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My question is: Canadian-specific
QUESTION: My father and mother owned a 5 acre chunk of land out in the =
country where they built a home/business combination. My mother ran a =
rest on a seasonal basis and they both lived on the premis. Part of the =
living quaters were upstairs(bedroom, living room)but common areas to =
both business and home use was the kitchen, laundry room, shower, and =
furnace. 1 acre was used for septic field and parts of it too narrow to =
do anthing with. Another acre or so is road, and pumphouse area and wood =
storage for wood burning furnace. All land except for the driveway and =
parking lot was personel use other than noted above.=20
My mother passed away in 1999 and my father closed the business for =
good. In 2000 he turned the title over to my sister and I as each 50% =
undivided interest to each of us. I moved in and it became my only =
residence and pricipal place of residence. My father passed away in =
2004. When my mother had originally bought the property she had it zoned =
commercial so she could open a summer chip stand and didn't need to zone =
it all that way but did as she thought was required by the R.M. In the =
last years since the business was shut down the building has depreciated =
and there is no buisiness re-opened or planned on my part. Here is the =
question I so desperatly need an answer on.
Will I have to pay capital gains even though I live on the property as a =
resident? If so , would it only be on a portion of my half? Also since =
it's larger than 1.2 acres it is not being used other than personel use =
so is this an exception to capital gains? The answer to this question =
would make all the differnce in my wanting to sell or not as living here =
is a hardship and if it were of no benifit I might as well move out and =
rent in a place I can find work as I am out in the countryside. I have =
been to 7 lawyers who all seem to only confuse my questions and give me =
answers that do not fit my situation. I realize your anser is not final =
but I have read your responses to others and find you very knowlegable =
and thus my long-winded question.=20
Thanks so much,=20
XXXXX
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david ingram replies:
Your father would have incurred the most of the capital gains tax if =
there is any when he transferred it to your sister and yourself.
If the land can NOT be subdivided, your half should be tax free. If =
yiou sister lives in another home that she owns, than her half should be =
taxable. If hse does not own another property andthis is her old family =
hom,e and she stays there sometimes with you, it is likely tax free to =
her as well if it can NOT be subdivided. =20
If it can be subdivided, that you are entitled to the house and 1/2 =
hectare which is about 1.22 acres.
This is what I do. You and your sister should likley book an hour of my =
time for $350 by phone or in person.
The following is an extract from my 1991 Income Tax Book. There is no =
material change in the policy since then in my opinion although others =
may say that they ae more likley to try and tax you because of the =
commerical zoning. =20
However, if that should apply, it would apply to your father, not you.
=20
LAND IN EXCESS OF ONE ACRE=20
=20
In 1984, Carl Rudeloff lost his claim for a tax free sale of his home =
and ten acres which he had lived on and in for ten years. The Tax Review =
Board ruled that although the excess 9 acres of land certainly =
`contributed' to the use and enjoyment of his home, it was not =
necessary. The facts that the Rudeloff family had a woodlot, raised =
horses and chickens, had a family garden and a play area, did not sway =
Judge Taylor of the Tax Court of Canada. He said, "I am not persuaded =
the relevant section of the Income Tax Act permits of the view espoused =
by this taxpayer - that merely because he resided in a housing unit on =
the property, and used the balance of the property in one way or another =
to enhance the utility and attractiveness of that domestic living style, =
he can expand the boundaries of his housing unit to the parameters of =
the natural domain desired in his appeal."=20
This last decision has been partially turned over in the 1991 Federal =
Court decision where Judge Strayer decided that an extra lot was not =
essential but certainly contributed to the use and enjoyment of the =
property. However, I find this ruling unusual for a country like Canada. =
Certainly, this country was built on small holdings, self-sufficiency, =
the raising of chickens and the growing of food in a garden. However, it =
seems that unless you can show that it was necessary for the use and =
enjoyment of a housing unit, it will not fly. Perhaps if he could have =
shown that he did not have enough money to feed his family, it would =
have proved `necessary'. I think I can explain it in other equally =
ridiculous terms, though. You buy a car with no doors or roof. It has an =
engine (necessary to use), a transmission (necessary to use), four =
wheels (necessary to use), a steering mechanism, (necessary to use), and =
brakes (but brakes are not necessary to use). Brakes, roofs, and doors =
are an example of things which certainly `add' to the use and enjoyment =
of a vehicle but are not necessary if you drive in a vacant and level =
field where it does not rain. Of course, if you want to drive down a =
hill, brakes would be necessary, but since you don't `HAVE TO' drive =
down the hill, they are not necessary. However, if you want to drive on =
a highway, THE LAW SAYS THAT BRAKES ARE NECESSARY. If it rains, you may =
say that a roof and doors (and windows) are necessary, but all sorts of =
people ride motorcycles in the rain with no doors, roof or windows. =
(Okay, okay, a windshield is really nice, but not necessary... my =
motorcycle does not have one).=20
In fact, if any case should have been appealed to a higher court, the =
Rudeloff case should have been, and we at the CEN-TA GROUP had a similar =
case that was destined to "go to the top". We took our case to `the top' =
in 1988.=20
=20
Unfortunately, the Tax Court ruled against five members of the Cillis =
Family and they have decided not to appeal. But I still feel they should =
have won. Four generations of one family lived on five acres in two =
houses. They used the acreage for a riding ring (one son is now a =
full-time professional equestrian), duck ponds, swimming pool, barns, =
sheds, and wood lot for themselves. However, as the two houses had been =
legally subdivided `out' of the five acres, it was ruled that the excess =
land was not `necessary' for the `Use and Enjoyment'.=20
And The Cillis family has decided not to appeal with good reason. DNR is =
treating this entire situation like parking meters. Either the violation =
flag is up or it is not. The courts have been interpreting the word =
"necessary" to mean "cannot be done without".=20
I still feel that the Cillis Family would have won their case on appeal. =
You have not really lost until the final judge has had his or her say. =
Marianne Fourt found that out when she did not take "NO" for an answer. =
Sort of a reverse of the popular T-shirt which says, "What part of No =
don't you understand".=20
In 1991, Marianne Fourt received a favorable ruling from the Federal =
Court Trial Division when the court ruled in favor of the tax free =
status of the second lot. The judge ruled that although not essential to =
the use and enjoyment of the family home, it clearly contributed to the =
use and enjoyment within the meaning of paragraph 54(g)(v) of the Act. =
She had lost in 1988 as stated below.=20
=20
In 1988, Marianne Fourt paid tax on an adjoining lot she sold. She =
bought two lots and built her home on one and used the second lot for an =
incinerator, storage shed and parking. Judge Goetz of the Tax court =
ruled that she could have built everything on one lot and the other was =
not necessary, i.e., could not be done without.=20
It seems that unless, you have a "Yates" argument, i.e., could not have =
bought less because of zoning, you will not get anything more than one =
acre tax free. (to be fair, it is really 1.2 acres (1/2 hectare). =
Because of welfare, etc., the courts are determining that `eating off =
the land', i.e., garden, raising animals, etc., is not sufficient for =
necessity.=20
=20
In 1989, Elmer Augart won an unusual case when you consider some of the =
other cases previously mentioned. (Elmo Baird for instance). He had =
bought 8.99 acres and he lived on it for FOURTEEN YEARS BEFORE the land =
was rezoned to require 80 ACRES FOR A SINGLE FAMILY HOUSE. Judge Mogan =
of the Tax Court of Canada ruled that because of the YATES case =
mentioned before in the text, the entire 8.99 acres was necessary under =
section 54(g) of the Act.=20
=20
But also in 1989, the estate of Anna Lewis and the estate of John Lewis =
were taxed on the land in excess of one acre even though it was shown =
that the 2.11 acres could not be subdivided and sold as separate =
parcels. Judge Rip did not apply the Yates argument but he did change =
the values placed on the property by DNR resulting in a little less tax. =
=20
The following cases just add to the argument and are here for your =
information. They include the YATES CASE.=20
=20
In 1983, Donald Fraser lost his claim for an extra half an acre used as =
a garden and play area. D. E. Taylor, member of the Tax Review Board, =
found that the taxpayer had failed to demonstrate the "necessity" for =
the garden and play area.=20
=20
In 1983, Elmo B. Baird, lost his bid for the tax-free sale of land in =
excess of one acre. Mr. Baird had bought 2.41 acres under the Veterans =
Land Act in 1951. He built outbuildings, raised farm animals, gardened, =
and used the size of the land for a septic field. Certainly "use", =
although an argument could be made by many "city dwellers" that tending =
a garden and cleaning stalls and septic fields is not "enjoyment", nor =
necessary. My understanding was that all VLA land was supposed to be in =
the 2 1/2 acres size `area'. If that is the case, Mr. Baird should have =
won his case because he could not have bought less land under VLA rules. =
=20
In 1991, Glen Windrim paid tax on the value of some 15 acres of land. He =
had a mobile home on 17.6 acres for three years and when he sold them, =
he tried to claim the total tax free. However, he had only lived there =
three years and showed no evidence of use and enjoyment or necessity. It =
is interesting that DNR voluntarily gave him 2 hectares (4.6 acres) tax =
free and Judge Muldoon of the Federal Court Trial Division went along =
with it even though the act only allows 1/2 hectare (about 1.22 acres) =
and originally allowed only 1 acre.=20
Interpretation bulletins IT 120 and IT 120R leave the impression that =
such matters as zoning will contribute to a favorable ruling when =
capital gains on land in excess of one acre are concerned.=20
=20
In the case of Mr. Baird, he could not legally have bought less than 2 =
1/2 acres (VLA financing not zoning rules), which is relevant when the =
next case is mentioned.=20
=20
The Famous Yates Case=20
In 1983, William and May Yates won their case in The Federal Court - =
Trial Division. The taxpayers could not legally have occupied their =
residence without ten acres because of local zoning laws. It was =
necessary to have more than one acre. Even though they had rented the =
excess out to a farmer, they only sold the excess 9.3 acres under threat =
of having the area expropriated. Judge Mahoney ruled "The defendants =
could not legally have occupied their housing unit as a residence on =
less than ten acres. It follows that the entire ten acres, subjacent and =
contiguous, not only `may reasonably' be regarded as contributing to =
their use and enjoyment of their housing unit as a residence; it `must' =
be so regarded. It also follows that the portion in excess of one acre =
was necessary to that use and enjoyment." This case was appealed to the =
Federal Court of Appeal. I am pleased to say that In 1986, William Yates =
and his wife May Yates won again. Judges Heald, Stone and Ryan found for =
the Yates.=20
But, there is a sense of futility here. When people need and use the =
land, they lose, but when they rent it out and don't use it, they win.=20
=20
In 1986, the estate of Sarah Raper won the tax free ownership of an =
extra 4 acres for 9 out of 10 years. Until 1980, zoning laws prevented =
the subdivision of the land into less than 5 acre plots. Even though she =
did not subdivide the land in 1980, Judge Tremblay of the Tax Court of =
Canada ruled that her lifestyle was not sufficient to show `necessity =
for use and enjoyment' after 1980, and assessed tax on the capital gain =
after 1980. He said that `use and enjoyment' should be decided on a year =
to year basis, thus giving credence to my graph in the tax books from =
1974 to '82 wherein I suggest that a taxpayer should be able to =
designate alternate years or different years as tax free, rather than =
the successive years suggested by DNR.=20
=20
In 1987, John Wallace Beaton lost his case for the sale of 2.1 acres tax =
free showing again how the judge's mind works in these situations. In =
1979 he had bought a `remnant' 4 acres in an area that required 25 acres =
to build a house. He built a house and drilled two wells, one on each =
half of the property. Neither well was satisfactory. In 1984 he sold 2.1 =
acres and kept the balance as his residence. He claimed the 2.1 acres =
was tax free because he needed it for his well and because of the zoning =
in place at the time of purchase. Judge Brule of the Tax Court of Canada =
ruled that it could not be said that Beaton could not have built on less =
than 4 acres as the land in question was already a remnant, and he =
certainly didn't need the extra 2.1 acres for his water supply because =
the well was unsatisfactory. The taxpayer was able to "do without" the =
2.1 acres (i.e., he didn't need brakes.)=20
=20
In 1986, Jacob and Ruth Schellenberg won $221,000 out of a $375,000 sale =
as tax-free gains from the sale of their principal residence and an =
adjoining lot. DNR tried to reverse the figures to $154,000 for the =
principal residence, and $221,000 as taxable from the sale of the lot. =
Judge Christie of the Tax Court of Canada ruled that the Schellenberg's =
figures were correct.=20
=20
ESTATES and CAPITAL GAINS and ROLLOVERS=20
Death can cause difficulties and hardships with regard to capital gains. =
=20
Income Tax is extremely time sensitive. In 1982, the estate of W. E. =
Hillis was caught in a time warp which our legislators would not have =
wanted to happen. When W. E. Hillis died in testate on February 21, =
1977, his lack of a will (intestacy) delayed normal settlement of the =
estate, plus left (under Saskatchewan law) part of the estate to the =
sons, both of who disclaimed any interest in the estate in June and July =
1979. His widow was granted the entire estate on December 14, 1979 under =
the Dependent's Relief Act of the Province of Saskatchewan. The act =
specifies that to escape capital gains tax on assets transferred to a =
trust or spouse upon the death of a taxpayer, the assets must vest in =
that trust or spouse within fifteen months of the death. If not, there =
is a deemed disposition at fair market value of any assets of the =
deceased as of the date of death.=20
In this case, it is obvious that this did not happen. And it is easy to =
say that the judge was correct in taxing the assets, but is this what =
parliament wanted, to tax widows because of time delays during moments =
of hardship? This case was appealed to the Supreme Court of Canada. The =
Court dismissed the application in 1985.=20
=20
And in 1989, the estate of Alexander Boger suffered the same indignity. =
Mr. Boger died in 1979 and left his estate to his wife and 4 daughters. =
Mrs. Boger contested the will and held up the settling of the estate for =
3 years. Judge Rip of the Tax Court of Canada ruled that the property =
had not been transferred to the children within the required 15 month =
period. It is obvious that this law needs changing. Fifteen months is =
not enough time when there are large numbers of items and potential =
family claims that have to be settled. Legislators awake! The results =
are not what you expected when fifteen months was allowed in the first =
place.=20
=20
But, in 1991, the Boger Estate fared better. There was a problem with =
the legal definition of "when the property transferred" because of a =
challenge to the will by the wife. To be tax free the property has to be =
vested or transferred within 15 months. Judge Jerome of the Federal =
Court ruled that it was necessary to look at concepts and terminology =
from real property law. As such, he ruled that the property was vested =
under the terms of the will under section 70(9) because there were no =
conditions precedent to stop the vesting. The Estate had lost in the Tax =
Court of Canada. The difference between this and the Hillis Estate, is =
that Hillis had no will, therefore, there was no immediate vesting which =
was challenged.=20
Two other cases dealt with slightly different matters but both dealt =
with Estates.=20
=20
In 1989, the Estate of Stanley Earl Lewis won its case for tax free =
rollover. Lewis's final 1982 T1 return was filed showing the rollover of =
the farm to two grandsons within the 36 months required under section =
70(9) of the act. However as the wife was to receive the rents and =
profits until their grandson's 20th birthday on June 17, 1989 when the =
two grandsons were to receive the farm, DNR tried to turn it over =
because the grandsons had not received possession. Judge Kempo ruled =
that there was an indefeasible vesting even though actual possession had =
not taken place.=20
Judge Kempo got another chance to make a wise decision as well.=20
=20
In 1989, the Estate of Wilbert A. May received the same treatment. =
Because May died on May 18, 1982 with an ambiguous holographic =
(personally handwritten but not witnessed) will, it took four years of =
litigation to reach an agreement as to the disposition of the estate. =
Mrs. May the widow was finally given the property subject to some rights =
of first refusal on some of the land on April 9, 1986. Judge Kempo ruled =
that there was a rollover as defined by section 70(6) of the Act.=20
=20
And in another estate situation, in 1987, The Estate of Jeannette Bell =
Kelley lost its bid for tax free capital gains under the US/Canada Tax =
Treaty. JBK died in 1970, and the land in Alberta was sold in 1980. The =
two heirs both lived in the United States. Article VIII of the US/Canada =
Tax Treaty of the time, exempted Capital Gains earned in one country by =
a resident of another country. The estate tried to claim this treaty =
exemption. Judge Rip of the Tax Court of Canada ruled that the estate =
realized the gains and that therefore gains were only indirect for the =
residents of the U.S. Furthermore, an intervening life estate could have =
nullified the inheritance if the beneficiary of the life estate had had =
children, etc.=20
=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D
Answers to this and other similar questions can be obtained free on Air =
every Sunday morning.
Every Sunday at 9:00 AM on 600AM in Vancouver, Fred Snyder of Cartier =
Partners and I will be hosting an INFOMERCIAL but LIVE talk show called =
"ITS YOUR MONEY"
Those outside of the Lower Mainland will be able to listen on the =
internet at
www.600AM.com=20
Local phone calls to (604) 280-0600 - Long distance calls to =
1-866-778-0600.=20
Old shows are archived at the site.
=20
This from ask an income tax immigration planning and bankruptcy expert =
consultant guru or preparer from www.centa.com or www.jurock.com or =
www.featureweb.com. Canadian David Ingram deals daily with tax returns =
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wizard - David Ingram's US/Canada Services
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Calls accepted from 10 AM to 10 PM 7 days a week
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Disclaimer: This question has been answered without detailed =
information or consultation and is to be regarded only as general =
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in any particular circumstances. No contract exists between the reader & =
the author and any and all non-contractual duties are expressly denied. =
All readers should obtain formal advice from a competent financial, or =
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