Citation: 2010 TCC 544
Date: 20101025
Docket: 2010-881(IT)I
BETWEEN:
SYLVAIN LESSARD,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Tardif J.
[1]
This is an appeal with
two distinct components. The first is regarding expenses, which were disallowed
on the ground that they were primarily personal expenses.
[2]
The second is regarding
the fair market value (FMV) of the property at the time its usage changed; the
building was being used as a rental property and became the appellant's
personal residence in July 2005.
[3]
First, the appellant
stated firmly that all the expenses incurred for the rental of the property for
which the claim was made were deductible because they occurred on dates during
which the property was occupied by a third party; they could therefore not be
personal expenses because he was not yet living in the property in question,
having moved only at the beginning of July 2005. In other words, the appellant
stated that the dates show the expenses were incurred before he took possession
of the premises as his residence; this, according to the appellant, was
sufficient to come to the conclusion that they were allowable expenses and not
personal expenses.
[4]
He
added and provided evidence that he was forced to personally occupy the
premises unexpectedly, and it was completely unplanned, since the person who
lived there had the right to continue to live there. He noted that he had to
negotiate with his tenant and offer compensation to convince him to leave the
premises so he could use it as his residence, starting in July 2005.
[5]
The
auditor explained that the deduction of expenses was disallowed because he
considered them to be personal expenses. As an example, he presented an invoice
for ceiling fixtures. He also stated that it might have been a capital
expenditure. Lastly, certain expenses were incurred shortly before the
property's usage officially changed. These are the explanations submitted to
justify the decision to disallow the expenses.
[6]
To
support the validity of his claims on this aspect of his appeal, the appellant
essentially stated and proved that he took possession of the premises at the
beginning of July 2005; this claim was not challenged.
[7]
Therefore,
the question is: does the fact the appellant showed and established that he
took possession on a specific date of the premises, which until then had been
rented out, automatically become acceptable evidence that expenses were
deductible if incurred before that date?
[8]
The
answer is clearly no; in fact, the date might be relevant but it is certainly
not a determining factor in itself regarding what is deductible or not. It is
absolutely essential to show that it was an expense related to the rental
activity or company, particularly since the boundary can be rather hazy in this
field.
[9]
In
the present case, the tenant's contribution might have been determining. The
appellant's evidence, namely his own verbal explanations, is not sufficient to
find that he met his burden of proof. Therefore, the appeal on this component
must be dismissed.
[10]
As
for the second component, it deals with the FMV of the house following its
change in usage in July 2005.
[11]
In
2008, the respondent had an evaluation made of the residence in question, located
at 30
Nicolas‑Godbout Avenue, in Baie‑Comeau. The evaluation expert,
Yvon Ouellet, prepared a report, submitted as Exhibit I‑3. He
explained his process, including a visit of the premises and a long
conversation with the owner, the appellant, on December 10, 2008.
[12]
He
indicated that the appellant cooperated; according to the expert, the appellant
had the opportunity to make all the submissions he wanted by presenting a
descriptive history of the property, since the evaluation was for the FMV in
July 2005, almost three years prior to the visit of the premises.
[13]
The
work carried out by the expert was done in accordance with the trade practices,
although it was quite a challenge to conduct a retroactive assessment of the
FMV three years later.
[14]
Such
an exercise is even more difficult because over the past ten or so years, the
property market has undergone many variations, so much so that the important,
dominant factor in the matter, that of comparable values, fluctuated a great
deal.
[15]
In
addition to this constraint, Mr. Ouellet also had another particularity to deal
with: the house had been a rental property until July 2005, when it became the
appellant's personal residence.
[16]
It
is reasonable to believe that during the change in usage, modifications or
improvements could certainly have been made to the property, all leading to an
increased FMV. In fact, owners are usually more selective about the quality of
a property they will reside in themselves than property they own for rental
purposes.
[17]
In this case, the appellant
stated he is a handy person, able to do a lot of work on the property. He
stated that he is disciplined, organized and can distinguish between his
personal affairs and those related to his rental activities.
[18]
After firmly
establishing these two premises, the appellant gave a long presentation; it was
well organized and clear and included the following categories:
─ garage;
─ kitchen,
bathroom and floors;
─ laundry
room;
─ lighting
fixtures;
─ bedroom
and windows;
─ landscaping;
─ renovations
in certain rooms and walls;
─ electricity
and heating;
─ entrance—paving
and exterior decorations;
─ interior
decorations;
─
fence;
─ patio;
─ sale
and evaluation.
[19]
He stated and repeated
that he was not able to present all his documentary evidence because they were
essentially personal expenses and he was therefore not under any obligation to
keep the invoices or documents establishing these expenses, since this type of
invoice is relatively unimportant and secondary.
[20]
He then gave a long
narrative on the exhibits and invoices indicating the scope of the renovations
at the property for which Mr. Ouellet established the FMV in 2007; the expenses
and work described were carried out after July 2005, when then property changed
usage.
[21]
I did not add up all
the amounts of the purchases described in the invoices. I rely on the
appellant's evaluation; he claims he invested more than $35,000 in his new
residence without taking into consideration the uncalculated time and work he
performed himself.
[22]
Based on the invoices
in question, the appellant stated and repeated that the evaluator neglected to
take into consideration the significance of the work performed after July 2005.
[23]
The expert Ouellet
indicated that the appellant cooperated and provided an extensive history of
the residence for which the FMV was to be established. Mr. Ouellet also
noted that he took into consideration improvements, repairs and various
additions.
[24]
Although the quality of
Mr. Ouellet's work is not in question, I believe the appellant's substantial
and documented submissions show on a balance of probabilities that he invested
substantial amounts for repairs, transformations and improvements to make his
new residence more pleasant and to improve its quality.
[25]
I do not find, however,
that the evaluation should be reduced in the amount suggested by the appellant,
since it is clear that the amounts spent on repairs, decorations, improvements
and transformations did not affect the FMV to that extent.
[26]
On one hand, such
expenditures might have a neutral effect, and on the other, if they are not
done, the FMV would be lowered, but in certain situations, the expenses might
have an impact and contribute to an increase in the FMV.
[27]
In this case it is
impossible to accurately determine the impact such expenditures had on the FMV
established by Mr. Ouellet. However, given that the evaluation was to establish
a value three years earlier than the date of the visit to the property, given
the importance of the documentary evidence, given the numerous and reasonable
explanations provided by the appellant, and finally, given that this was a
rental property generally with simpler and less polished finishings, I believe
there are sufficient reasons to intervene.
[28]
The appellant
questioned the expert in particular about the flooring. On this, the expert
essentially stated and repeated that he took into consideration the changes,
improvements, etc.
[29]
In this situation, the
parties' positions are at opposite extremes: the expert's work was properly
done, in accordance with the trade practices. Are such qualities sufficient to
conclude that the FMV retained is completely beyond reproach or totally reliable?
I do not think so, particularly since it is utterly impossible to recreate the
exact state of the premises at the time of the change in usage, unless the
interested party, in this case the appellant, had made it possible using many
descriptive photos of the premises, combined with witness input.
[30]
In this case, the
appellant, who has this burden of proof, did not make such a presentation; he
merely referred to many invoices for a very significant total amount to
establish that the expert under-evaluated him. It is impossible, however, that
such expenditures would translate into an equivalent added value.
[31]
At the time of the
change in usage, the best way to establish the scope or extent of the changes
or improvements made would have been photos and/or an expert's opinion at the
time. However, the appellant, who has the burden of proof, did not feel it was
necessary to rely on these tools, which would have been very useful, if not
determining.
[32]
For these reasons and
in a completely arbitrary manner, justified essentially by an approach led by
the principle of reasonableness, I find that the FMV established by Mr. Ouellet
should be revised and reduced by $10,000 for the residence only, since the land
was not affected by the amounts, which were correctly attributed; this clearly
has a direct impact on the terminal loss, which will be the subject of a
subsequent review.
[33]
The appeal is therefore
allowed in part, and the Minister of National Revenue shall make reassessments,
taking into consideration the value given to the residence is $79,400 not
$89,400, for a total evaluation of $97,700 not $107,700; the value of the land
is unchanged and established at $18,300. As a result, the Minister shall make
the recalculations pursuant to the Income Tax Act to determine
the appellant's terminal loss, all without costs.
Signed at Ottawa, Canada, this 25th day of October 2010.
"Alain Tardif"
on this 16th day
of December 2010.
Elizabeth Tan,
Translator
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