Brunet v. The Queen, docket 2002-1122(IT)I (Informal Procedure)

Date: 20021206

Docket: 2002-1122-IT-I

BETWEEN:

MARCEL BRUNET,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Lamarre, J.T.C.C.

[1]            In computing his income for the 1997, 1998 and 1999 taxation years, the appellant claimed net rental losses of $3,349, $7,431 and $7,605. The Minister of National Revenue ("Minister") reassessed the appellant, disallowing some of the expenses claimed. The Minister thus calculated a net rental income of $223 for 1997 and net rental losses of $449 and $1,137 for the 1998 and 1999 taxation years.

[2]            The appellant, who was an employee of the Government of Canada during the years at issue, rented one bedroom of his principal residence to his father-in-law (the "tenant"). In those years, the appellant lived with his wife and their three children. The tenant also had shared access to one bathroom, the kitchen, living room, dining room, hallways, stairs and driveway.

[3]            The monthly rent paid by the tenant was $300 for the years in question and included hydro, water, telephone and cable television. The appellant claimed the home expenses in a proportion of 50 per cent for 1997, 60 per cent for 1998 and 70 per cent for 1999, as per Exhibit R-1. The Minister allowed these expenses in a proportion of 25 per cent for 1997 and 30 per cent for 1998 and 1999 (as per Exhibit R-4). The Minister further refused to allow as a current expense an amount of $4,146.81 with respect to repairs done on the roof that was claimed in 1998 under maintenance and repairs. The Minister is of the view that this was a capital outlay.

[4]            The Minister also disallowed as being personal expenditures amounts of $49.52, $89.16 and $60.41 claimed for maintenance and repairs in 1997, 1998 and 1999 respectively, and as being unsupported an amount of $126.34 claimed in 1997 with respect to management and administration. The appellant does not challenge this portion of the assessment.

[5]            And finally, the Minister also disallowed as being unsupported by any vouchers amounts totalling $216.75, $349.19 and $201.30 claimed under maintenance and repairs for 1997, 1998 and 1999 respectively. At the hearing, the parties agreed that those amounts should be reduced to $143.91 for 1997 and to $295.98 for 1998 ($156.08 + $139.90). The appellant no longer contests the disallowance of the amount of $201.30 for 1999. The Minister is ready to concede that the amount of $139.90 disallowed with respect to 1998 should be deducted in the 1997 taxation year.

[6]            In summary, the only items still at issue before me are the roof expense and the appellant's personal portion of the expenses.

[7]            With respect to the personal portion of the expenses, the appellant explained that he made a mistake when completing his tax returns. He submits that the personal portion should be 43 per cent and the rental portion 57 per cent. To justify this latter figure, he calculated the rental space used by the tenant by taking the percentage of time the tenant occupied the different rooms in the house and then determining the adjusted total square footage used by the tenant (Exhibit A-1). However, the appellant agreed that the approach he took in Exhibit A-1 was flawed in that his calculations were made on the basis that the tenant occupied the rented portion of the house 300 per cent of his time. Indeed, he calculated that the tenant occupied the kitchen 40 per cent of his time, the upper-level hall 10 per cent, the lower-level hall 5 per cent, the living and dining room 40 per cent and the master bedroom 5 per cent, which alone gives a total of 100 per cent of the tenant's time. The appellant mistakenly omitted to calculate the time spent by the tenant in his room and in the bathroom, each of which he considered to have been used 100 per cent by the tenant.

[8]            The auditor from the Canada Customs and Revenue Agency ("CCRA") used another method (Exhibit R-3). He accepted the fact that the rented bedroom and bathroom were used exclusively by the tenant. He also accepted the fact that the tenant had access to the whole lower level with the exception of the master bedroom and the bathroom attached thereto.

[9]            The auditor calculated the square footage of the shared area, divided it by the number of people living in the house (6) and added this figure to the area used exclusively by the tenant to obtain the total rental area. He then divided that total rental area by the total square footage of the house, which gave a proportion of 25 per cent used by the tenant. In the assessments made for the years 1998 and 1999, that proportion was mistakenly raised to 30 per cent.

[10]          In my view, this is reasonable in the circumstances, especially considering the fact that the appellant himself recognized that he made mistakes in his tax returns with regard to the personal portion and that the method he used in Exhibit A-1 was flawed.

[11]          With respect to the roof expense, the appellant testified that in 1998 he had had to change all the asphalt shingles damaged by an ice build-up which had resulted in water seepage, causing damage to the walls in the house and leakage of water into the basement. He said that he replaced the 25-year shingles with exactly the same type of asphalt shingles. The house, built in 1972, had a low-slope roof. The appellant purchased the house in 1991. At the time of purchase, he was told that the former owner had changed the shingles on the roof five years before (in 1986). According to some manufacturers, the appellant said, the 25-year shingles had a 12-year lifespan on a low-slope roof. The appellant said that he could have changed to another material (aluminum, for example) that would have upgraded the existing roof. However, the cost would have been double and for that reason and because aluminum is too noisy, the appellant simply decided to replace the shingles with others of the very same type.

[12]          At the hearing, I accepted counsel for the respondent's argument that the roof expense was a capital expenditure. However, after reviewing the evidence and the case law I have changed my mind.

[13]          As stated by the Federal Court of Appeal in The Queen v. Donohue Normick Inc., 96 DTC 6061, referred to by counsel for the respondent, each case is sui generis and no test is decisive in all cases when it comes to determining whether an expenditure is capital or current in nature. It is a question of fact and often a question of degree. The Federal Court of Appeal referred in Donohue to another Federal Court of Appeal case, Shabro Investments Limited v. The Queen, 79 DTC 5104. In that case Urie J. stated the following at page 5109:

             Perhaps the starting point in the determination of whether an expenditure is a capital one or an income one is the expression used by the Lord President in the case of Valambrosa Rubber Company, Limited v. Farmer, 5 TC 536 where he said:-

Now I don't say that this consideration is absolutely final or determinative, but in a rough way I think it is not a bad criterion of what is capital expenditure-as against what is income expenditure-to say that capital expenditure is a thing that is going to be spent once and for all, and income expenditure is a thing that is going to recur every year.

             As observed by Rowlatt, J. in Dunsworth v. Vickers, Limited (1915) 3 KB 267 no stress is placed on the words "every year". Rather "the real test is between an expenditure which is made to meet a continuous demand for expenditure, as opposed to an expenditure which is made once for all, to put it shortly". 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. All repairs involve to some degree, renewal and replacement of parts of the subject matter of the repair and, therefore, of necessity an improvement to the repaired structure, machine or whatever the subject matter is. That alone, it appears from the jurisprudence, is not sufficient to convert an expenditure for repairs to an income producing property from an income expenditure to a capital expenditure. The crucial question it appears [is] was the outlay such as to bring into existence a capital asset different from that which it replaced?

[14]            In Canada Steamship Lines Ltd. v. M.N.R., 66 DTC 5205 (Ex. Ct.), President Jackett said the following at page 5207:

             Things used in a business to earn the income-land, buildings, plant, machinery, motor vehicles, ships-are capital assets. Money laid out to acquire such assets constitutes an outlay of capital. By the same token, money laid out to upgrade such an asset-to make it something different in kind from what it was-is an outlay of capital. On the other hand, an expenditure for the purpose of repairing the physical effects of use of such an asset in the business-whether resulting from wear and tear or accident-is not an outlay of capital. It is a current expense.

[15]            In Marklib Investments II-A Ltd. v. Canada, [1999] T.C.J. No. 716 (Q.L.), Judge Brulé of this Court referred to the decision of the Quebec Court of Appeal in Le sous-ministre du Revenu du Québec c. Denise Goyer, [1987] A.Q. no 644 (Q.L.), 1987 CarswellQue 122. Judge Brulé states at paragraph 26:

. . . in Le Sous-Ministre du Revenu du Québec c. Denise Goyer, [1987] A.Q. no 644, 1987 Carswell Que 122 [hereinafter Goyer], the Quebec Court of Appeal found that the replacement of decrepit balconies, plumbing, windows and doors did not constitute capital property but was rather components to capital property which only required repair, not replacement. Emphasis was placed on whether a new capital asset had been created. Justice Vallerand stated at paragraph 19:

"...as long as one is not creating new capital property, or causing the normal value of the property to be inflated, or replacing a property that has disappeared, then the work done will amount to repairs and maintenance in efforts to restore the property to its normal value."

[16]            This principle is stated in Interpretation Bulletin IT-128R at paragraph 4, which reads as follows:

4.           The following guidelines may be used in determining whether an expenditure is capital in nature because depreciable property was acquired or improved, or whether it is currently deductible because it is in respect of the maintenance or repair of a property:

(a) Enduring Benefit - Decisions of the courts indicate that when an expenditure on a tangible depreciable property is made "with a view to bringing into existence an asset or advantage for the enduring benefit of a trade", then that expenditure normally is looked upon as being of a capital nature. Where, however, it is likely that there will be recurring expenditures for replacement or renewal of a specific item because its useful life will not exceed a relatively short time, this fact is one indication that the expenditures are of a current nature.

(b) Maintenance or Betterment - Where an expenditure made in respect of a property serves only to restore it to its original condition, that fact is one indication that the expenditure is of a current nature. This is often the case where a floor or a roof is replaced. Where, however, the result of the expenditure is to materially improve the property beyond its original condition, such as when a new floor or a new roof clearly is of better quality and greater durability than the replaced one, then the expenditure is regarded as capital in nature. Whether or not the market value of the property is increased as a result of the expenditure is not a major factor in reaching a decision. In the event that the expenditure includes both current and capital elements and these can be identified, an appropriate allocation of the expenditure is necessary. Where only a minor part of the expenditure is of a capital nature, the Department is prepared to treat the whole as being of a current nature.

(c) Integral Part or Separate Asset - Another point that may have to be considered is whether the expenditure is to repair a part of a property or whether it is to acquire a property that is itself a separate asset. In the former case the expenditure is likely to be a current expense and in the latter case it is likely to be a capital outlay. For example, the cost of replacing the rudder or propeller of a ship is regarded as a current expense because it is an integral part of the ship and there is no betterment; but the cost of replacing a lathe in a factory is regarded as a capital expenditure because the lathe is not an integral part of the factory but is a separate marketable asset. Between such clear-cut cases there are others where a replaced item may be an essential part of a whole property yet not an integral part of it. Where this is so, other factors such as relative values must be taken into account.

(d) Relative Value - The amount of the expenditure in relation to the value of the whole property or in relation to previous average maintenance and repair costs often may have to be weighed. This is particularly so when the replacement itself could be regarded as a separate, marketable asset. While a spark plug in an engine may be such an asset, one would never regard the cost of replacing it as anything but an expense; but where the engine itself is replaced, the expenditure not only is for a separate marketable asset but also is apt to be very substantial in relation to the total value of the property of which the engine forms a part, and, if so, the expenditure likely would be regarded as capital in nature. On the other hand, the relationship of the amount of the expenditure to the value of the whole property is not, in itself, necessarily decisive in other circumstances, particularly where a major repair job is done which is an accumulation of lesser jobs that would have been classified as current expense if each had been done at the time the need for it first arose; the fact that they were not done earlier does not change the nature of the work when it is done, regardless of its total cost.

(e) Acquisition of Used Property - Where used property is acquired by a taxpayer and at the time of acquisition it requires repairs or replacements to put it in suitable condition for use, the cost of such work is regarded as capital in nature even though, in other circumstances, it would be treated as current expense.

(f) Anticipation of Sale- Repairs made in anticipation of the sale of a property or as a condition of the sale are regarded as capital in nature. On the other hand, where the repairs would have been made in any event and the sale was negotiated during the course of the repairs, or after their completion, the cost should be classified as though no sale was contemplated.

[Emphasis mine.]

[17]          In the present case, the evidence discloses that the expenditure made to "reshingle" the roof did not materially improve the property beyond its original condition. The appellant replaced the shingles with exactly the same type of shingles, and because of the structure of the roof, the new shingles will not be of greater durability than the ones replaced.

[18]          Furthermore, the expenditure amounts to $4,146.81, or approximately 3 per cent of the value of the house, which was purchased for $135,000 in 1991. This is another indication that the expense was not so substantial as to constitute the replacement of an asset.

[19]          I therefore conclude that the expenditure of $4,146.81 on the roof was not a capital outlay but a current expense in the 1998 taxation year.

[20]          For all these reasons, the appeals are allowed and the assessments are referred back to the Minister for reconsideration and reassessment on the following basis:

(1) The rental expenses will be deductible in the proportion allowed by the Minister in the assessments under appeal, that is, 25 per cent in 1997 and 30 per cent in 1998 and 1999.

(2) The disallowed expenses in the amounts of $216.75 for 1997 and $349.19 for 1998 claimed under maintenance and repairs will be reduced to $143.91 for 1997 and to $295.98 for 1998. The appellant no longer contests the disallowance of the amount of $201.30 that he claimed under maintenance and repairs for 1999.

(3) The expense of $139.90 claimed by the appellant under maintenance and repairs in 1998 will be reported and allowed as a deduction for 1997.

(4) The expense of $4,146.81 claimed under maintenance and repairs, which is the amount spent on the roof, will be treated as a current expense and not as a capital outlay and will be deductible in 1998.

(5) Respecting the amounts of $49.52 and $126.34 in 1997, of $89.16 in 1998 and of $60.41 in 1999 that were claimed by the appellant and that were disallowed as being personal expenses or as being unsupported, their disallowance is no longer disputed by the appellant and the assessments will remain unchanged with regard to those amounts.

(6) In all other respects, the assessments will remain unchanged.

Signed at Ottawa, Canada, this 6th day of December 2002.

"Lucie Lamarre"

J.T.C.C.COURT FILE NO.:                                   2002-1122(IT)I

STYLE OF CAUSE:                                               Marcel Brunet v. The Queen

PLACE OF HEARING:                                         Ottawa, Ontario

DATE OF HEARING:                                           October 24, 2002

REASONS FOR JUDGMENT BY:      The Honourable Judge Lucie Lamarre

DATE OF JUDGMENT:                                       December 6, 2002

APPEARANCES:

For the Appellant:                                                 The Appellant himself

Counsel for the Respondent:              Justine Malone

COUNSEL OF RECORD:

For the Appellant:                

Name:                               

Firm:                 

For the Respondent:                             Morris Rosenberg

                                                                                Deputy Attorney General of Canada

                                                                                                Ottawa, Canada

2002-1122(IT)I

BETWEEN:

MARCEL BRUNET,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeals heard on October 24, 2002, at Ottawa, Ontario, by

the Honourable Judge Lucie Lamarre

Appearances

For the Appellant:                                                 The Appellant himself

Counsel for the Respondent:              Justine Malone

JUDGMENT

                The appeals from the assessments made under the Income Tax Act for the 1997, 1998 and 1999 taxation years are allowed, without costs, and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the following basis:

(1) The rental expenses will be deductible in the proportion allowed by the Minister in the assessments under appeal, that is, 25 per cent in 1997 and 30 per cent in 1998 and 1999.

(2) The disallowed expenses in the amounts of $216.75 for 1997 and $349.19 for 1998 claimed under maintenance and repairs will be reduced to $143.91 for 1997 and to $295.98 for 1998. The appellant no longer contests the disallowance of the amount of $201.30 that he claimed under maintenance and repairs for 1999.

(3) The expense of $139.90 claimed by the appellant under maintenance and repairs in 1998 will be reported and allowed as a deduction in 1997.

(4) The expense of $4,146.81 claimed under maintenance and repairs, which is the amount spent on the roof, will be treated as a current expense and not as a capital outlay and will be deductible in 1998.

(5) Respecting the amounts of $49.52 and $126.34 in 1997, of $89.16 in 1998 and of $60.41 in 1999 that were claimed by the appellant and that were disallowed as being personal expenses or as being unsupported, their disallowance is no longer disputed by the appellant and the assessments will remain unchanged with regard to those amounts.

In all other respects, the assessments will remain unchanged.

Signed at Ottawa, Canada, this 6th day of December 2002.

"Lucie Lamarre"

J.T.C.C.