The taxpayer sold his six-acre rural property after it was rezoned for residential use as a result of an application made on behalf of owners of adjacent properties. He claimed a principal residence exemption on the entire gain. The Minister denied the gain on the basis of paragraph (e) of the definition of "principal residence" in s. 54 of the Act, which provides that a principal residence only includes up to a half-hectare of land contiguous with the residence unless the taxpayer can establish that a larger portion of the property was "necessary to the use and enjoyment" of the residence. The Tax Court rejected the taxpayer's appeal on the reasoning that the determination under paragraph (e) is to be made at the time the property is sold, and at that time the property had been rezoned and could be subdivided. Therefore, the entire six acres was no longer necessary to the use and enjoyment of the residence.
The Court of Appeal granted the taxpayer's appeal. Sharlow J.A. stated (at para. 35):
The error in the interpretation of paragraph 40(2)(b) proposed by the Crown, and perhaps implicit in Joyner, is that it fails to give effect to the language of paragraph 40(2)(b) that defines variable B. As mentioned above, the determination of variable B requires a determination, for each taxation year in which the taxpayer owned the property in issue, as to whether the property met the definition of "principal residence" of the taxpayer for that taxation year.
Given that the rezoning and the sale both occurred in 2003, and in light of the "plus one" component of B, the taxpayer was entitled to the principal residence exemption on the entire gain.