Dec 01, 1988

Principal Residence - Exemption or Taxable Gain #131


By Gerry Neely

Where the lands surrounding a principal residence exceed one acre, the excess area only falls within the principal residence exemption if the owner can prove that the excess is necessary to the use and enjoyment of the housing unit as a residence.

The standard of proof required of an owner was discussed in a tax case where a taxpayer in Nanaimo purchased two adjoining vacant lots. She constructed upon one of them a house in which she lived, and installed on the other lot a shed and an incinerator and occasionally used the other lot for parking. Upon the sale of this lot, the taxpayer failed to declare the gain believing that the lot was part of her principal residence and therefore exempt from tax.

The Tax Department assessed the gain as taxable and the taxpayer appealed. The Minister of National Revenue argued that for the taxpayer to succeed, she had to establish that the adjoining lot was "necessary" to her use and enjoyment of her principal residence. Necessary was defined to mean something "that cannot be done without."

Since the taxpayer could have moved the shed and incinerator onto the residence lot, and since she continued to live in her home after the sale of the lot, she failed to meet the test proposed by the Minister. The judge agreed with this and confirmed the assessment.1

Many owners who could not subdivide their lands either because they were in the Land Reserve or the zoning prohibited it, found it necessary to keep more land than they needed for the use and enjoyment of their residence. Could they reduce the total capital gain by claiming an exemption for the years the property could not be subdivided?

In one case a woman owned a six acre parcel which could not be subdivided because of zoning. This zoning was changed in the ninth year following the date when capital gains became effective and she died in the tenth year. The Minister assessed the entire gain as taxable. The Tax Court, however, said that for nine of the ten years all of the property was necessary for her use as a residence because it could not be subdivided. Therefore, only 1/10th of the capital gain attributable to the land in excess of one acre was taxable.2

In another case, a taxpayer owned a 14-acre parcel which they could have subdivided into 1/2 acre lots. The land, however, was then included within the Agricultural Land Reserve from 1972 until 1975, when the landowner was able to obtain the removal of 7.9 acres from the Reserve. While they could have subdivided the 7.9 acres into residential lots, they chose not to do so but instead continued to live on it until 1980, when it was sold. The taxpayers argued that they were entitled to a partial exemption for the four years between 1972 to 1975, inclusive, when this parcel was in the Land Reserve.3

The Judge hearing this case reviewed the same sections of the Income Tax Act as the Judge in the preceding case, but came to a different conclusion. He decided as a matter of statutory interpretation, that the time when necessity was to be determined was the year in which the property was sold. Since it could have been subdivided in that year, the taxpayer was assessed the entire gain on the 6.9 acres remaining after the house and 1-acre surrounding it was exempted.

It is to be hoped that this case is appealed so that the Federal Court of Appeal can remove the uncertainty created by these two conflicting decisions.

 1.Fourt v. M.N.R., 88 D.T.C. p.l420.
 2.Raper v. M.N.R., 86 D.T.C. p.1513.
 3.Her Majesty the Queen v.Joyner, 88 D.T.C. p.6459.

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