Docket: A-201-03
Citation: 2004 FCA 80
CORAM: ROTHSTEIN J.A.
BETWEEN:
ESTATE OF MYRTH MAY STUART
Appellant
and
HER MAJESTY THE QUEEN
Respondent
Heard at Vancouver, British Columbia, on January 28, 2004.
Judgment delivered at Ottawa, Ontario, on March 1, 2004.
REASONS FOR JUDGMENT BY: MALONE J.A.
CONCURRED IN BY: ROTHSTEIN J.A.
SHARLOW J.A.
Docket: A-201-03
Citation: 2004 FCA 80
CORAM: ROTHSTEIN J.A.
BETWEEN:
ESTATE OF MYRTH MAY STUART
Appellant
and
HER MAJESTY THE QUEEN
Respondent
REASONS FOR JUDGMENT
Introduction
[1] This is an appeal from a judgment of Rip J. (the Judge) of the Tax Court of Canada dismissing an appeal of an income tax assessment for the 1994 taxation year. (See Stuart Estate v. Canada, [2003] 3 C.T.C. 2232, 2003 DTC 329.) Of the issues considered in the court below, the only one remaining in dispute is whether the Judge erred in his interpretation or application of paragraph (e) of the definition of "principal residence" in section 54 of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) (the Act).
Facts
[2] The facts are not disputed. From 1947 to 1994, Myrth May Stuart lived in the City of Surrey, British Columbia (the City) in a small house located on 1.31726 hectares (approximately 3.255 acres) of land (the Property). Mrs. Stuart became the sole owner of the Property in 1957, which she purchased from the Estate of her husband, who had died in 1954. Over that period of time, the Property was zoned "single residential".
[3] In 1992, Mrs Stuart was 92 years old and lived alone. She had available to her the advice of her daughter, a lawyer, her son-in-law who had a financial background, and a neighbour who she talked to occasionally and had worked in a bank. Her income was meagre, consisting of approximately $10,000 in government pensions. In August of 1992, Mrs. Stuart signed an offer to sell the Property to a developer for $1.8 million, which then commenced a lengthy application process before the City to rezone the Property to "multi-family residential". The developer had agreed to effect the rezoning at its own expense. That process was completed in February of 1994 and the sale closed in April.
[4] Mrs. Stuart did not file an income tax return for 1994. She died in 1995. In due course the Minister of National Revenue (the Minister) became aware of the sale of the Property. In assessing the income tax liability of Mrs. Stuart for 1994, the Minister took the position that only 45% of the land (0.592726 hectares) fell within the definition of "principal residence" as defined in paragraph 54(e) of the Act. The Estate appealed that assessment to the Tax Court of Canada on the basis that the entire Property had been Mrs. Stuart's principal residence.
Statutory provisions
[5] Generally, a capital gain realized by a Canadian resident on the sale of a principal residence is exempt from income tax. The statutory definition of "principal residence" does, however, limit the amount of land that qualifies for that exemption. The limitation is expressed in the following words of paragraph (e) of the definition of "principal residence" in section 54 of the Act:
|
(e) the 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 can reasonably be regarded as contributing to the 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 ½ hectare, the excess shall be deemed not to have contributed to the use and enjoyment of the housing unit as a residence unless the taxpayer establishes that it was necessary to such use and enjoyment ... |
e) la résidence principale d'un contribuable pour une année d'imposition est réputée comprendre ... le fonds de terre sous-jacent au logement ainsi que la partie du fonds de terre adjacent qu'il est raisonnable de considérer comme facilitant l'usage du logement comme résidence; toutefois, dans le cas où la superficie totale du fonds de terre sous-jacent et de cette partie excède un demi-hectare, l'excédent n'est réputé faciliter l'usage du logement comme résidence que si le contribuable établit qu'il était necessare à cet usage ... |
[6] Before the Judge, the Estate of Mrs. Stuart argued that whether viewed objectively or subjectively, all of the Property was Mrs. Stuart's principal residence because in reality she was locked into the Property as a single parcel and was required to sell it as a single unit. This was alleged to be so because at the time of the offer to sell, the City would not have approved a subdivision for fourteen lots, notwithstanding the zoning laws of the day, since it was better suited for higher density development. The Estate also argued that Mrs. Stuart did not have the means to finance a subdivision application, and that in any case, all of the land was necessary to the use and enjoyment of the Property as a residence because, with her modest income, Mrs. Stuart was forced to rely on fruits and vegetables grown on the Property in order to survive financially and maintain her independence.
[7] Both arguments were rejected by the Judge. First he found that there was no 'hard' evidence from the City or other knowledgeable experts to suggest that the City Approval Officer would not have approved a subdivision proposal from Mrs. Stuart. As to the argument that age, inexperience and finances prevented Mrs. Stuart from subdividing the Property, the Judge held "it is the within the realm of probability that if Mrs. Stuart had wished to sell the Property, a purchasing developer, like First Allied, perhaps, would absorb the costs of subdivision. There is no evidence to the contrary and in fact, it was First Allied who was obliged under the Contract to obtain subdivision at its cost."
Standard of Review
[8] The issue in this appeal is whether the Judge erred in his interpretation or application of paragraph (e) of the definition of principal residence in section 54 of the Act. The test in Housen v. Nikolaisen, [2002] 2 S.C.R. 235 is to be applied. For questions of law it is correctness, otherwise the standard of review is that of palpable and overriding error.
Analysis
[9] It is common ground that the relevant time for determining how much of the land in excess of ½ hectare (1.235 acres) was necessary to the use and enjoyment of the housing unit as a residence is the time of the disposition. (See R. v. Yates, 83 DTC 5158 (F.C.T.D.), aff'd 86 DTC 6296 (F.C.A.)).
[10] Before this Court, the Estate argued that the Judge made two errors of law. The first is based on the inference drawn by the Judge that a purchasing developer might have absorbed the costs of subdivision. Here, the developer had agreed to pay the rezoning costs because of its desire to build a multi-unit project of 122 units on the Property. However, a subdivision could only have allowed fourteen single family units. It is argued for the Estate that subdivision into fourteen single family units is a much different concept than rezoning to a higher density, with different economics. According to counsel for the Estate, there was no evidence that the developer or another third party would have entertained a subdivision deal, and therefore there is no foundation for the inference drawn by the Judge.
[11] I cannot subscribe to the argument that there was no evidence supporting the inference that the developer or a third party might have absorbed the subdivision costs. The Property was located in a fast-developing area of the City which is part of the Greater Vancouver community. The developer did pay for rezoning, and the inference drawn by The judge that a third party developer would pay for the costs of a subdivision application is reasonably supported by the overall evidence and is not contrary to the overwhelming weight of the evidence. (See Rich v. The Queen, 2003 DTC 5115 at 5220 (F.C.A.)). Accordingly, I can see no error here.
[12] The second argument by the Estate of Mrs. Stuart is based on a particular interpretation of the closing words of the statutory definition, which I repeat here for ease of reference:
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(e) ... where the total area of the subjacent land and of that portion exceeds ½ hectare, the excess shall be deemed not to have contributed to the use and enjoyment of the housing unit as a residence unless the taxpayer establishes that it was necessary to such use and enjoyment ... |
e) ... dans le cas où la superficie totale du fonds de terre sous-jacent et de cette partie excède un demi-hectare, l'excédent n'est réputé faciliter l'usage du logement comme résidence que si le contribuable établit qu'il était nécessaire à cet usage ... |
[13] It is argued for the Estate that the taxpayer must be taken to have established the requisite necessity if the land cannot be subdivided, either because there is a law that prohibits rezoning (as in Yates, cited above), or because of practical barriers to rezoning, such as a lack of funds. The Estate says that a prima facie case of necessity had been made out based on Mrs. Stuart's personal circumstances which the Minister did not rebut (see Cardella v. Canada, 2001 DTC 5251 (F.C.A.)), and that the only possible conclusion was that Mrs. Stuart could not have subdivided the Property.
[14] The Minister accepted that 45% (0.592767 hectares) of the 1.31726 hectare Property contributed to Mrs. Stuart's use and enjoyment of her housing unit as a residence. Under paragraph 54(e), the onus was on the Estate to establish that the remainder of the Property was necessary to Mrs. Stuart's use and enjoyment of her housing unit as a residence.
[15] The evidence that is relevant to the question of how much land in excess of ½ hectare is necessary to the use and enjoyment of a housing unit as a residence is mainly objective, and must be linked to the legal and physical characteristics of the property. Without intending to be exhaustive, the relevant factors would typically include zoning restrictions affecting the use or sale of the property, access to roads and necessary utilities, and geographical or topographical barriers to subdivision.
[16] Evidence of a landowner's financial resources is of marginal relevance. The following example advanced by the Minister makes the point. Two adjoining and otherwise identical residential properties are sold. Each is greater than ½ hectare. There is no legal or physical impediment to subdividing either property. The first property is owned by a taxpayer like Mrs. Stuart who could not afford to pay preliminary subdivision costs. The neighbouring property, however, is owned by a taxpayer with abundant cash. Counsel for the Estate argues that the owner of the first property should be found to have established that the entire property is necessary to the use and enjoyment of the housing unit as a residence, so that the entire gain on the sale of the first property would escape taxation, while the gain on the sale of the second property owner would be taxable to the extent it is attributable to the portion of the property exceeding ½ hectare. I can see no logical reason for the difference in tax treatment, given that the issue arises in the context of a statutory provision that asks about the use or potential use of property, not the cash in the hands of the owner of the property.
[17] In this case, the Judge summarily dismissed the argument that it was impossible for Mrs. Stuart to subdivide the Property due to her personal circumstances. This is not an error of law but rather a determination that the evidence does not demolish the Minister's assumption. In the result, the Judge correctly concluded that the test of necessity had not been met.
[18] One further matter requires resolution. The Judge awarded solicitor-client costs to the Minister in respect of 1 ½ days lost due to an adjournment during trial caused by the Estate's late production of documents. The Estate appeals this award on the basis that it was not allowed to make submissions on costs. The Minister agrees that the matter should be remitted to the Judge for a hearing.
[19] Accordingly, the appeal should be allowed but only on the issue of solicitor-client costs. The judgment of the Tax Court of Canada dated March 26th, 2003 should be set aside on the costs issue only and that issue should be remitted to the Tax Court of Canada for redetermination by the Judge once the parties have been heard. In view of the fact that the Minister was successful on the substantive issue, the Minister should be granted his costs on appeal.
"B. Malone"
J.A.
"I agree
Marshall Rothstein J.A."
"I agree
Karen Sharlow J.A."
FEDERAL COURT OF APPEAL
NAMES OF COUNSEL AND SOLICITORS OF RECORD
DOCKET: A-201-03
STYLE OF CAUSE: ESTATE OF MYRTH MAY STUART
- and -
HER MAJESTY THE QUEEN
PLACE OF HEARING: Vancouver, BC
DATE OF HEARING: January 28, 2004
CORAM: ROTHSTEIN J.A.
SHARLOW J.A.
MALONE, J.A.
REASONS FOR JUDGMENT BY: MALONE J.A.
CONCURRED IN BY: ROTHSTEIN J.A.
SHARLOW J.A.
DATED: MARCH 1, 2004
APPEARANCES:
MR. JOEL NITIKMAN for APPELLANT
MR. CARL JANUSZCZAK for RESPONDENT
SOLICITORS OF RECORD:
Fraser Milner Casgrain LLP for APPELLANT
Vancouver, BC
Mr. Morris Rosenberg for RESPONDENT
Deputy Attorney General of Canada