Citation: 2013 TCC 79
Date: 20130311
Docket: 2011-1434(IT)I
BETWEEN:
MARIA SICURELLA,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Masse D.J.
[1]
This is an appeal from
two assessments made under the Income Tax Act, R.S.C., 1985, 5th Supp.,
c. 1, as amended (the Act) against the appellant, for the 2007 and 2008
taxation years. The assessments were confirmed by a decision on the objection
rendered on March 2, 2011. Hence this appeal.
Factual background
[2]
The appellant is a
widow residing at 7385 Cartier Street, in Montréal. Her husband, Francesco
Sicurella, passed away in 1993. On February 28, 1968, the appellant’s
husband purchased the building located at 7385 Cartier Street in Montréal for
$85,000. The building was a multiresidential rental property consisting of seven
units. Following the death of Mr. Sicurella in 1993, the appellant became the
sole owner of the building. She lives in one of the units as her principal residence.
That building is the subject of this dispute. The issue is whether the Minister
of National Revenue (the Minister) properly calculated the Capital Cost
Allowance (CCA) of the building for the relevant years.
[3]
The appellant claimed $11,065
as a CCA for 2007 and the same amount for 2008. The Minister issued assessments
in respect of those two years disallowing a deduction of $6,398 for 2007 and
$6,585 for 2008. Those two amounts were added to the appellant’s income for
those two years. The appellant challenges the Minister’s decision to disallow
the capital cost allowances.
[4]
This dispute originated
in 1994. In April 1995, the appellant elected to report a capital gain on property
owned at the end of February 22, 1994, and to that end, she completed Form T664
(see Exhibit I‑2). This enabled the appellant to maximize her
capital gain exemption before the federal government abolished the exemption. The
appellant was entitled to designate as proceeds of disposition any amount
between the acquisition cost of the property and the fair market value (FMV)
of the property. By the T664 election, the appellant designated the amount of
$262,500 as the FMV of the property and as the designated proceeds of
disposition. Also, she designated the amount of $131,250 as adjusted cost base
(ACB). Unfortunately, the amounts indicated by the appellant in her T664
election would have unexpected consequences in respect of the capital cost
allowance of the property.
[5]
Giovanni Sicurella, age
46, is the appellant’s son. He testified that his father purchased the building
in 1968 for $85,000. From 1968 to 1994, the father did significant renovations and
improvements to the building. According to Mr. Sicurella, those capital expenditures
were in the tens of thousands of dollars. Unfortunately, he was unable to find
any documentation to establish the amount of those expenses. Therefore, he
hired a construction contractor to provide an estimate of the capital costs that
may have been incurred during that period of time. Exhibit A‑2, dated
April 17, 2011, is the estimate prepared for Mr. Sicurella. According to
him, that document shows that, between 1968 and 1994, significant renovations
valued at approximately $140,300 were made to the building, and therefore, the FMV
and the ACB of the building in 1994 should reflect the capital cost expenses. However,
those estimates were not accepted by the Minister. Therefore, Mr. Sicurella decided
to hire an accredited appraiser, Nicholas St‑Cyr, to determine the FMV of
the building in 1994.
[6]
Mr. St‑Cyr, a very
seasoned appraiser, described to us the appraisal methods he used to reach his conclusions.
He prepared a very detailed report, which was filed with the Court as Exhibit A‑1.
Mr. St‑Cyr used three appraisal methods: the cost method, the comparison method
and the income method. Mr. St‑Cyr established the FMV of the building
on July 1, 1994, at $332,000 using the cost method, at $301,000 using the
comparison method and at $244,000 using the income method. He is of the view
that in this case, the comparison method is the most reliable, and therefore,
that the building’s most probable market value as of July 1, 1994, was $301,000.
He is of the view that the land value at the time was $80,455 using a unit cost
rate of $18 per square foot and a land area of 4,470 square metres. Thus, the
building’s value at the time would have been $220,545.
[7]
According to Mr.
Sicurella, when the appellant made her T664 election, the ACB of the building
should have been $262,500 and the FMV should have been $301,000 instead of the
amounts indicated in Exhibit I‑2. Today, he is attempting to correct
those errors and re-establish the FMV and the ACB to their real values.
[8]
Dorothy Sanon works for
the Canada Revenue Agency as an appeals officer. She handled the file when the appellant
objected to the assessment disallowing the capital cost allowance for 2007 and
2008. Ms. Sanon testified that in order to determine the amount of the capital
cost allowance, one must start with the undepreciated capital cost (UCC).
However, there was a dearth of information in that regard for the building
prior to 2003. Thus, Ms. Sanon decided that it would be reasonable to use the amount
that the appellant herself had reported in her T664 election. Ms. Sanon assumed
that when the appellant made her T664 election in 1994, all work and capital expenses
prior to 1994 had already been included. Ms. Sanon therefore calculated the UCC
of the building to be $84,164 in 2003. In making that calculation, she took as
a starting point the ACB of $131,250 as indicated by the appellant in her T664
election. From that amount, she subtracted the amount of $19,031, representing
the land value as established using the appraisal of the City of Montréal for 1971
($131,250 x 14.5 % = $19,031) as well as the amount of
$28,055, which represents 25% for use as the appellant’s principal residence ($131,250 -$19,031) x 25% = $28,055).
The result of that calculation is an UCC of $84,164. The CCA for 2007 and 2008 is
based on the UCC, the property class and the rate applicable to that class (Class 1 — 4%
for a building).
[9]
The calculations supporting
the assessments are found in Exhibits I‑3 and I‑4, which are reproduced
as Annex “A” and “B”, respectively.
The appellant’s position
[10]
The appellant submits that
the assessment made against her should be vacated as the ACB of the building
used by the Minister to calculate the capital cost allowance is too low and
does not reflect either the real UCC or the real ACB of the building. When the appellant
filled out Form T664, a few errors occurred as to the amounts indicated despite
the fact that said amounts were provided by the appellant. The appellant only
wishes to correct the errors she made in 1994 with respect to the FMV and the ACB
despite the fact that 13 years have elapsed. The appellant took the time to
hire an accredited appraiser who provided insight through his professional
opinion that the FMV of the building in 1994 was $301,000 and not $262,500. The
appellant submits that the ACB indicated in the T664 election should have been
$262,500 instead of $131,250, which would have given a result of $168,328 as
the UCC instead of $84,164. Significant improvements were made to the building,
and therefore, it is just and equitable that the ACB and the UCC reflect said
improvements.
The respondent’s position
[11]
The respondent submits
that the FMV of the building and the appraisal that was prepared by Mr. St‑Cyr
have no bearing on this matter. In the case at bar, the issue is merely the calculation
of the CCA, which is obtained from the calculation of the UCC and not the FMV of
the property. The Minister claims that he was correct in relying on the ACB
indicated in the appellant’s T664 election (Exhibit I‑2) as the
starting point for the calculation of the capital cost allowance. There was a
lack of data prior to 2003 which made it impossible to verify the capital
expenses that were incurred prior to 2003. Neither the respondent nor the appellant
was able to provide information about the various tax attributes of the
building. Thus, a starting point was necessary, and the most reliable that was made
available to the respondent by the appellant herself was the ACB indicated in
the T664 election. It is the appellant who chose the ACB in her T664 election
and the Minister was justified in relying on that amount and calculate the capital
cost allowance based on that amount.
[12]
In the circumstances of
this case, the Minister can rightfully rely on the amounts indicated in the
appellant’s T664 election to establish the UCC of the building. The respondent
therefore submits that the assessments are well-founded and, accordingly, the
appeal must be dismissed.
Statutory provisions
[13]
The relevant provisions
involving paragraph 13(7)(e) and subsection 110.6(19) of the Act are as
follows:
. . .
(e) notwithstanding any other provision of this Act except subsection
70(13), where at a particular time a person or partnership (in this paragraph
referred to as the “taxpayer”) has, directly or indirectly, in any manner
whatever, acquired (otherwise than as a consequence of the death of the
transferor) a depreciable property (other than a timber resource property) of a
prescribed class from a person or partnership with whom the taxpayer did not deal
at arm’s length (in this paragraph referred to as the “transferor”) and,
immediately before the transfer, the property was a capital property of the
transferor,
(i)
where the transferor was an individual resident in
Canada or a partnership any member of which was either an individual resident
in Canada or another partnership and the cost of the property to the taxpayer
at the particular time determined without reference to this paragraph exceeds
the cost, or where the property was depreciable property, the capital cost of
the property to the transferor immediately before the transferor disposed of
it, the capital cost of the property to the taxpayer at the particular time
shall be deemed to be the amount that is equal to the total of
(A)
the cost or capital cost, as the case may be, of the
property to the transferor immediately before the particular time, and
(B) 1/2 of the amount, if any, by which
(I) the transferor’s proceeds of disposition of the
property
exceed the total of
(II)
the cost or capital cost, as the case may be, to the transferor immediately
before the particular time,
(III)
twice the amount deducted by any person under section 110.6 in respect of the
amount, if any, by which the amount determined under subclause 13(7)(e)(i)(B)(I) exceeds the
amount determined under subclause 13(7)(e)(i)(B)(II),
and
(IV)
the amount, if any, required by subsection 110.6(21) to be deducted in
computing the capital cost to the taxpayer of the property at that time
and for the purposes of paragraph 13(7)(b)
and subparagraph 13(7)(d)(i), the cost of the property to the taxpayer shall be
deemed to be the same amount,
.
. .
(iii)
where the cost or
capital cost, as the case may be, of the property to the transferor immediately
before the transferor disposed of it exceeds the capital cost of the property
to the taxpayer at that time determined without reference to this paragraph,
the capital cost of the property to the taxpayer at that time shall be deemed
to be the amount that was the cost or capital cost, as the case may be, of the
property to the transferor immediately before the transferor disposed of it and
the excess shall be deemed to have been allowed to the taxpayer in respect of
the property under regulations made under paragraph 20(1)(a) in computing the
taxpayer’s income for taxation years ending before the acquisition of the
property by the taxpayer;
(e.1) where a taxpayer is deemed
by paragraph 110.6(19)(a)
to have disposed of and reacquired a property that immediately before the
disposition was a depreciable property, the taxpayer shall be deemed to have
acquired the property from himself, herself or itself and, in so having
acquired the property, not to have been dealing with himself, herself or itself
at arm’s length;
Election for property
owned on February 22, 1994
110.6(19)
Subject to subsection 110.6(20), where an individual
(other than a trust) or a personal trust (each of which is referred to in this
subsection and subsections 110.6(20) to 110.6(29) as the “elector”), elects in
prescribed form to have the provisions of this subsection apply in respect of
(a)
a capital property … owned at the end of February
22, 1994 by the elector… the property shall be deemed … :
(i)
to have been disposed of by the elector at that time
for proceeds of disposition equal to the greater of
(A) the
amount determined by the formula
A
– B
where
A
is the amount designated in respect of
the property in the election, and
B
is the amount, if any, that would, if the
disposition were a disposition for the purpose of section 7 or 35, be included
under that section as a result of the disposition in computing the income of
the elector, and
(B) the adjusted cost base to the elector of the property immediately
before the disposition, and
(ii) to
have been reacquired by the elector immediately after that time at a cost equal
to
.
. .
(C)
in any other case, the lesser of
(I)
the designated amount, and
.
. .
(24)
An election made under subsection 110.6(19) shall be
filed with the Minister
(a)
where the elector is an individual (other than a trust),
(i)
if the election is in respect of a business of the elector, on or before the
individual’s filing-due date for the taxation year in which the fiscal period
of the business that includes February 22, 1994 ends, and
(ii)
in any other case, on or before the individual’s balance-due day for the 1994
taxation year; and
.
. .
(25) Subject to subsection 110.6(28), an elector may revoke an election
made under subsection 110.6(19) by filing a written notice of the revocation
with the Minister before 1998.
(26)
Where an election made under subsection 110.6(19) is
filed with the Minister after the day (referred to in this subsection and
subsections 110.6(27) and 110.6(29) as the “election filing date”) on or before
which the election is required by subsection 110.6(24) to have been filed and
on or before the day that is 2 years after the election filing date, the
election shall be deemed for the purposes of this section (other than
subsection 110.6(29)) to have been filed on the election filing date if an
estimate of the penalty in respect of the election is paid by the elector when
the election is filed with the Minister.
(27) Subject to subsection 110.6(28), an election under subsection
110.6(19) in respect of a property or a business is deemed to be amended and
the election, as amended, is deemed for the purpose of this section (other than
subsection 110.6(29)) to have been filed on the election filing date if
(a)
an amended election in prescribed form in respect of
the property or the business is filed with the Minister before 1998; and
(b)
an estimate of the penalty, if any, in respect of the
amended election is paid by the elector when the amended election is filed with
the Minister.
(28)
[Election that cannot be revoked or amended in certain cases]
(29)
[Penalty in respect of an election to which subsection
110.6(26) or 110.6(27) applies]
The Income Tax Regulations, C.R.C., 1978, c. 945,
stipulate as follows:
PART XI
Capital cost allowances
Section
I
Deductions
allowed
1100. (1) For
the purposes of paragraphs 8(1)(j)
and (p) and 20(1)(a) of the Act, the following
deductions are allowed in computing a taxpayer’s income for each taxation year:
(a)
subject to subsection (2), such amount as the taxpayer may claim in respect of
property of each of the following classes in Schedule II not exceeding in
respect of property
(i)
of Class 1, 4 per cent,
.
. .
DIVISION III
PROPERTY RULES
Property Not Included
1102. (1) The
classes of property described in this Part and in Schedule II shall be deemed
not to include property
.
. .
Land
(2) The classes of property described in
Schedule II shall be deemed not to include the land upon which a property
described therein was constructed or is situated.
SCHEDULE II
(ss. 215, 700, 700(1), 1100 to 1105, 1205, 1206, 1700, 1704, 3900,
4600, 4601, 5202 and 5204)
Capital Cost Allowances
CLASS 1
(4 per cent)
Property
not included in any other class that is
.
. .
(q)
a building or other structure, or a part of it, including any
component parts such as electric wiring, plumbing, sprinkler systems,
air-conditioning equipment, heating equipment, lighting fixtures, elevators and
escalators …
Analysis
[14]
It is clear that the statutory
provisions that apply in this case are very complex sand difficult to interpret.
In ruling on the merits of this case, it is important not to confuse the principles
that apply to the capital gains exemption with the principles governing the
capital cost allowance calculation.
Capital gains exemption
[15]
With respect to the capital
gains exemption, as provided for in section 110.6, it is appropriate to learn
a bit about the history of capital gains taxation. Judge Lamarre‑Proulx provided
us with a very brief overview in her reasons for decision in Foisy v. The
Queen, 2000 CanLII 431 (TCC). She stated as follows in paragraphs 17
et seq.:
[17]
Before 1972, capital gains were not
subject to income tax. In 1967, the report of the Royal Commission on Taxation,
known as the Carter Commission, recommended that such gains be taxable in the
same way as business earnings. In 1969, the White Paper on Taxation recommended
the full taxation of capital gains with the exception of those on shares of
Canadian public corporations, which would be taxed at 50 percent. The Income
Tax Act that came into force on January 1, 1972, provided for a 50 percent
tax rate for capital gains.
[18]
In 1985, the Act was amended to
give individuals a cumulative capital gains exemption that could progressively
reach $500,000. That exemption increased gradually: thus, the limit was $20,000
in 1985, $50,000 in 1986 and $100,000 in 1987. It was then supposed to increase
by $100,000 each year until it reached a final limit of $500,000 in 1990.
[19]
The exemption was said to be
cumulative because it was necessary to accumulate the exemptions taken
throughout an individual's life. Any exemption amount used in a previous year
reduced the available exemption limit.
[20]
The increase in the exemption limit
stopped at $100,000 in 1987 with the tax reform of that year. The same reform
provided that the taxable portion of capital gains would rise to 66 2/3 percent
in 1988 and 75 percent starting in 1990. The $100,000 exemption ended in 1994.
(The federal budget of February 28, 2000, contains a proposal to bring the
inclusion rate for capital gains realized after February 27, 2000, down to two
thirds.)
[21]
The end to the increase in the tax
exemption limit that occurred in 1988 did not apply to qualified farm property
or qualified small business corporation shares. For them, the exemption reached
its final limit in 1990 and did not end in 1994.
[22]
When the $100,000 exemption was
repealed in 1994, subsection 110.6(19) of the Act enabled individuals to make
an election by which capital property would be deemed to be disposed of on
February 22, 1994, and repurchased at its fair market value or some lower
value. The elected value became the property's adjusted cost base. The election
had to be made within the time set out in subsection 110.6(24) of the Act.
[16]
Subsection 110.6(19)
of the Act makes it possible for a taxpayer to elect to use the amount remaining
from the cumulative capital gains exemption to prevent the exemption from being
lost forever. The taxpayer, through the T664 election, designates a capital
property and elects a value for said property. According to the statutory provisions,
the taxpayer is deemed to have disposed of the designated property and to have
reacquired it for the elected value. Any gain on the deemed disposition will
result in a taxable capital gain that could be offset by the amount remaining
to the taxpayer as cumulative exemption. In future, when there is a disposition of or
sale the property, the gain at that time will be
offset against the elected amount, rather than the original cost and the future
gain. This will result in a reduction
of tax payable from the eventual sale of the property.
[17]
In the present case, the
appellant had could elect as designated proceeds of disposition any amount that
did not exceed the FMV of the building. That allowed her to report a capital gain
in order to benefit from the $100,000 capital gains exemption before the
federal government abolished the exemption. The appellant’s election had the
effect of maximizing the benefit of the exemption. It cannot be said that she
made a bad choice in that regard.
[18]
It is important to note
that these statutory provisions affect only the capital gains calculation and
not the depreciation of the property. The amount designated by the taxpayer as proceeds
of disposition (and therefore the new cost of acquisition of the property) in
the T664 election is very important in calculating the capital gain when the
property is sold at a later date, but that amount is not significant when calculating
the capital cost allowance of the property.
Capital cost allowance calculation
[19]
With respect to capital
cost allowances of a property, various considerations apply. By the application
of subsection 110.6(11), the appellant is deemed to have dealt with herself, meaning
that the transaction is considered as having been carried out with a person who
is not at arm’s length to the appellant. Paragraphs 13(7)(e) and (e.1)
determine the capital cost for a taxpayer of the property acquired from a
related person. By application of those provisions, the purchaser’s cost
corresponds to the seller’s cost increased by the non-exempt taxable capital gain.
Thus, the cost for the appellant is the ACB of the depreciable property, which
she indicated in her T664 election as being $131,250. For these very reasons, the
UCC before the deemed transfer is the same as the UCC following the deemed
transfer. The Minister’s calculation was based on the appellant’s election and
on the information provided by her.
[20]
I am of the view that
the Minister was correct in relying on the ACB as indicated in the appellant’s T664
election. The ACB is a very important piece of information. It is up to the
taxpayer to ensure that the capital costs attributable to a depreciable
property are properly accounted for. As stated by Justice Campbell in Estate
of Lily Bullard v. The Queen, 2004 TCC 294 (CanLII):
[34] … The taxpayer's choice of the ACB figure is a
vital piece of information on this form. This is information that the taxpayer
has, not the Minister, and it is up to the taxpayer to ensure that the correct
amount is obtained and included on the form.
[35] … a taxpayer is electing a capital
gain against which a capital gain's deduction may be applied. … It is simply a logical deduction to conclude that a
taxpayer must be vigilant that the correct ACB is included on the form so that
the Minister is not left to second-guess the tax treatment chosen by the
taxpayer.
[21]
Accordingly, the Minister
was justified in considering the ACB indicated by the appellant in her T664
election as the starting point for calculating the UCC and, therefore, the CCA of
the property for 2007 and 2008.
Conclusion
[22]
I am of the view that
the Minister was correct in taking the ACB indicated by the appellant in her T664
election as a starting point to calculate the capital cost allowance for 2007 and
2008. Furthermore, given the lack of information as to the various tax
attributes of the building between 1994 and 2003, the Minister acted reasonably
in ignoring all the capital cost allowance that may have been taken during that
period of time, which is to the appellant’s benefit. The capital cost allowance
calculations for 2007 and 2008, which are included in Exhibits I‑3 and
I‑4, are therefore reasonable and fair, and the appellant did not show on
a balance of probabilities that the Minister erred in taking the ACB indicated
by the appellant in her T664 election as a starting point.
[23]
For these reasons, the appeal
is dismissed.
Signed at Kingston, Ontario, this 11th day of March 2013.
“Rommel G. Masse”
Translation certified true
on this 26th day of April 2013
Daniela Guglietta,
Translator
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