Tremblay, TCJ:—This case was heard on September 28, 1984, in the City of London, Ontario.
1. The Point at Issue
The point is whether the appellant is correct in the computation of his income for the taxation year 1979 in not including any amount as taxable capital gain upon the sale of a residence and 9.18 acres of land located in the County of Puslinch, Ontario. This piece of land had been acquired prior to 1971. The appellant contends that the 9.18 acres were necessary to the use and enjoyment of the housing unit thereon as a residence and therefore there is no capital gain.
The respondent reassessed the appellant including $11,028.67 as taxable capital gain on the basis that only two acres were necessary for the use and enjoyment of the housing unit. The V-day value of the balance of 7.18 acres was $9,500 plus expense of $442.67, totalling $9,942.67. The proceed allowable for 7.8 acres was $32,000 which gave a capital gain of $22,057.33.
2. The Burden of Proof
2.01 The burden of proof is on the appellant to show that the respondent's assessment is incorrect. This burden of proof results particularly from several judicial decisions, including the judgment delivered by the Supreme Court of Canada in johnston v MNR, [1948] CTC 195; 3 DTC 1182.
2.02 In the same judgment, the Court decided that the assumed facts on which the respondent based his assessment or reassessment are also deemed to be correct. In the present case, the assumed facts are described in the reply to notice of appeal as follows:
3. In so reassessing the appellant for the 1979 taxation year, the respondent made the following assumption:
(a) the appellant purchased land as described as Part Lot 24 of Concession 9, Township of Puslinch, prior to December 31, 1971, and, with respect to 9.18 acres thereof, resided thereon continuously until the disposition of the said 9.18 acres ("the property”) in 1979;
(b) no more than 2 acres of the said 9.18 acres was necessary to the use and enjoyment of the housing unit as a residence situate thereon;
(c) the proceeds of disposition from the sale of the 9.18 acres in 1979 were $120,000.00;
(d) the value properly ascribable to the residence and two acres at the date of disposition was $88,000.00, being $72,000.00 to the residence, $9,000.00 to the land, and $7,000.00 to the improvements (including a pond) thereon;
(e) the fair market value of the remaining 7.18 acres at December 31, 1971, was $9,500.00;
(f) the outlays and expenses incurred consequent upon the disposition of the said property in 1979 were $442.57;
(g) the appellant realized a capital gain of $22,057.33 upon the sale of the property, calculated as follows:
Proceeds from 9.18 acres $120,000.00 Less: Amount applicable to residence and 2 acres: Land $ 9,000.00 House 72,000.00 Pond & Improvements 7,000,00 88,000.00 Proceeds allocable to 7.18 acres $32,000.00 Less: V-day value of 7.18 acres $ 9,500.00 Outlays & Expenses 442.67 9,942.67 Capital Gain $22,057.33
3. The Facts
3.01 The appellant admitted subparagraphs (a) and (c) of the respondent's assumptions of facts quoted above and denied the others.
3.02 Mr J Wallace Beaton, appellant’s appraiser, filed his report as Exhibit A-1. This exhibit does not show the value of the property on December 31, 1971 but gives facts to show that all the land is necessary for the use and enjoyment of the housing unit and therefore concludes that the requirement of paragraph 54(g) of the Income Tax Act is met. Mr Beaton first gives a brief description of the property:
BRIEF DESCRIPTION
The subject property comprises a two-storey single-family residence on a site of approximately 9.2 acres. It is located on the north side (northeast side) of Victoria Road 3 /2 miles east of the City of Guelph and a mile and a half west and north of the Macdonald-Cartier Freeway (Highway 401). The nearest community is Aber- foyle, a mile and a half to the west.
Along the east side of the property there is a lane, which is separated from the balance of the property by a heavy line of mature trees, mostly cedars. The land and trees are 45 feet from the east limit at the front, narrowing to about 30 feet in most of the property.
At the front of the property there is a wooded area about 100 feet deep. Next back from this is a level area in grass, something like 140 feet deep by 360 feet wide (about 1.2 acres).
Next to the rear is a low-lying area of scrub-land which, according to the new owner, is wet and muddy in spring. (It extends into the next property to the east where it widens into a peat bog with two substantial ponds. In the low-lying lands in this vicinity, therefore, both internal and surface drainage appear to be poor.) Behind the scrub-land, there is a small enclosed field which is level and suitable for recreation. From this a treed slope leads to the house location at its apex. Together this area of wet scrub-land, small field and hill-slope comprise about 3 /2 acres.
The house is situated about 600 feet back from the road, in the rear portion of the property. It enjoys both scenic amenity and considerable privacy by reason of two treed areas in front and the cedar trees on its east side. To the west the land slopes up from the property and is in agricultural use.
Between the house and the north limit of the property there is a substantial pond surrounded by lawns, an orchard, and a variety of mature trees. The land slopes with hillsides rising to the west and north from the pond. This portion of the site contains more than 3 acres. It is well maintained.
(The approximate areas indicated above are subject to correction if the site were to be surveyed and measured.)
The combination of trees and water in the site make it a mecca for birds and there are a number of bird-feeders on the property, which is evidently something of a small bird-sanctuary.
The mixture of small land segments in the property, as detailed above, has been dictated by the natural topography and the soil conditions in the land.
Victoria Road is a gravel road on the subject frontage but farther to the west a portion of it is paved.
Appendix No 4 is a site sketch showing the arrangement of the site features discussed above.
3.03 At page 6 of A-1, he gave the highest and best use of the property:
HIGHEST AND BEST USE
The highest and best use of a property is that use to which the land can be put which will create the greatest utility, be it in profit or in amenities to the owner, that is permitted or would be permitted by the laws and by-laws and is not unduly objectionable to the character of the surrounding property.
The subject, as indicated above, is a rural-residential property which meets substantially all of the requirements of the “A” zone in which it is located.
Being a combination of pond, wooded areas, scrub land and small fields, the subject, in my view, is unsuitable for agriculture. The provisions of the Official Plan and Zoning By-Law are such as prohibit further subdivision of the property, either by way of severance or by registration of a subdivision plan, in the foreseeable future.
The highest and best use of the subject property, in my opinion, therefore, must be its present use as a single-family rural-residential unit.
3.04 On page 7, he also referred to the applicable Official Plan and Zoning By-Law to confirm his opinion of the highest and best use.
The applicable Official Plan and Zoning By-Law indicate that the entire 9.2 acres were necessary for the owner’s use of the housing unit:
(a) Without 9.9 acres, more or less, it would not have been possible for the owner to have obtained the 1979 consent from the municipal authorities necessary for the severance of the housing unit from the adjoining lands and its sale herein.
(b) Without 400 feet of frontage, it would likewise not have been possible to have obtained such consent.
3.05 Finally his opinion is summarized at Page 10:
OPINION
With 9.2 acres the subject is an integrated whole rural-residential unit. It does not lend itself to division, either within the existing laws and by-laws or from a practical standpoint. As a partly low-lying, richly treed, exurban home with a pond it is a private bird-sanctuary type of place.
It is reasonably evident, in my view, that all 9.2 acres were and are necessary for the use of the unit as a residence, and that most if not all of these 9.2 acres were also necessary for its enjoyment as a residence.
Having regard for the circumstances, and based on the facts as set out in this report, it is therefore my opinion that the taxable capital gain arising out of the sale of the property in 1979 was NIL.
3.06 During the cross-examination of Mr Beaton, counsel for the respondent, filed as Exhibit R-1 the agreement dated April 20, 1979 related to the sale of the subject property for $120,000 to Mr and Mrs Geo W Uptegrove. He also filed as Exhibit R-2 an agreement dated November 15, 1971, related to a sale of a piece of land for one dollar, to Ruth Michael, his common law wife. The land area does not appear on the document.
Finally he filed as Exhibit R-3, an agreement dated September 13, 1972, related to a sale of a piece of land, the area of which is 10 acres. The grantor is Stan Michael and the grantee Byron Essery, in trust. The price was for one dollar.
3.07 Mr Bruce Walker, the respondent's appraiser, filed his report as Exhibit R-4.
Mr Walker, basing on six comparables, concludes that the selling price in April 1979 of $120,000 was an appropriate price and that the price per acre was $4,500. Therefore the land value was $41,310 ($4,500 x 9.18 acres).
| Land Value | $ 41,000 |
| Building Value | $ 71,000 |
| Site Improvements | $ 8,000 |
| $120,000 |
No opinion was given of the value of the land on December 31, 1971.
Concerning the highest and best use, he writes on page 13 of A-1:
Highest and Best use
The highest and Best Use is defined as that use which will produce the greatest benefit either in money or amenities over a given period.
In this connection consideration is given to many factors, such as zoning, size and utility and condition of existing improvements, economic conditions, supply and demand of similar properties.
As previously stated, the subject property zoning permits single family dwellings. The subject property has value in use as a residential living unit and considering its present age and condition, should continue to provide that utility for many years to come. The subject property conforms with the surrounding development. There are several other similar properties in the area of the subject and in various parts of Puslinch Township. Demand for this type of property is good.
Considering all factors, it is my opinion that the present improvement represents the highest and best use of the land.
4. Law — Cases at Law — Analysis
4.01 Law
The main provision of the Income Tax Act involved in the instant case is the one which gives the definition of “principal residence". It is the end of 54(g) which reads as follows in English and French version:
and for the purposes of this paragraph 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 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 /2 hectare, 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;
et, aux fins du présent alinéa, la «résidence principale» d'un contribuable pour année d'imposition est réputée comprendre le fonds de terre sur lequel repose le logement et toute partie d'un fonds de terre contigu qui peut raisonnablement être considéré comme facilitant au contribuable l’usage et la jouissance du logement à titre de résidence, sauf que, si la superficie totale du fonds de terre sous- jacent et de cette partie dépasse un demi-hectare, l'excédent est réputé ne pas avoir facilité au particulier l’usage et la jouissance du logement considéré comme résidence, à moins que le contribuable ne prouve que cet excédent était nécessaire à cet usage et à cette jouissance;
4.02 Cases at Law
Counsel for the parties referred to the following cases at law:
1. Carter v MNR, [1980] CTC 2623;80 DTC 1537;
2. MNR v Yates, [1983] CTC 105; 83 DTC 5158;
3. Matador Inc et al v A-G (Can), [1980] CTC 51; 80 DTC 6018;
4. Matador Inc et al v MNR, [1980] CTC 2105; 80 DTC 116.
4.03 Analysis
4.03.1 Counsel for the respondent objected to the facts and the conclusion of the appellant’s appraisal report on the basis that it does not conclude to a value of the property.
On the one hand, if it is true that the report does not conclude to a value of the subject property, on the other hand it gives numerous facts related to the property (description, zoning, highest and best use) which are useful to help the Court in arriving at a conclusion concerning the first point at issue: the necessity of the total area of the subjacent (sic) land for the use and enjoyment of the principal residence. Those facts are ordinarily found in an appraisal report because they affect the value.
4.03.2 The respondent's appraisal report concludes to a value of the subject property at the time of the sale in 1979. However the said value was in dispute. The same report did not give the V-day value of the said property which is the subsidiary point at issue according to the general contention of the respondent This V-day value would have helped the Court to understand part of the assumptions of facts described in subparagraph 3(g) of the reply to notice of appeal. The said report however gives also some facts related to the subject property (highest and best use, site analysis, zoning) which are useful to help the Court in arriving at a conclusion concerning the main point at issue.
4.03.3 One of the main criterion argued by counsel in the argumentation was the severance policy. Indeed in the Yates decision, referred to above, given by Mr Justice Mahoney of the Federal Court, Trial Division, the substance of the decision was that the taxpayers (Mr and Mrs Yates) could not legally have occupied their housing unit as a residence on less than ten acres, and the portion in excess of one acre was necessary for their use and enjoyment.
In the Carter decision, (referred to above) Mr Commissioner Bonner of the then Tax Review Board sustained the position of the Minister "that the principal residence ought not to be valued as severed unless it was in fact severed or severable under The Planning Act RSO 1970, c 349.
4.03.4 The official plan issued by the City of Guelph concerning the severance policy was introduced in 1972. It can be summarized as follows:
The parcel to be severed must not be prime agricultural land (sec 5.2a) the severance must not conflict with the local zoning by-law (sec 5.2.1.1a), only one severance is permitted from any existing parcel of land (sec 5.2.1.1e) and the parcel to be severed must contain at least 25 acres (sec 5.2.1.2b).
In the zoning map of the municipality, the subject property is zoned “A”’ agricultural. In the by-law, such zoning permits farms, one-family detached dwellings and certain recreational, institutional and medical uses (sec 7.1).
Properties in “A” agricultural zoning require a minimum lot area of 4.0 hectares (9.9 acres), a minimum frontage of 121.9 metres (399.8 feet) and for a two-storey non-farm dwelling, a minimum floor area of 750 square feet (sec 7.2). The area of the principal residence on the subject property was 1222 square feet (B Walker report, p 10) the subject property is 400 feet of frontage by a depth of 1000 feet: 9.18 acres (B Walker report, p 5).
It is true that the area of the subject property is only 9.18 acres. The respondent contends it is the third severance. However pursuant to Section 5.2.1.1 of the Official Plan Guelph and Suburban Planning Area, only one severance is permitted from any existing parcel of land.
Such contention of the respondent is contrary to the evidence described in paragraph 3.06. Indeed Exhibit R-2 is dated November 1971. Thence it was issued before the official plan was introduced in 1972. Exhibit R-3 is dated September 13, 1972. There is no evidence that it was not approved by the appropriate committee of the City before the enactment of the Official Plan.
From the fact that the appellant was authorized by the City to sell the subject property, it can be assumed that it was pursuant to the severance policy. Maybe the subject property was the balance of the original piece of land purchased by the appellant. This however was not in evidence.
The fact that there is a difference of less than three quarters of an acre (9.90 - 9.18) cannot in substance affect the decision of this Court, that the subject property could not be severed less than 9.18 acres. Therefore based on the Yates decision, this appeal should be allowed.
4.03.5 There is another point in favour of the appellant’s thesis which is maybe stronger than the preceding one. The description of the subject property given in paragraph 3.02 and, among others, the fact that the house is situated 600 feet back from the road, in the rear portion of the property, it seems to the Court that the highest and best use of the whole land is for the use and enjoyment of the principal residence. The whole description in 3.02 is to be read. Moreover because the subject land is Dumfries soil, its best use, with the other elements (trees, pond, etc) is for the enjoyment of the residence. Here is an extract from “Soil Survey of Wellington County", Report No 35 of the Ontario Soil Survey. It was prepared by the Research Branch, Canada Department of Agriculture and the Ontario Agricultural College:
DUMERIES SERIES
The main area of Dumfries soils is in Erin and Puslinch Townships. These soils have developed from stony soil material derived mainly from limestone. The material is therefore calcareous and free carbonates can be found at depths of 18 to 24 inches except in places of severe erosion where they occur at the soil surface.
The topography is hilly; slopes are steep, irregular and short; depressions or “potholes” are common. Since water runs rapidly off the steep slopes or readily percolates through the stony materials the Dumfries soils are well drained. However, within the areas shown on the soil map there are often areas of poorly drained soils too small to be delineated. These potholes contain water a large part of the year, cannot be easily drained and therefore are not arable.
It is obvious to the Court, that under the circumstances, the said piece of land cannot be used for farming.
4.03.6 Finally the Walker’s report is in the sense of the conclusion of the use and enjoyment of all the land. In the quotation of highest and best use in paragraph 3.07 above, one can read among others:
the subject property has value in use as a residential living unit and considering its present age and condition, should continue to provide that utility for many years to come. The subject property conforms with the surrounding development. There are several other similar properties in the area . . .
The Court concludes that, taken as a whole, the subjacent (sic) land must not be severed because it contributes only to the use and enjoyment of the housing unit as residence.
5. Conclusion
The appeal is allowed and the matter referred back to the respondent for reassessment.
The appellant is entitled to party and party costs.
Appeal allowed.