Citation: 2008TCC165
Date: 20080414
Docket: 2007-3100(IT)I
BETWEEN:
LUC BERGERON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Bédard J.
[1]
The Appellant is
appealing, under the Informal Procedure, a reassessment made under the Income
Tax Act ("the Act") for the 2004 taxation year. In this
reassessment, the Minister of National Revenue ("the Minister") disallowed
the Appellant's claim of maintenance expenses that he incurred in 2004 with
respect to a rental building that he owned.
[2]
In making and
confirming the reassessment in respect of the 2004 taxation year, the Minister
relied on the same assumptions of fact, namely:
(a)
The Appellant is the
owner of a building located at 4716‑4720 Marquette Street in Montréal.
(b)
The building has two
businesses, on the ground floor and in the basement, and two apartments upstairs.
(c)
The Appellant occupies
one of the two apartments.
(d)
That apartment takes up
20% of the area of the building.
(e)
The gross revenues from
the building total $36,097.
(f)
The Appellant claimed
the following rental expenses in his income tax return:
|
Expense
|
Total
outlay
|
Personal
portion
|
Qualifying
expenses according to Appellant
|
Qualifying
expenses according to audit
|
|
Insurance
|
$2,243
|
$449
|
$1,795
|
$1,795
|
|
Interest
|
$7,769
|
$1,554
|
$6,216
|
$6,216
|
|
Maintenance
and repairs
|
$43,588
|
$8,718
|
$34,870
|
$1,560
|
|
Accounting
fees
|
$345
|
0
|
$345
|
$345
|
|
Taxes
|
$4,800
|
$960
|
$3,840
|
$3,840
|
|
Utilities
|
$100
|
$20
|
$80
|
$80
|
|
Bank fees
|
$56
|
$11
|
$45
|
$45
|
|
|
|
|
|
|
|
Total
|
$58,902
|
$11,711
|
$47,191
|
$13,881
|
(g)
After filing his return,
the Appellant amended his expenses and reduced the personal portion of the
maintenance and repairs item to $355.
(h)
The expenses associated
with the maintenance and repairs item that were disallowed as a result of the
audit are as follows:
(i)
$16,229 paid to
Entreprise Pierre Charest, because the work performed was done to the structure
of the apartment, though the expense nonetheless qualified as a capital expenditure;
(ii)
similarly, the sums of $699,
$2,895, $139 and $140 spent at Réno-Dépôt for a new kitchen in maple
were also capitalized; and
(iii)
the amounts of $8,123
paid to Entreprise Pierre Charest, $9,612 to Doraco Noiseux, $50 to Groupe
HPDG and $3,945 to F.S.C. Consultant were disallowed because they were personal
expenses for the Appellant.
[3]
In addition, the
evidence disclosed as follows:
(i)
The building was erected
in 1915 and acquired by the Appellant in 1998.
(ii)
From 2000 to 2005, the
Appellant lived in the apartment situated at 4716 Marquette Street ("the apartment at 4716");
(iii)
The apartment situated
at 4718 Marquette Street ("the apartment at 4718") was
rented by people at arm's length until December 31, 2003. It was vacant
in 2004 and 2005, and underwent major and structural renovations during this
period. In fact, the sum of $33,309 claimed as rental expenses by the Appellant
for the 2004 taxation year and disallowed by the Minister was related to the
work done on this apartment.
(iv)
Since January 1, 2006, the date on which the renovations to the
apartment at 4718 were completed, the apartment has been the Appellant's principal
residence.
(v)
In 2003, thus before
the renovations began, the Appellant rented out the apartment at 4718 for roughly
$550 a month. The Appellant testified that the nature and the scope of the
renovations to the apartment at 4718 would allow him to charge roughly $1,500 a
month today. The Appellant also testified that his intention was
always to rent this renovated apartment to a person at arm's length for about
$1,500 a month. The Appellant explained that he was living in the
renovated apartment while waiting to acquire a building similar to the one on Marquette Street, renovate it, and then live in one of the
apartments. The Appellant added that he had been particularly active
during the last eight months in his quest to acquire a building that required
major renovations.
[4]
It should be noted that
the agent of the Appellant acknowledged that the 2004 renovation expenditures
for the apartment at 4718 were not current expenses incurred by the Appellant
to earn income from property, but rather, capital expenditures, since the
purpose of the renovations was to permanently improve the building. The agent
nevertheless argued that the cost of all the work done at the apartment at 4718
in 2004 should be added to the capital cost of the building and that paragraph 20(1)(a)
of the Act allowed a taxpayer to deduct, in computing his income from property,
such part of the capital cost to him of property, or such amount in respect of
the capital cost to him of property, if any, as was allowed by regulation. In other
words, the Appellant's agent claimed that, even though his client could not
deduct the cost of the renovations from his 2004 rental income as a current
expense, he could nevertheless claim a depreciation expense, to the extent
permitted by regulation, for the cost of the renovations, though in his
submission, this depreciation expense should be reduced by 20% because his
client personally occupied 20% of the area of the building on Marquette Street.
[5]
Counsel for the
Respondent, on the other hand, submitted as follows:
(i)
All amounts paid in 1994
to Les Entreprises Pierre Charest Enr., Réno‑Dépôt, Doraco Noiseux,
Groupe HPDH and F.S.L. Consultant Inc. (Exhibits A-1, A-2 and A-3) were
personal expenses for the Appellant, because the evidence adduced at the
hearing showed that they were all related to the apartment at 4718, which has
been the Appellant's principal residence since the end of the renovation work.
(ii)
The Respondent would
never have found that the amount of $16,229 paid to Les Entreprises Pierre
Charest Inc. (Exhibit A-2) and the amounts of $699, $28,959, $139 and
$140 paid to Réno-Dépôt in 2004 (Exhibit A-3) qualified as capital
expenditures if the Respondent had known that the Appellant had been living in the
apartment at 4718, not the apartment at 4716, since the completion of the
renovations.
[6]
The relevant provisions
of the Act are as follows:
18(1)(a)
(a) General limitation -- 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 the business or property;
18(1)(b)
(b) Capital outlay or loss -- 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;
20(1)(a)
(a) Capital
cost of property [CCA] -- such part of the capital
cost to the taxpayer of property, or such amount in respect of the capital cost
to the taxpayer of property, if any, as is allowed by regulation;
18(1)(h)
(h) Personal
and living expenses -- personal or living expenses
of the taxpayer, other than travel expenses incurred by the taxpayer while away
from home in the course of carrying on the taxpayer's business;
248(1)
"personal
or living expenses" includes
(a)
the expenses of properties maintained by any
person for the use or benefit of the taxpayer or any person connected with the
taxpayer by blood relationship, marriage or common-law partnership or adoption,
and not maintained in connection with a business carried on for profit or with
a reasonable expectation of profit,
(b)
the expenses, premiums or other costs of a
policy of insurance, annuity contract or other like contract if the proceeds of
the policy or contract are payable to or for the benefit of the taxpayer or a
person connected with the taxpayer by blood relationship, marriage or
common-law partnership or adoption, and
(c)
expenses of properties maintained by an estate
or trust for the benefit of the taxpayer as one of the beneficiaries;
[7]
Paragraph 18(1)(a)
of the Act sets out the general rule that expenses are not deductible in the
calculation of the taxpayer's income from a business or property, except to the
extent that they were made or incurred by the taxpayer for the purpose of
gaining or producing income from that business or property.
[8]
Paragraph 18(1)(h)
of the Act states, inter alia, that personal and living expenses are not
deductible in computing the taxpayer's income from a business. The term
"personal or living expenses" is defined in subsection 248(1) of the
Act as "the expenses of properties maintained . . . for the use . . .
of the taxpayer . . . and not maintained in connection
with a business carried on for profit or with a reasonable expectation of
profit.
[9]
Paragraph 18(1)(b)
of the Act stipulates that a capital outlay is not deductible, except as
expressly permitted by Part I of the Act. Paragraph 20(1)(a) of the
Act permits a taxpayer to deduct, in computing income from a business or
property, such part of the capital cost to the taxpayer of property, or
such amount in respect of the capital cost to the taxpayer of property, if any,
as is allowed by regulation.
[10]
Finally, section 67 of
the Act provides that, even if it is otherwise deductible under the Act, an
expense is only deductible if it is reasonable. However, it must be noted that
this provision was not raised in the Reply to the Notice of Appeal.
Consequently, I shall express no opinion as to whether the expenses were
reasonable.
[11]
Consequently, in light
of the evidence adduced, I must determine if the deduction of the expenses was
prohibited under paragraphs 18(1)(a) and 18(1)(b) of the Act,
which have essentially the same effect. In other words, I must answer the
following question: Are these expenses personal expenses that were not incurred
for the purpose of gaining or producing income from a business?
Analysis and
conclusion
[12]
In the case at bar, the
Appellant's agent admits that all the expenditures in question were of a
capital nature. And paragraph 18(1)(b) of the Act states that, in computing
the income of a taxpayer from property, no deduction shall be made in respect
of a capital outlay. However, it must be noted that, based on the relationship
between sections 18 and 20 of the Act, paragraph 20(1)(a) permits,
within specific limits, that which paragraph 18(1)(b) of the Act
prohibits. Indeed, notwithstanding the general prohibition found in
paragraph 18(1)(b) of the Act, paragraph 20(1)(a) of the Act
allows the taxpayer to deduct, in computing his income from property for a taxation
year, a portion of the capital outlay made for the purpose of earning this
income. This deduction permitted by paragraph 20(1)(a) is what the Act
calls a "capital cost allowance" (CCA), that is, a deduction
permitted each year in respect of the cost of acquiring a depreciable asset. In
other words, in computing the income derived
from the rental property on Marquette Street for the 2004 taxation year, the Appellant
had, in principle, the right to claim a CCA, computed based on the
undepreciated capital cost (UCC) of the building at the end of that taxation
year. The UCC had to include, in principle, those capital expenses in issue that
were incurred (and paid) during that year, provided, however, that such capital
expenses were incurred (and paid) for the purpose of gaining or producing income
from that property. It is understood that if the capital expenses were not
incurred (and paid) for the purpose of gaining or producing income from the
building, or if they were of a personal nature, the Appellant would not be
entitled to claim a CCA for such capital expenses because they could not be
included in the UCC of the building at the end of the taxation year. In the
instant case, the evidence demonstrates that the capital expenses were related
to the apartment at 4718, which has been the Appellant's principal residence since the completion of the work.
In my view, these capital expenses were, quite simply, personal expenses for the
Appellant, not capital expenses incurred (and paid) by the Appellant for
the purpose of gaining or producing income from the building during the
taxation year in question.
[13]
In my opinion, the
reasoning of the Appellant's agent, that the capital expenses in question should
be added to the UCC of the building at the end of the 2004 taxation year, but
actually reduced by 20%, the percentage of the building reserved for personal
use, does not apply unless the capital expenses were incurred (and paid) both
for personal use and for gaining or producing income from property. Therefore, if
the Appellant had, for example, replaced the roof of the building in 2004,
he would then have been entitled to add the cost of replacing the roof to the
calculation of the building's UCC at the end of the 2004 taxation year and
claim 80% (the percentage of the area of the building used in 2004 to gain or
produce income from property) of the CCA permitted by the regulations. The reasoning
of the Appellant's agent cannot succeed in the case at bar because the capital
expenses in question were related to a portion of the building, the apartment
at 4718, which served as the Appellant's principal residence once the renovations
were completed, and which remains the Appellant's principal residence.
[14]
For these reasons, the
appeal is dismissed.
Signed at Ottawa, Canada, this 14th
day of April 2008.
"Paul Bédard"
Translation
certified true
on this 26th day
of May 2008.
Brian McCordick,
Translator
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