Bowland v. R., 99 DTC 998, [1999] 4 CTC 2530 (TCC)

Hamlyn T.C.J.:

These are appeals with respect to the 1993 and 1994 taxation years.

In computing the income from his rental property for the 1993 and 1994 taxation years, the Appellant claimed repairs and maintenance expenses in the following amounts:

Issue

The issue is whether or not the expenditures claimed as repairs and maintenance were on account of capital within the meaning of paragraph 18( !)(£>) of the Income Tax Act (the “Act”).

Facts

À Partial Agreed Statement of Facts was filed. It reads as follows:

The following are facts that are admitted by the Appellant and the Respondent, and which do not require any further proof.

l. The Appellant acquired the property located at 112 Granite Crescent, Thompson, Manitoba (“the property”) in September of 1990.

2. The estimated value of the property in 1990 was $80,000.00, with approximately $5,000.00 of this amount being attributable to the land.

3. The Appellant started renting the property out in October of 1991.

4. The property was extensively damaged by fire on or about February 12, 1992;

5. Repairs to the property were initiated in the fall of 1992 and completed later in 1993.

6. The Appellant resumed renting the property out in May of 1993.

7. The Appellant claimed expenses from the property in 1993 and 1994, which included expenses which related to the repair of the fire damage as repairs and maintenance in the amount of $56,500.00 for the 1993 taxation year and $9,972.00 for the 1994 taxation year.

8. Expenditures claimed as repairs and maintenance in the amount of $56,500.00 in 1993 and in the amount of $9,972.00 in 1994, totalling $66,472.00, were incurred in the 1993 taxation year.

The Appellant took the Court through a prepared Exhibit A-1 that included documents, facts and arguments to support his contention the expenditures were an account of repairs and maintenance to his building.

In essence, the Appellant stated the expenses were incurred to restore the property to its original condition.

He asserted sixty percent of the total cost was attributable to the demolition of the building as a result of the fire smoke and water damage. In a letter dated February 11, 1997 to Revenue Canada, he argued:

The expenses claimed in 1993 and 1994 included 60% contractor labour to remove by shovel fulls:

• 2 stories of gyproc’d interior walls (double sheets) both sides.

• One half of the main floor, including all of the supporting wooden beams and joists.

• All plumbing, electrical, ductwork and fixtures.

• All interior doors, closets, cabinets.

° Interior stair case.

• 6 or more broken windows

Demolition work is not a capital improvement.

The remaining 40% of the contract value was to supply and install the replacement of the above materials and equipment to less than its original condition.

¢ The original flooring was hardwood and it was replaced with plywood.

• The solid core interior doors (5) were replaced with hollow core vendor doors.

• The base cove moulding around the walls was hardwood, it is now plastic moulding.

• The high quality double, insulated drapes in the living room were never replaced.

The Appellant, in evidence, added he expended an additional $20,000 for work to the basement but did not claim the expenses as he was of the view it was a capital expenditure.

Analysis

As stated, the Appellant asserts that the expenditures incurred to restore his rental property, as a result of the fire, were for repairs and maintenance. However, the Minister contends that these expenditures were capital in nature within the meaning of paragraph 18( !)(/?) of the Act.

The relevant paragraphs of the Act are paragraphs 18(1)(a) and (b), which read as follows:

18(1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of

(a) an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from a business or property;

(b) an outlay, loss or replacement of capital, a payment on account of capital or an allowance in respect of depreciation, obsolescence or depletion except as expressly permitted by this Part.

The criteria to determine whether or not certain expenditures are expenses for repair and maintenance on current account or capital outlays are set forth in Johns-Manville Canada Inc. v. R. (1985), 85 D.T.C. 5373 (S.C.C.). The Appellant corporation had bought a piece of land to maintain the pit walls of its mine at a specific slope. The corporation claimed the price of the land as a current expense. The Minister, in his reassessment, claimed that is was a capital outlay. The Supreme Court of Canada found that the land was an expense as it gave a temporary advantage only, the expenditure was repetitive as it had been incurred each year for the past forty years and, finally, the expenditure did not add to the infrastructure of the mine.

In the analysis, the Court reviewed the jurisprudence and a list of principles to be utilized. These summarized principles include the purpose of the expenditure, whether the expenditure was incurred as part of the day-to-day operation of the business, whether the expenditure relates to something that is being consumed in the operation of the business, whether there is an enduring benefit as a result of the expenditure, whether the expense is recurring in nature and the cost of the expenditure relative to the cost of the business.

Justice Urie of the Federal Court of Appeal in Shabro Investment Ltd. v. R. (1979), 79 D.T.C. 5104 (Fed. C.A.), stated that determining whether or not an expenditure is considered to be repair and maintenance or capital in nature is a question of fact. He said at page 5109:

Thus it is a question of fact in each case and often a question of degree. It is the latter question which causes difficulty in characterization, i.e., frequently from one point of view the expenditure is simply one made to repair an existing asset not to renew, replace or improve it.

In Shabro (supra), the Appellant had claimed expenditures as repair or maintenance after the bottom floor of his two-storey building had subsided because if had been built on a garbage landfill. The Federal Court of Appeal found that such expenditures were capital in nature because the new floor was different than the previous one. Special measures had been taken to reinforce the floor, hence it was a permanent improvement to the building instead of a mere repair.

Other cases have dealt with the issue of the categorization of expenses when a rental property was destroyed by fire. Generally, the Courts have found that the expenditures incurred to repair them where capital in nature. In Leclerc c. R. (1997), [1998] 2 C.T.C. 2578 (T.C.C.), the taxpayer had purchased a duplex. He lived in one unit and rented out the other one. He discovered, while doing minor renovations, that he would have to do substantial repairs because “contrary to municipal by-laws” the previous owner had done the repairs that were required as a result of a fire, himself. The repairs that had been made were in fact dangerous and the taxpayer had to obtain a demolition and a construction permit from the municipality. The taxpayer claimed the expenditures as expenses incurred for repairs. Judge Lamarre Proulx of this Court found the expenditures to be capital in nature stating at page 2581 that:

The expenses at issue in the instant appeal are obviously not related to production. They are in fact related to the process of generating income. The expenses claimed were for reconstruction of the house, not its maintenance. They were thus not in the nature of operating expenses but of expenses on capital account, and could not be deducted in calculating income because s. 18(1)(b) of the Act does not allow them to be deducted...

[T]he repairs were not usual repairs on a property in rental condition but repairs to make the property rentable, the purpose of which was to confer a lasting benefit on the property.

Associate Chief Judge Christie of this Court in Speek v. /?., [1994] 2 C.T.C. 2422 (T.C.C.), stated at page 2424:

Apart from the cement foundation, the dwelling was entirely destroyed by fire on the evening of December 31, 1989. It was replaced on the old foundation by a new two-storey dwelling during the period January-June 1990 at a cost in the order of $115,292. The new structure was rented commencing July 1, 1990. I have no hesitation in stating that the amounts expended on the new dwelling were on capital account. These expenses cannot be regarded as outlays for the maintenance and repair of a capital asset. The pre-December 31, 1989 capital asset was destroyed and replaced by a new capital asset.

Considerably less extensive substitution of assets has been held to come within these words in paragraph 18( 1 )(b) of the Income Tax Act. (emphasis added)

Conclusion

The Appellant asserts the expenditures cannot be capital in nature because they were not improvements to the house.

I conclude, however, the expenditures incurred by the Appellant that included amongst other things the demolition cost, the replacement of half of the main floor, the supporting wooden beams, some of the windows, were not of a repetitive nature. These expenditures (over $66,048) provided for permanent advantages as the taxpayer will not have to incur them every year. These repairs were a one-time occurrence. They gave rise to an enduring benefit. The effect of the expenditures brought the rental property back into existence. The house was virtually rebuilt and resulted in a new capital asset. Thus, I conclude expenditures incurred were capital in nature.

The Appellant also addressed briefly and summarily in his Notice of Appeal concerns he had about collection issues and refund interest issues for the tax years 1996 and 1997. Further, he alleged tardiness by Revenue Canada in dealing with a matter that had been resolved. He also addressed a claim for damages as a result of personal stress. All these issues are beyond the assertainment of the validity of the assessments of tax for 1993 and 1994 as pleaded in the Appellant’s Notice of Appeal.

Decision

The appeals are dismissed.

The Respondent is entitled to her costs.

Appeals dismissed.