Citation: 2009TCC558
Date: 20091103
Docket: 2009-260(IT)I
BETWEEN:
IRMA HENKELS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
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(Delivered orally from the bench on August 12, 2009,
in Cranbrook,
British Columbia.)
By: The
Honourable Justice Campbell J. Miller
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Appearances:
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Agent for the Appellant:
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J. Malcolm Killam
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Counsel for the Respondent:
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Whitney Dunn
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_______________________________________________________________
Miller J.
[1] Ms. Henkels appeals, by
way the Informal Procedure, the Minister of National Revenue’s assessment of
her 2005 taxation year in connection with rental income that she earned in that
year. There are two major issues in this case. First, is Ms. Henkels
entitled to claim 50% of her current property expenses or 35% as relating to
the rental of part of her property? Second, is Ms. Henkels entitled to a
capital cost allowance beyond the amount allowed by Canada Revenue Agency? In
that regard, CRA allowed CCA only on the paving costs of the driveway.
[2] I will briefly go over the
facts. Ms. Henkels did not testify. Only her agent (her accountant and
certified financial planner), Mr. Killam, appeared on her behalf. He was well
aware of Ms. Henkels' circumstances and he certainly knew the property. He was
a credible witness. He had acted as a financial advisor to Ms. Henkels for many
years and started doing her income tax returns in 2005. Up to that point, Ms.
Henkels had always filed her tax returns claiming property expenses at the rate
of 35%, as this represented the percentage of square feet occupied by the
tenant in her principal residence.
[3] Ms. Henkels had a 2,000
square foot home that included a 700 square foot rental suite on the lower
floor. This suite had a combined living room/kitchen, as well as one bedroom
and a bathroom. Upstairs, where Ms. Henkels lived, were two bedrooms, a
living room, kitchen and two bathrooms.
[4] In 2005, Ms. Henkels had
just the one tenant. Both she and the tenant had a car and they shared the
driveway and a two-car carport. According to Mr. Killam, the tenant had the
complete run of the property.
[5] Ms. Henkels had started
renting the property in 1994. Just before doing so, she spent $15,000.00 on
repairs to the water well which was situated some 285 feet away from her
home. Ms. Henkels claimed 50% of her property expenses related to the rental of
the property. The expenses included insurance, maintenance and repairs,
property taxes, salaries and wages, utilities, security, gardening and snow
removal. She also claimed $900.00 for legal and accounting, though $500.00 was
not billed until 2008 for services rendered after the 2005 taxation year.
[6] CRA allowed Ms. Henkels 35%
of the property expenses based on the square footage percentage. Using Ms.
Henkels' numbers would reduce her rental income of $3,875.00 to close to nil.
CRA's approach yielded only $2,096.00 in expenses, leaving Ms. Henkels with net
income of $1,778.00.
[7] CRA then allowed CCA on
driveway paving costs as a class 17 asset at the rate of eight percent. Ms.
Henkels maintains, through Mr. Killam, that she is entitled to CCA on the
following: water well pump $18,000.00, furnace $15,000.00; hot water tank $150.00;
water softener $550.00; septic system $1,400.00; fridge $900.00; stove $500.00 and
furniture $3,000.00.
[8] Mr. Killam suggested all
these capital items fell into the catchall class 8 category at 20%. Apart from
the $1,500.00 well repair cost, which Mr. Killam suggested Ms. Henkels
might still have receipts for, all the other amounts were Mr. Killam's estimate
of fair market value at the time that Ms. Henkels started renting the
property.
Analysis
[9] I will deal with the
property expenses, the current expenses first. Mr. Dunn referred me to
several cases suggesting that the percent of square footage rented compared to
used personally was a valid, acceptable means to determine the appropriate
breakdown. These cases, which include Connor (J.G.) v. Canada
for example, or a number of them deal with mortgage interest and not all
property expenses. I do not take these cases to stand for the proposition that
square footage is the only basis for allocating expenses.
[10] Mr. Killam argues that two
people use the property equally and therefore 50% is a more appropriate
measure. My view is that there are certain expenses for which the 50/50 split
does indeed seem more reasonable and logical. For example, utilities, security,
gardening, snow removal, where there is a direct connection between usage and
the related cost. The same, however, could not be said for the other expenses,
which I agree with Mr. Dunn, are readily and properly determined on a square
footage basis.
[11] Mr. Killam argued further
that some factor -- some percentage should be factored in to take account of
Ms. Henkels' loss of privacy. Having not heard from Ms. Henkels, I am not
prepared to do this. She may well have got considerable enjoyment from the
tenant, not any loss of privacy. The evidence does not support me making any
ruling in that regard.
[12] Therefore, with respect to
current expenses, I allow an additional 15% in the categories of utilities,
security, gardening and snow removal. This is an additional $455.00. This
leaves Ms. Henkels with net income of $1,778.00 minus the $455.00, or $1,323.00.
[13] I will now turn to the
question of CCA to determine if Ms. Henkels is entitled to any further CCA
beyond the driveway costs. I received no documents from Mr. Killam that related
to any of the capital expenditures. I also received no detailed evaluation
other than his educated estimate as a financial planner and someone, I am
satisfied, who was knowledgeable of such costs in this area. I am reluctant to
decide these issues on such limited information except, however, for the
$15,000.00 water well repair expense, which I am satisfied was indeed incurred
by Ms. Henkels just before she started renting the property.
[14] While I certainly would
have preferred some documentary evidence on that point, Mr. Killam was a
credible witness and seemed authoritative on that issue. The question then is
what class a water well pump falls into for CCA purposes? Mr. Dunn for the Respondent,
suggests it falls in class 1, specifically under subsection (q). I will read
that.
Class 1, 4% class. Property not included in any
other class that is a building or other structure or a part of it, including
any component parts such as electric wiring, plumbing, sprinkle systems, air
conditioning equipment, heating equipment, lighting fixtures, elevators and
escalators…
…
[15] Mr. Killam suggests class 8
would be the more appropriate class, which is also a catchall class. And the
pertinent provision in class 8 is 20%.
Property not included in class 1, 2, 7, 9, 11, 17
or 30 that is (i) a tangible, capital property that is not included in another
class in this schedule…
…
And
then there are some exceptions that do not apply.
[16] I have not been provided a
great deal of jurisprudence on this issue, but I will take the words of class 1
at their face value. To be in class 1, the water well and pump must be a part
of Ms. Henkels' house. Mr. Dunn ably argued that because the supply of water
was essential to the functioning of the house, it was part of the house. Mr.
Dunn, I disagree. The water well was 285 feet away. It was a separate structure
altogether, and though a water supply is clearly critical, that does not make
the well a part of the house. It is physically separate and I find more
logically fits into the catchall class 8, which is 20%. A supply of water is a
utility, which I determined is the sort of expense eligible for a 50/50 split.
I find Ms. Henkels is entitled to 20% of 50%. In other words, 10% of the
$15,000 or $1,500.00. This exceeds her net income and therefore reduces her
income from the rental property to zero, though it does not allow her to claim
any loss.
[17] The appeal is allowed and
referred back to the Minister for reconsideration and reassessment on the basis
that Ms. Henkels is entitled to additional current expense of $455.00 and CCA
of $1,500.00, only $1,323.00 of which is necessary to bring Ms. Henkels' income
to zero.
Signed at Ottawa, Canada, this 3rd day of November 2009.
"Campbell J. Miller"
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