Docket: 2012-3070(IT)I
BETWEEN:
JEAN DRAGO,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
____________________________________________________________________
Appeal heard
on July 19, 2013, at Québec, Quebec.
Before: The Honourable Justice Gaston Jorré
Appearances:
|
Agent for the appellant:
|
Marcel Tremblay
|
|
Counsel for the respondent:
|
Martin Lamoureux
|
____________________________________________________________________
JUDGMENT
In accordance with the attached Reasons for
Judgment, the appeal from the assessment made under the Income Tax Act
for the 2007 taxation year is allowed, without costs, and the matter is
referred back to the Minister of National Revenue for reconsideration and
reassessment on the following basis:
(a) $6,000 of the $36,939 at
issue are current expenses,
(b) $30,939, the balance of the amount at
issue, are capital expenses and the appellant may claim, if he chooses to, a
capital cost allowance in accordance with the Income Tax Act and the Income
Tax Regulations.
Signed at Calgary, Alberta, this 21st day of August
2013.
"Gaston Jorré"
Translation certified true
On this 16th day of September 2013
Monica F.
Chamberlain, Translator
Citation: 2013 TCC 257
Date: 20130821
Docket: 2012-3070(IT)I
BETWEEN:
JEAN DRAGO,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Jorré J.
Facts
[1]
The appellant is
appealing an assessment for the 2007 taxation year during which he bought a
rental property and deducted some renovation expenses as current expenses. He
elected the informal procedure.
[2]
The respondent does not
dispute the amount of these expenses nor the fact that they are related to a
rental property. However, the respondent argues that they are capital expenses.
[3]
In 2006, the
appellant's mother received a notice informing her that the owner of her apartment
intended to take it back and move into it. His mother knew that there was a
vacant unit in the building at issue; a building that was close to her home.
[4]
On June 22, 2007, the
appellant bought an undivided half of the building at issue for $150,000. His
undivided half contained two units. Consequently, each unit cost the appellant
$75,000. The building was built in 1910.
[5]
The appellant paid
$15,000 in cash. The appellant agreed to pay the balance of $135,000 over a
20-year period at a 7% interest rate in monthly instalments of $1,046, that is
$523 per unit. The debt is secured by a hypothec.
[6]
I would note that at a
7% interest rate, the appellant paid about $9,450 in interest over the first 12
months or about $787 per month, $393 per unit.
[7]
One of the units had a
tenant and the appellant intended to continue renting it out.
[8]
The other unit had not
been rented for a long time.
The appellant intended to rent the second unit to his mother.
[9]
The appellant did a lot
of work on the unit rented to his mother. This work was done not only before
his mother moved into the unit, but before he bought the property.
[10]
No renovations were
made to the unit that was already rented.
[11]
The renovations at
issue cost $36,939. Almost all of these expenses were for the purchase of
materials. Only $4,360 was spent on demolition work. The
proportion of expenses for the purchase of materials is so high because the
appellant did almost all the work himself; he worked between 30 and 40 hours a
week over a four-month period.
[12]
The appellant testified
that he could have rented the second unit as is and I accept his testimony on
this issue.
[13]
Among other things, the
appellant carried out the following work: the appellant replaced three of the
windows; he removed five or six layers of wallpaper from the walls; he removed
the drywall; he put insulation in the walls to replace the paper that was
there; he rebuilt the walls; he also replaced the wiring; he replaced the
sinks; he changed the kitchen cupboards.
[14]
According to the
appellant, the renovated unit would be good for 8 to 10 years.
[15]
The appellant wanted
the unit to be nice for his mother.
[16]
The appellant testified
that he replaced more or less what was there. For the following reasons, I do
not accept the appellant's testimony on this particular point.
[17]
The appellant rented
the renovated unit to his mother for $625 per month.
[18]
The evidence does not
contain any detailed description of the work nor a detailed outline of the
expenses by the type of work carried out.
Analysis
[19]
There is a substantial
body of case law on whether an expense that is otherwise deductible is a
current expense, that is, an expense may be deducted during the year in which
it is incurred, or a depreciable capital expense that must be deducted over a
period of several years.
[20]
Although the mechanics
of accounting and the Income Tax Act may be different and the details
may be different, overall, with depreciation, both try to give a better idea of
profit when an expense will last a certain amount of time by spreading out the
expense over a given period.
[21]
The general idea behind
all that is that a routine and repetitive expense that does not last a long
time is deducted in the year when the expense was incurred, whereas an expense
that should last a certain amount of time will be spread out over a number of
years.
[22]
Various factors must be
considered, including the following:
(a) the nature of the expense
(b) the amount of time the result will last
(the longer the duration, the more likely that the expense is a capital
expense).
(c) whether the expense has the effect of
restoring what already existed, without improvement, or whether it is an
improvement (if it is a simple repair or restoration, it is more likely that it
will be deemed a current expense; if it is an improvement, it is more likely to
be deemed a capital expense).
(d) whether the effect of the expense
increases the value of a property (an indication that it is a capital expense).
(e) when there is a lot of work, in
reviewing it as a whole, whether it can be described more as an improvement
than a simple restoration (however, it is possible, even where there is a lot
of work, that certain projects should be reviewed separately from the others).
[23]
Although the quantum of
expenses in itself does not prove anything, it could, for example, in
comparison with a recent purchase price, be an indication that it was an
improvement.
[24]
All the factors must be
considered when assessing the matter.
[25]
In this case, these are
more than simple routine repairs. For example, removing wallpaper and drywall,
putting in modern insulation when there was paper before and redoing the
interior walls are improvements.
[26]
The fact that the
appellant wanted a nice apartment for his mother combined with the fact that he
spent almost $37,000 in addition to having worked between 30 and 40 hours a
week for four months, a very large investment when compared with the purchase price
of $75,000, is also an indication of improvements rather than mere repairs.
[27]
Moreover, the fact that
the appellant had indicated that this work would avoid the need to do
significant work on his mother's unit for 8 to 10 years is also an indication of
capital expenses.
[28]
Thus, I find that,
overall, the outlays were capital expenses.
[29]
I reviewed the evidence
to determine whether part of the work could be considered a current expense.
[30]
As I have already
noted, the evidence does not provide many details about the work nor the
expenses linked to specific work. Thus, it is impossible for me to
systematically review whether some of the work should be treated individually
as a current expense.
[31]
The only indication
that that there are current expenses is the fact that the list of purchases
includes small expenses. I also noticed that it includes the purchase of paint,
which is typically considered a current expense. Because of this and the fact
that it is quite likely that at least a small part of the work is routine, I
find that $6,000 of the total $36,939 at issue represent current expenses. The
rest, i.e. $30,939, represents capital expenses for which the appellant may
claim a capital cost allowance.
[32]
The appeal is allowed,
but only to allow the limited changes related to $6,000 as current expenses
discussed above and to enable the appellant, if he so wishes, to claim a
capital cost allowance.
[33]
Accordingly, the appeal
is allowed, and the matter is referred back to the Minister for reconsideration
and reassessment, on the basis of the following:
(a) $6,000 of the $36,939 at
issue are current expenses,
(b) $30,939, the balance of the amount at
issue, are capital expenses and the appellant may claim, if he chooses to, a
capital cost allowance in accordance with the Income Tax Act and the Income
Tax Regulations.
[34]
Given the appellant's
limited success, no costs will be awarded.
Signed at Calgary, Alberta, this 21st day of August
2013.
"Gaston Jorré"
Translation certified true
On this 16th day of September 2013
Monica F.
Chamberlain, Translator
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