one acre of
land subjacent and contiguous thereto were considered exempt
under paragraph 54(g) of the Income Tax Act.
The taxpayer argues that since, during the years 1972 to
1975, by-laws prevented the selling of the house without also
selling the whole 14-acre parcel, the whole property was, during
those years, necessary to the use and enjoyment of their resi
dence within the meaning of paragraph 54(g) and therefore
part of their principal residence. It is therefore argued in this
appeal from the Tax Court of Canada that the assessment of
the capital gains tax payable on the 6.9 acres should be reduced
proportionately to take into account the years during which the
zoning restriction prevented subdivision of the property.
The issue in this case relates to the time at which, for the
purposes of paragraph 40(2)(b) of the Income Tax Act, the size
of the area of land which will be deemed to be part of the
taxpayer's principal residence (one acre maximum or some
larger area) is to be determined.
Held, the appeal should be allowed.
It is the time of the disposition of the property which is
significant in ascertaining whether or not land in excess of one
acre should be deemed to be part of the taxpayer's principal
residence. There were no "more than one acre" minimum
requirements at the time of disposition, nor at the time of
purchase, nor on valuation day. Paragraph 40(2)(b) should not
be interpreted as meaning that a taxpayer's principal residence
will have a varying size over the years, depending upon the
applicable zoning by-laws and that the capital gains tax pay
able on disposition is to be calculated on the basis of that
varying size.
STATUTES AND REGULATIONS JUDICIALLY
CONSIDERED
B.C. Reg. 4/73.
B.C. Reg. 19/73.
Environment and Land Use Act, R.S.B.C. 1979, c. 110, s.
6.
Income Tax Act, S.C. 1970-71-72, c. 63, ss. 3, 38, 39, 40
(as am. by S.C. 1977-78, c. 1, s. 17(1)), 45, 54(g).
Land Commission Act, S.B.C. 1973, c. 46.
CASES JUDICIALLY CONSIDERED
NOT FOLLOWED:
Estate of S. I. Raper v. Minister of National Revenue
(1986), 86 DTC 1513 (T.C.C.).
DISTINGUISHED:
The Queen v. W. and M. Yates (1986), 86 DTC 6296
(F.C.A.); affg [1983] 2 F.C. 730; 83 DTC 5158 (T.D.);
The Queen v. G. Mitosinka (1978), 78 DTC 6432
(F.C.T.D.); S. K. and T. Watson v. Minister of National
Revenue (1985), 85 DTC 270 (T.C.C.); E. Rode et al. v.
Minister of National Revenue (1985), 85 DTC 272
(T.C.C.).
CONSIDERED:
F. F. Saccomanno v. M.N.R., [1986] 2 C.T.C. 2264
(T.C.C.).
COUNSEL:
M. J. Weder for plaintiff.
W. Lay and R. E. Levine for defendant.
SOLICITORS:
Acting Deputy Attorney General of Canada
for plaintiff.
Thorsteinsson, Mitchell, Little, O'Keefe &
Davidson, Vancouver, for defendant.
The following are the reasons for judgment
rendered in English by
REED J.: The issue raised by this appeal (trial
de novo) concerns the extent to which certain
sums, arising out of the sale of a property, are
exempt from capital gains tax as attributable tc
the sale of the taxpayer's principal residence.
These reasons apply to file T-1369-87 and to file
T-1370-87.
The facts in this case are not in dispute. During
the years 1965-1968, the taxpayer and his wife
(hereinafter referred to as the "defendants")
acquired, as joint tenants, 14-acres of land. There
was on the property a house which the defendants
occupied, until it was sold in 1980. As of Decem-
ber 31, 1971 and, indeed, when the defendants
first acquired the 14-acre property, it was zoned
residential and could have been subdivided into 1/2
acre lots. The property was contiguous to a resi-
dentially developed area. The defendants' inten
tion, at all relevant times, was to sell the property
for subdivision purposes.
In 1972 and early 1973, Orders in Council were
passed pursuant to section 6 of the British
Columbia Environment and Land Use Act, now
R.S.B.C. 1979, c. 110. These Orders in Council
(4483/72 [B.C. Reg. 4/73] and 157/73 [B.C. Reg.
19/73]) applied to the defendants' property. As a
result, after December 21, 1972, the 14-acre prop
erty could not be subdivided, and after January 18,
1973 it could not be used for purposes other than
farming, unless authorization to do either of these
was given. Such authorization might be given by
an Order in Council or pursuant to a provision of
some other Act (i.e. other than the Environment
and Land Use Act, supra): refer to Order in
Council 157/73.
In 1973, the Land Commission Act, S.B.C.
1973, c. 46 was enacted. It provided for the estab
lishment of land reserve plans. The defendants'
property was designated as included in an agricul
tural land reserve area. As with the earlier Orders
in Council, the effect of this restriction was to
prevent the defendants' property from being subdi
vided or being used for purposes other than farm
ing. On March 8, 1975 the defendants applied to
the Provincial Land Commission, which had been
established by the Land Commission Act, supra,
to have their 14-acre property removed from the
agricultural land reserve. On October 6, 1975,
removal of 7.9 of the 14 acres was granted; the rest
of the 14 acres (i.e. 6.1 acres) remained subject to
the agricultural land reserve restrictions. An
appeal of the decision not to exempt the whole 14
acres from the reserve was launched; that appeal
was not successful.
As of the October 1975 date, then, 7.9 acres of
the defendants' 14-acre property could again be
subdivided into residential lots. The defendants'
residence was on this 7.9-acre parcel of land. In
1980 the defendants sold their residence and the
7.9 acres. They built a new residence on the adja
cent 6.1 acres, the portion of the land still subject
to the agricultural land reserve restrictions.
With respect to the sale of the 7.9 acres, the
Minister's assessment exempted the defendants
from paying capital gains tax on the proceeds of
that sale in so far as those proceeds were attribut
able to the house itself and to one acre of land
subjacent and contiguous thereto. (This portion of
the proceeds was clearly exempt from capital gains
tax under the Income Tax Act, as being proceeds
arising out of the disposition of the defendants'
principal residence: see paragraph 54(g) of the
Income Tax Act, R.S.C. 1952, c. 148 (as am. by
S.C. 1970-71-72, c. 63, s. 1)). Capital gains tax
was assessed, however, with respect to the remain
ing 6.9 acres. It is this assessment which is in
dispute.
The defendants argue that since during the
years 1972-1975 they could not have sold their
house without also selling the whole 14-acre
parcel, the whole property was, during those years,
necessary to the use and enjoyment of their resi
dence and therefore part of their principal resi
dence. Accordingly, it is argued that the Minister's
assessment of the capital gains tax payable on the
6.9 acres should be reduced by 5/9ths to take
account of the 1972-1975 period during which the
zoning restriction prevented subdivision of the
property. This, it is argued, follows from applying
the provisions of paragraphs 40(2)(b) [as am. by
S.C. 1977-78, c. 1, s. 17(1)] and 54(b) of the
Income Tax Act, infra.
I paraphrase the relevant provisions of the
Income Tax Act as follows: (1) all gains arising
out of the disposition of property are to be taxable;
(2) those arising from the sale of a principal
residence are exempt from tax; (3) a principal
residence may include up to one acre of land,
subjacent and contiguous to the housing unit itself,
but no larger area of land shall be deemed to be
part of the taxpayer's principal residence unless
the taxpayer proves the excess is necessary to the
use and enjoyment of the housing unit as a
residence.'
The issue in this case relates to the time at
which, for the purposes of paragraph 40(2)(b) of
the Income Tax Act, the size of the area of land
which will be deemed to be part of the taxpayer's
principal residence (one acre maximum or some
larger area) is to be determined. Is it the size at
the time of the disposition; the size at the time of
acquisition; varying sizes during the term of the
ownership of the property?
The defendants base their argument that the
size is of a varying nature and that the capital
gains tax payable should be reduced, by the pro
portion indicated, on the decision of the Federal
Court of Appeal in The Queen v. W. and M. Yates
(1986), 86 DTC 6296, affirming [1983] 2 F.C.
730; 83 DTC 5158 (T.D.), and on the Tax Court
decision in Estate of S. I. Raper v. Minister of
National Revenue (1986), 86 DTC 1513.
I do not think the reasoning in the Yates deci
sion assists the defendants. In the Yates case, the
taxpayers had acquired a 10-acre parcel of land on
which they had constructed their principal resi
dence. In 1978 they sold 9.3 acres to the local
municipality under threat of expropriation. At the
time of acquisition and up to the date of the
apprehended expropriation, the applicable zoning
by-laws required that residential properties be
situated on lots having a minimum size of 10 acres.
(Indeed at the date of disposition, the requirement
was 25 acres and the taxpayers' property existed as
a non-conforming use.) Mr. Justice Mahoney held
that since the taxpayers could not have occupied
their housing unit as a residence on less than 10
acres, the land in excess of one acre was necessary
for their use and enjoyment of that residence and
must be considered to be part of their principal
residence. He wrote, at pages 732 F.C.; 5159
DTC:
' See generally Income Tax Act, R.S.C. 1952, c. 148, as
amended, ss. 3, 38, 39, 40, 45, 54(g).
In my opinion the critical time is the moment before
disposition.
The Defendants could not legally have occupied their hous
ing 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 enjoy
ment 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. [Underlining added.]
Mr. Justice Mahoney clearly stated that the
date of the disposition of the property was the
critical time for determining whether property in
excess of one acre was necessary for the use and
enjoyment of the residence. This reasoning is
adopted by Christie A.C.J.T.C. in E. Rode et al. v.
Minister of National Revenue (1985), 85 DTC
272, at page 274. It is at the time of disposition
that the capital gain is realized by the taxpayer
and it is in that taxation year that the gain is
taxed. Therefore, as indicated above, I do not
think the Yates decision assists the defendants.
In addition, in the Yates case the legal require
ment that the taxpayer's residence be located on a
parcel of land, having a minimum size of 10 acres,
existed both at the date of acquisition of the
property by the taxpayers and at the date of the
disposition of the property. In the present case,
there were no "more than one acre" minimum
requirements in existence at either the time the
taxpayers acquired the property or when they sold
it; nor did such limitation exist on evaluation day,
December 31, 1971. In the present case, the
market price of the 14 -acre property when it was
purchased, the evaluation of the property on valua
tion day and the sale price of the property when it
was disposed of would all have been made by
reference to a property free of "more than one
acre" minimum size zoning regulations.
In the Raper case the taxpayer's residence was
situated on a 2.46 hectare parcel (slightly more
than 6 acres). This had previously been part of a
50 acre parcel of farm land; the rest had been sold
by the taxpayer and her husband in 1961. The
taxpayer maintained a rural way of life on the 2.46
hectare property (growing her own vegetables,
keeping some animals) until she was hospitalizec
by a stroke in 1977. She never considered selling
or subdividing the property. The taxpayer died ir.
1982 and a deemed disposition occured on her
death. The tax payable on the capital gain arising
from the deemed disposition of the land in excess
of one acre subjacent and contiguous to the resi
dence was in issue.
The Tax Court found that 1/10th of the capita]
gain attributable to the land in excess of one acre
was taxable. While in 1982, at the time of the
taxpayer's death, the property could have been
subdivided, this had not always been the case.
Prior to 1980, zoning restrictions had required that
the taxpayer's house be situated on a parcel of
land no smaller than 2.1 hectares (5.2 acres). The
Tax Court held that, prior to 1980, the taxpayer
had been unable to sever the residence from the
larger parcel of land on which it stood, ownership
of the entire property had been necessary up until
that date for the enjoyment and use of the resi
dence. Therefore, it was held that, since for nine of
the ten years the entire property had been neces
sary for the use of the residence, 9 / 1 0ths of the
capital gain realized on the disposition of the land
should not be taxable. In coming to this conclu
sion, paragraphs 40(2)(b) and 54(g) of the Income
Tax Act were read together. At pages 1519 and
1520 of the Raper decision, it was stated:
It is true that the time of disposition is an important time for
demonstrating the necessity to the use and enjoyment of the
housing unit. In this case it was in December 1982. However, is
it the only time?
The designation of principal residence status being made for
each year of ownership, it seems equitable that the critical time
for demonstrating necessity would be also on a yearly basis.
The provisions 40(2)(b) and 54(g) are exemption provisions.
The strict interpretation of an exemption provision requires
that the wording of such a provision clearly state the exemp
tion. Is it so in paragraphs 40(2)(b) and 54(g)?
The definition of principal residence in paragraph 54(g)
includes the element of necessity to the use and enjoyment of
the housing unit. The words "principal residence" are used in
paragraph 40(2)(b). Its definition in paragraph 54(g) applies to
paragraph 40(2)(b). Indeed paragraph 54(g) starts by saying
"In this subdivision ... principal residence ... means ...." The
said subdivision is subdivision (c) of Division B of Part I and
covers sections 28 to 55.
Therefore "principal residence" in paragraph 40(2)(b) being
taken in its entire meaning, including the necessity to use and
enjoyment of the housing unit in computing the exemption, is
not only equitable but, in my opinion, is clearly provided in the
wording of the said provision. The critical time for demonstrat
ing necessity would be also on a yearly basis. [Underlining
added.]
I have difficulty applying the reasoning of the
Raper case to the facts of this case. There is no
doubt that the issue of statutory interpretation will
only be determined by a decision of the Federal
Court of Appeal. In the absence of a decision by
the Federal Court of Appeal, however, indicating
that the reasoning in the Raper decision applies to
the facts of this case, I am reluctant to apply it. I
have difficulty, as a matter of statutory interpreta
tion in reading paragraphs 40(2)(b) and 54(g)
together in the manner required to reach the result
sought by the defendants. The applicable portions
of section 40 provide:
40. (1) ...
(a) a taxpayer's gain for a taxation year from the disposition
of any property is the amount, if any, by which
(i) if the property was disposed of in the year, the amount
... by which his proceeds of disposition exceeds the aggre
gate of the adjusted cost base to him of the property
immediately before the disposition and any outlays and
expenses to the extent that they were made or incurred by
him for the purpose of making the disposition ...
(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 ... on which he
last acquired or reacquired it ... is his gain therefrom for the
year otherwise determined minus that proportion thereof that
(i) one plus the number of taxation years ending after the
acquisition date for which the property was his principal
residence and during which he was resident in Canada,
is of
(ii) the number of taxation years ending after the acquisi
tion date during which he owned the property whether
jointly with another person or otherwise;
The applicable portion 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;
As I read paragraph 40(2)(b) it seems to me it
was intended to apply to the situation where a
taxpayer purchases a house (housing unit) and at
some time subsequent to the date of purchase, but
not contemporaneous therewith, makes that hous
ing unit his or her principal residence. It also
clearly applies to the situation where a taxpayer
changes his or her place of principal residence
(house, housing unit) without selling that property.
It is clear that paragraph 40(2)(b) was intended
to allow a taxpayer to change his principal resi
dence from year to year as between alternative
principal residences. It is clear that that paragraph
applies to a change of occupation or a change of
designation by the taxpayer. But, I have difficulty
applying the paragraph to provide that a taxpay
er's principal residence will have a varying size
over the years, depending upon the applicable
zoning by-laws and that the capital gains tax
payable on disposition is to be calculated on the
basis of that varying size.
The manner in which counsel for the defendants
reads paragraphs 40(2)(b) and 54(g) means that
the entity to which the words "principal residence"
refers in section 40(2)(b) has an elastic existence. I
do not think section 40(2)(b) was intended to
encompass a process of calculation dependent on
such elastic existence. If the taxpayers in this case
had sold their property in 1973, when they would
have had to sell the whole 14 -acre property, would
they have been required to pay capital gains tax on
a proportion of the gain calculated by reference to
the earlier period of time during which no zoning
restrictions applied?
Counsel for the plaintiff makes an additional
argument. The taxpayer, Kenneth W. Joyner, car
ried on the business of farming on the property in
question, continuously, from prior to December 31,
1971 until disposition of the 7.9-acre parcel in
1980. The profit and loss from that farming opera
tion (the raising of thoroughbred horses and some
cattle) was reported for income tax purposes. It is
argued that the property in excess of the one acre
contiguous to a taxpayer's house (principal resi
dence) cannot be considered to be necessary for
the use and enjoyment of the housing unit when
that land is being used for business purposes.
Reference was made to the decision in: The Queen
v. G. Mitosinka (1978), 78 DTC 6432 (F.C.T.D.);
S. K. and T. Watson v. Minister of National
Revenue (1985), 85 DTC 270 (T.C.C.) and E.
Rode et al. v. Minister of National Revenue
(1985), 85 DTC 272 (T.C.C.) and to paragraph
40(2)(c) [as am. by S.C. 1977-78, c. 1, s. 17(2)] of
the Income Tax Act. 2
I did not find the cases referred to by counsel for
the plaintiff of much assistance. The Mitosinka
case deals with a situation where two housing units
were found to have existed. The Watson case was
decided before Yates or at least did not make
reference to that decision. The Rode case dealt
with taxpayers who were contending that an area
of land in excess of one acre was necessary for the
use and enjoyment of their principal residence
because of their self-sufficient life-style. That case
2 4o.(2)...
(c) where the taxpayer is an individual, his gain for a
taxation year from the disposition of land used in a farming
business carried on by him that includes property that was at
any time his principal residence is
(i) his gain for the year, otherwise determined, from the
disposition of the portion of the land that does not include
the property that was his principal residence, plus his gain
for the year, if any, determined under paragraph (b) from
the disposition of the property that was his principal
residence, or
(ii) if the taxpayer so elects in prescribed manner in
respect of the land, his gain for the year from the disposi
tion of the land including the property that was his princi
pal residence, determined without regard to paragraph (b)
or subparagraph (i) of this paragraph, less the aggregate
of
(A) $1,000, and
(B) $1,000 for each taxation year ending after the
acquisition date for which the property was his principal
residence and during which he was resident in Canada;
did not deal with the effect of zoning restrictions
or restrictions of a nature similar thereto.
Counsel for the defendants referred to the deci
sion in F. F. Saccomanno v. M.N.R., [ 1986] 2
C.T.C. 2269 (T.C.C.) as authority for the proposi
tion that income may be earned from part of a
principal residence without those premises becom
ing any less a principal residence. She argues, in
addition, that once it is determined that a certain
area of land is deemed to be part of a taxpayer's
principal residence because it is necessary for the
use and enjoyment thereof, the actual use made of
the land cannot detract from its classification as
part of the principal residence. It is argued that
paragraph 40(2)(c) of the Income Tax Act only
applies to land which is not part of the taxpayer's
principal residence, that is, that paragraph only
applies to land remaining after the area character
ized as constituting the principal residence is
carved out of the larger whole. Since in this case,
the whole 14 -acre parcel was, during the years in
question, incapable of subdivision, counsel for the
defendants argues that it must, during those years,
be classified as included in the taxpayer's principal
residence and it does not fall under paragraph
40(2)(c).
Counsel for the plaintiff is understandably ner
vous about this interpretation. While the defen
dants' property in this case comprises only 14 ,
acres, the British Columbia land restrictions,
referred to above, also prohibit the subdivision of
much larger acreages.
Counsel for the plaintiff is apprehensive that
arguments will be made in future cases that very
large acreages must be classified as part of a
taxpayer's principal residence because of the pro
vincial land use legislation. In any event, since I
have come to the conclusion that it is the time of
the disposition of the property which is significant
for the purposes of ascertaining whether or not
land in excess of one acre should be deemed to be
part of taxpayer's principal residence, I do not
need to consider counsel for the plaintiff's second
argument. For the reasons given, it is my view the
plaintiffs appeal must succeed.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.