Citation:
2007TCC574
Date: 20070928
Docket: 2006-388(IT)I
BETWEEN:
GA
KY NGUYEN,
Appellant,
and
HER
MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Sarchuk D.J.
[1] These appeals are from
reassessments for the 1999 and 2000 taxation years made under the Income Tax
Act, in which the Minister of National Revenue disallowed certain
amounts claimed by the Appellant as expenses against rental income. The
Appellant disputes the reassessments on the basis that the expense items were
properly deductible in the computation of his taxable income.
Facts
[2] In 1997, the Appellant and
another party purchased property located at 1272 Bloor
Street East, Toronto. The Appellant has been the sole
owner of the property since August 1999.
[3] In computing income for the
1999 and 2000 taxation years, the Appellant reported gross rental revenue in
the amounts of $9,600 in 1999 and $18,000 in 2000, and deducted rental losses
in the amount of $24,791.32 and $12,043.75. respectively. In both years, the Appellant
deducted 100% of the expenses of the property in computing the rental losses.
[4] The Minister’s reassessments
were made on the basis that in the 1999 and 2000 taxation years,
(a) the Appellant did not pay or incur expenses of
the property in excess of the amounts of $33,132.54 and $23,154.03,
respectively, for the purpose of gaining or producing income from the property
in those taxation years; and
(b) as a result, since at all material times
during these taxation years, at least 50% of the property was the principal
residence of the Appellant, 50% of the expenses in the amounts of $16,556.27
and $11,577.01 were the Appellant’s personal expenses and are not deductible by
him.
[5] The Respondent further contends
that repair and maintenance expenses claimed by the Appellant in the 2000
taxation year in the amount of $10,682 included an amount of $6,240.22 that was
paid by him for the renovation of the ceiling, walls, floor and electrical
improvements and is therefore a capital expenditure of the Appellant. Accordingly,
he was precluded by subsection 18(1) and paragraph 18(1)(b) of the Act
from deducting that amount in the computation of the rental loss under
subsections 9(1) and 9(2) of the Act. I propose to deal with this issue
first.
Renovation
Expenses
[6] The buildings in issue were
situated on a narrow lot approximately 18 feet in width and 100 feet in depth.
A plan of survey submitted as part of the of the Appellant’s Notice of Appeal
disclosed that buildings had been erected on the whole of the property. The front
portion consisted of a two-storey building attached to which was a small
one-storey section described by the Appellant as “It’s part of the store empty,
not used”. The
second storey of this building was described by the Appellant as an “Apartment,
2 bedrooms” which had been occupied by tenants since 1998.
[7] With respect to the main
floor, the Appellant testified that in the year 2000, a prospective tenant, Vu
My Trang (Trang) showed interest in renting the property to be used as a store,
but said that substantial repairs were required before she was prepared to do
so.
[8] The Appellant conceded that
there was substantial damage to the ceiling, the walls and “a lot of things
broken”. He added that “No one had ever repaired it, so it has deteriorated
quite a bit” and as a result, renovation was required which included substantial
repairs to the ceiling, floor, plumbing, broken doors, and drywall. He further stated
that the prospective tenant was prepared “to help me so I let them help me, repair
renovate the place with a very cheap price” because he believed that if “he did
not fix the store, the tenant would not rent the place”.
[9] In support, the Appellant
made reference to a letter dated May 15, 2002, signed by Trang, and which he
sent to Revenue Canada. It
reads:
As required the landlord from the place we
rented to do business at 1272
Bloor St. W, Toronto, ontario. Today we write
letter to you to explain the sum of money we did because, we had agree the
store have to Fix before we take over but that time the landlord was busy, he
hired us to do. The things we did as:
-
May 1st to
May 15,, the wall right side of the building damaged, it effected by
moisture of the weather (closed outside), we take it out, put drywall with
compound and paint. It cost $1,642.00
-
May 16 to May 20 we
fixed ¼ the ceiling because it cracked, almost fell down, it danger for
employee and Client when we do business, the new copper water pipe to replace
the old one, the drywall put on, compound it, Sand and painted, it cost
$1,815.00
-
May 21 to May 22 We
dumped garbage, cleaned the place $353.22
-
May 24 to May 30 we cut
down ¼ floor, replace damage wood (which handle floor), put plywood on top
before
-
We replace the vinyl
for the floor. It cost $2,430.00
Total cost $6,240.00, I get money back from
landlord and I fill on my incometax, it money as my income year 2000 I have.
[10] Evidence was also adduced by
the Appellant from the tenant, Trang. She initially stated that she personally
was involved in the repairs, and “did plumbing, repaired floor, broken door”
and “I put up drywall”, etc. However, in cross‑examination, the following
exchange with counsel took place:
Q, With regard to the
repairs, Mr. Nguyen was too busy to do the repairs so he hired you to do it, is
that correct?
A. He said that I’m
the one who request to have repair. He would not do the repairs so then I
suggest to him that I will hire somebody to do the job but he would have to pay
me back for that person to do the job.
Q. When you said, we
did plumbing, repaired floor, broken door, put up the drywall, you said “I put
up drywall”. It wasn’t you that put up the drywall?
A. I have to hire someone.
Q. You didn’t put up the drywall
yourself?
A. No.
[11] The Appellant had difficulty
in articulating the basis for this aspect of his appeals. It is fair to say
that his primary objective was to establish that the repairs in issue were minor
and that as his accountant wrote in the Appellants Notice of Objection:
These repair and maintenance expenses did
not meet capitalization criteria as suggested by the Government representative.
These expenses were incurred to keep up with the wears and tears and not to
enhance the value of the property. Also the taxpayer had to repair and clean
the property, so that the property could be rented to tenants. Therefore, the
repairs and maintenance should be deducted in 1999 and 2000 as originally
submitted.
Conclusion
[12] The issue is whether the
cost of the repairs was an expense on account of capital or income. In Johns-Manville
Can. Inc. v. The Queen, the
Supreme Court of Canada conducted a substantial review of other decisions
regarding the characterization of expenses as to whether they were on current
or capital account. Reference was made by Estey J. to the comments by Viscount Cave in British Insulated and
Helsby Cables v. Atherton,
in which he stated:
When an expenditure is made not
only once and for all, but with a view to bringing into existence an asset or
an advantage for the enduring benefit of a trade, I think that is a very good
reason (in the absence of special circumstances leading to an opposite
conclusion) for treating such an expenditure as properly attributable not to
revenue, but to capital.
[13] Further reference should be
made to the decision of Décary J.A. in The Queen v. Canadian Reynolds Metal
Co, Limited,
in which he noted specifically:
The characterization of expenditures as current
or capital in nature has been complicated by the trend in case law to focus on
the nature of the asset itself and whether or not it must be replaced on a
recurring basis rather than on the benefit which the expenditure is intended to
confer upon the enterprise. It is clear however that while the recurring nature
of an expense may be a relevant factor in distinguishing between capital and
current expenses, it is in no way decisive. On the other hand, it is also clear
that an asset need not be of a perpetual nature in order to be classified as
capital for the purposes of tax treatment.
[14] The
Appellant’s submission appears to be that the expenses were of a recurring
nature and were incurred at the insistence of the tenant, Trang. This is totally
inconsistent with the evidence. The fact that the building was 93 years old and
required substantial renovation was never made more evident than by the
Appellant’s responses to the questions put to him. As
an example, I refer to the following exchange between the Appellant and counsel
for the Respondent:
Q. You planned to fix it and rent it
out to tenants, is that correct?
A. Yes.
Q. When you purchased it, it wasn’t
in a rentable condition, was it?
A. If there is somebody willing,
then I could rent it out.
Q. You stated earlier
that the tenants in the store refused to move in until after you had repaired
the store, is that correct?
A. Yes.
Q. The fact that you
couldn’t find anybody to rent it suggests that it wasn’t in a rentable
condition. Is that right?
A. There was a lot of
interest, but they all required that it need to be repaired.
Q. It wasn’t in a rentable state as
is?
A. Depends on what
kind of business they are in. These people came in and they required all the
work to be done first. That’s why we did it because we have to. I have to fix
up before I can rent out and I have left it empty for about two years, three
years now.
[15] Clearly,
the expenses claimed were for a substantial reconstruction of the portion of
the building in issue and were not 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.
[16] The distinction between a
capital expenditure and an expense can simply be answered by the question, was
the expenditure incurred to preserve a capital asset in a capital aspect, or in
a revenue aspect. It is fair to say that a taxpayer who incurs expenses to
restore a rundown building incurs capital expenditures which would not be considered
to be routine maintenance. Given the decrepit nature of the premises, the work
done goes far beyond the performance of minor repairs.
[17] I have concluded that the
Minister’s reassessments that the expenses were capital in nature were correct
in fact and in law.
Personal use
issue
[18] The Appellant submitted that
there was absolutely no “personal use” of the property during the taxation years
in issue. He went on to say that his comments in a number of exhibits such as
“my place living” reflected nothing more than it was a “temporary living space.
It’s like a resting place doing renovations”. However, this assertion is contradicted
by a number of statements made by him in the course of his testimony, as well
as by documents which have been filed as exhibits in these appeals. By way of example:
(a) The Appellant’s objection to the reassessments
forwarded to Revenue Canada by
his then accountant reads, in part:
On October 27, 2004. I reviewed and
discussed with the taxpayer: I found that the 50% of the personal use of the
property is not reasonable. The taxpayer’s personal use portion should be only
40%. The property had 2,596 square feet and the taxpayer’s personal use is 1,024
square feet. Thus the personal use should be 40%. (1,024/2,596). The 50% reassessed
by Canada Customs and Revenue Agency is not reasonable in this case.
(b) In his undated letter to Revenue Canada in response to a request for information, the Appellant provided a rough
sketch of the building with two portions described as “my place living”.
(c) In a subsequent letter received by the
Respondent on December 11, 2004,
the Appellant provided a further sketch of the property in which the personal
living area was now shown as the second floor of the section described in the Survey
Plan as “brick garage”. On the following day, the Appellant sent a further note
to Revenue Canada adding the following comment regarding this sketch, “The
width of the building 18’; length, 100’, total of the building is 1,800 square
feet. I live space 450 sq. ft. (1/4 space)”.
(d) In his Notice of Appeal dated January 26, 2006, he stated:
The personal/rental portion was determined
as 50/50, it is more than I use, 1/3 it’s not right, but it’s still OK, because
the building has main floor and second floor, the basement too low, cannot use
anything, I live back side of the main floor, the back side did not have a
second floor, did not have basement. And the side smaller front main floor. I
sent to you the survey of this property and try to draw the map for you to easy
understand.
[19] Reference must be made to
the Appellant’s T1 General 1999 income tax return in which he gave his address
as 1272 Bloor Street E., Toronto, Ontario.
This document also discloses that the Appellant claimed Ontario Property Tax
Credits in the amount of $881 on the basis that the property in issue was his
principal residence. Furthermore, he certified that the information given on
this return was correct and complete.
[20] Nonetheless, the Appellant maintains
that there had been no personal use of the property whatsoever during the
relevant period of time and that at least since 1991, he has been a tenant
renting one room of a property owned by Trang. In chief, she was asked the
following questions by the Appellant:
Q. Do I still pay you
rent? In 1999, did you receive money from me, the rent money?
A. Yes.
Q. Am I still your tenant even in
the year 2000?
A. Yes.
[21] The Appellant relied to a
good extent on the testimony of Trang. However, in cross-examination, asked when
he began renting, she responded: “he lived there for a very long time, 1991 or
something like that, he lived there for a very long time”. When asked when he
moved, she responded, “he moved out around 2002 or 2003, somewhere around
there”. Asked whether receipts were provided, she responded: “no, only when he
needed, as you know that’s how Vietnamese people like when they need it, will
give them one. Vietnamese people like to pay cash”.
[22] It is difficult to accept
this witness as credible given the vagueness and inconsistencies of her
responses and, more particularly, her readiness to sign the letter drafted by
the Appellant without reading it and without taking any steps to confirm the
facts. I
note that as part of his Notice of Appeal, the Appellant submitted a copy of
the Plan of Survey of the property in issue superimposed on which was a receipt
from Trang dated 20th May, 2002, in which she acknowledged that she
“received from Nguyen Ky Ga, $6,240.22 for the repair the store”. This document
shows that this payment was made at least 10 days prior to the date on which
the repairs were said to have been completed in the aforementioned letter.
[23] The Appellant also submitted
two receipts, both dated 15th October, 2006, stating that one
Pauline Vu was the recipient of the amount of $5,100 in each of the two years
for rent at 22 Oakwood Avenue, Toronto. He stated that these two receipts were “for the year that I lived
in that house” and when asked when the amounts were paid, he responded: “in the
Vietnamese community, whatever we pay would be every year, for the year 1999,
2000”. When asked why receipts were dated the 25th of October, 2006, he
responded: “because in the Vietnamese community, we trust each other so when we
give money, we do not get any receipt back”.
Conclusion
[24] The burden of proof lies on
the taxpayer to establish that the facts upon which the Minister’s reassessments
were based were wrong. The taxpayer’s burden does not require him to rebut
every possible set of facts that would justify the Minister’s reassessments.
However, since the Appellant most likely has the best access to the facts, it
is his responsibility to affirmatively establish the proposition on which he
relies in this case that 1272 Bloor St. East was not his primary residence during the taxation years in issue.
That has not been done. In a number of documents prepared by the Appellant, he referred
to a portion of the property as “my place living”. I make specific reference to
his Notice of Objection in which the accountant wrote:
On October 27, 2004, I
reviewed and discussed with the taxpayer; I found that the 50% of the personal
use of the property is not reasonable. The taxpayer’s personal use portion
should be only 40%. The property has 2,596 square feet and the taxpayer’s
personal use is 1,024 square feet.”
There is I might
add, absolutely no mention in the Notice that it was used as a “temporary
resting place doing renovations”.
[25] On balance, given the
testimony adduced on behalf of the Appellant, it is not possible to determine
with any degree of certainty that the property was not used by him as his
primary residence.
[26] There remains the question
regarding the proportion to be allocated to the Appellant. My assessment of the
evidence leads me to conclude that a personal allocation of one-third, as was
agreed by the parties, would be most appropriate. To this extent, the appeals are
allowed. In all other respects, the appeals are dismissed.
Signed at Ottawa, Canada, this 28th day of September,
2007.
“A.A.
Sarchuk”
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