Friday, September 30, 2011

Cassidy v. Canada, 2011 FCA 271

The Federal Court of Appeal clarified that the application of the formula set out in s.40(2)(b) of the Income Tax Act requires an annual determination, rather than a single determination at the time of disposition of the taxpayer’s “principle residence.” The formula set out in s.40(2)(b) is used to determine the capital gain tax payable on this disposition.

The Income Tax Act [the “Act”] allows an exemption on capital gains that are realized from the disposition of a principal residence. This exemption, per s.54(e) of the Act, is limited to 0.5 hectares unless the taxpayer can show that any additional land claimed was necessary for the use and enjoyment of the property. It is undisputed that Cassidy’s property was a principal residence, and at the time the property was purchased, zoning by-laws prohibited the land from being smaller than 2.43 hectares. Accordingly, more than 0.5 hectares was necessary for the use and enjoyment of the property.  In 2003, the year the taxpayer disposed of the property, zoning by-laws changed and Cassidy could have divided the land prior to disposition. The Crown argued that s.40(2)(b) called for a single determination of capital gain at the time of disposition. Since the land had been re-zoned at this time, only half a hectare of land was necessary for the use and enjoyment of the property, and accordingly only this amount should receive favourable tax status. Sharlow JA rejected this approach, holding that s.40(2)(b), interpreted according to the language and purpose of the Act, required an annual determination. According to Sharlow JA, the purpose of s.40(2)(b) is to relieve taxpayers from capital gain taxes where the gain is realized on the sale of their principle residence. Annual determination ensures that this benefit is partially available in the case of properties that do not meet the definition of “principle residence” for the entire period of ownership.

September 30, 2011
Link to Decision

Kaitlind de Jong & Steve Holinski
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