REASONS
FOR JUDGMENT
Woods J.
[1]
Richard and Madeleine Jennings appeal in respect
of assessments under the Income Tax Act that denied deductions for
expenditures made in relation to a zoning matter on a rental property. In
aggregate, the expenditures are $13,464.26 for application fees for a zoning
change and $7,686.26 for related consulting fees.
[2]
The question to be decided is whether the
expenditures are on income account, as submitted by the appellants, or on
capital account, as submitted by the respondent.
Background facts
[3]
In 1987, the appellants purchased a residential
property in Ottawa that had three rental units, including one in the basement.
The property was purchased solely as a rental property. The appellants assumed
the three tenancies.
[4]
When purchasing the property, the appellants relied
on a report on zoning from the City of Ottawa (the “City”)
that seemed to suggest that there were no zoning violations.
[5]
Six years later, in 1993, the appellants
received a notice of violation of zoning by-laws from the City. The nature of
the alleged violation was set out in a letter (Ex. R-1) as follows:
[…]
the previous use of the property, as a legal non-conforming duplex, is also no
longer permitted given that the building was converted to a three unit dwelling
without prior approvals. The only means of legalizing the property as either a
three unit converted dwelling or as a duplex would be to apply for a zoning
amendment to request that these uses be permitted. […]
[6]
To the appellants’ surprise, the City was taking
the position that the property could only have one rental unit under existing
laws. It appeared that the alleged violation occurred when the basement began
to be rented, which was
prior to the appellants’ ownership.
[7]
Soon after, the appellants applied for rezoning
“to legalize the property as a three unit converted dwelling” (Ex. R-2). In the
application, the appellants mention that the property had been assessed
property tax since 1980 as a three-unit building, and that the City had
informed the appellants that the property enjoyed non-conforming rights.
[8]
Consideration of the application was delayed for
several years through no fault of the appellants and the existing use of the
property was permitted during this period because an application was pending.
[9]
The appellants were required to make a new
application in 2010, which they did with the assistance of a planning
consultant. The expenditures at issue relate to application fees for this
application and the related fees of the planning consultant.
[10]
The application was approved in 2010, and a
zoning by-law was passed for use of the property as a duplex. According to the
by-laws at the time, this enabled the property to also have a “secondary unit”
which qualified the basement unit as well.
Analysis
[11]
The question to be decided is whether the
zoning-related expenses incurred in 2010 are on current or capital account.
There is no bright line test for this – each case depends on its own particular
facts. In this case, the question is whether the expenditures are an ordinary
expense incurred in the management of the property or whether they are
extraordinary expenses designed to achieve an enduring benefit.
[12]
The appellants essentially argue that the
expenditures are on current account because the zoning amendment did not expand
their use of the property.
[13]
It is submitted that the appellants had the
right to use the property as a duplex in 1987, and the zoning by-law entrenched
this right in 2010. The qualification of the basement unit was a matter of
permitted use under an existing by-law and was not part of the application.
What the expenditures achieved from the appellants’ perspective was to ward off
losing their right to use the property as they historically had done.
[14]
I would first comment that the classification of
the expenditures as current or capital should not turn on the niceties of the legal
rights relating to the property. It is the nature of the expenditures from a
practical perspective that should govern (Johns-Manville Canada Inc. v. The
Queen, 85 D.T.C. 5373, at page 5383).
[15]
According to the evidence, which I accept, the
appellants applied for the zoning amendment in 1993 and again in 2010 as the
best way of dealing with the notice of zoning violation and in accordance with
professional advice.
[16]
From a practical perspective, the appellants
were doing what was appropriate from time to time to ensure compliance with
City by-laws. This was an activity that was part and parcel of the day-to-day
management of the rental property. Zoning compliance was on ongoing matter from
the time the property was acquired in 1987, until the zoning amendment was
finally approved in 2010. I understand that the appellants tried to avoid
having a new application in 2010, but the City required them to go through a
new process.
[17]
Throughout this whole period, the use of the
property did not change.
[18]
In my view, the expenditures should be viewed as
ordinary expenditures incurred in connection with the day-to-day management of
the rental property. It is true that the expenditures would likely have a long
term benefit in the sense that the property was now clearly in compliance with
existing by-laws. However, I do not think that this should tip the balance to
result in the expenditures being non-deductible capital expenditures.
[19]
The appeals will be allowed, with costs to the
appellants based on one set of counsel fees.
Signed
at Ottawa, Ontario this 17th day of April 2015.
“J.M. Woods”
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