Capital Gains Tax – Principal Residence #96

By Gerry Neely
B.A. LL.B.

Following the death of a woman in 1982 who lived on a parcel of land of 6.09 acres, the Department of National Revenue assessed a taxable capital gain of $202,800.00 on the deemed disposition of the property. This assessment was based upon the Department's contention that only one acre was necessary for the taxpayer's use and enjoyment, and that therefore the balance was not covered by the principal residence exemption.

The 6.09 acres was part of a fifty acre farm, the bulk of which was sold in 1961. The deceased had continued after the sale to maintain the rural way of life to which she had been accustomed, which included keeping several cows on the property. She enjoyed her life style, but that was only one of the reasons why she kept the 6.09 acres. The other reason was that until 1980, the zoning restrictions applicable to the property required a minimum lot size of 5.2 acres. After the change in zoning, she could have subdivided, but chose not to do so.

One argument made on behalf of the taxpayer was that she needed the whole of the property for her use and enjoyment. A further argument was that for the period from V-Day until 1980, she could not have subdivided the property to sell off the area in excess of one acre. The Tax Court of Canada agreed with the Department of National Revenue that her life style did not require more than one acre and that therefore the area in excess of that was taxable.

It agreed, however, with the estate that between 1971 and 1980, ownership of all of the property, because of the zoning limitations, was necessary in order to use and enjoy the residence. Therefore, the entire property was to be treated as the principal residence for nine of the ten years of ownership.¹

In 1978 an assistant professor was employed at the University of Waterloo under a contract that would give him tenure in 1983 if his performance was satisfactory. Until that time, his employment could be terminated yearly. In 1979, he and his wife bought a home in Toronto intending to move into it if his contract at the University of Waterloo was not renewed. This decision was based upon the lack of employment opportunities in the Kitchener-Waterloo area for someone with his qualifications if his employment were terminated, as well as the belief that homes in the Toronto area were increasing in value. The assistant professor didn't wish to find himself three or four years later having to pay 1982 or 1983 prices in order to live in Toronto.

The house he bought had been a single family residence that was divided into three apartments. Two of those apartments were rented at the time of the purchase and they continued to be rented. The assistant professor's wife moved into the third apartment and lived there while he rented an apartment in Kitchener-Waterloo, returning on week-ends and holidays to his home in Toronto.

During the period the two apartments were rented, they did not take depreciation on the property and lost money on the rents. Their intention when they bought it was to eventually take over the whole of it and renovate it for their sole use.

In 1983 when he was granted tenure, they sold the house and bought one in the Kitchener-Waterloo area. The Department of National Revenue assessed the taxpayer for taxable capital gains upon the rental portion of the house. The taxpayer's appeal against this assessment was allowed. The Tax Court of Canada held that the entire house was a housing unit as defined, rather than three separate units. The Court accepted the taxpayer's explanation that he didn't purchase an income producing property, but instead a principal residence for his use.²

	1.	The Estate of Sarah Raper v. M & R 86 D.T.C. 1513.
	2.	Saccomanno v. M & R, 86 D.T.C. 1699.

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