Date:
20030109
Docket:
2002-1280-IT-I
BETWEEN:
DOUGLAS R.S.
JACQUES,
Appellant,
and
HER MAJESTY
THE QUEEN,
Respondent,
AND
BETWEEN:
2002-1281(IT)I
ANNA K.
SIPOS,
Appellant,
and
HER MAJESTY
THE QUEEN,
Respondent.
Reasons
for Judgment
Lamarre,
J.T.C.C.
[1]
These appeals heard on common evidence are against assessments
made by the Minister of National Revenue ("Minister")
under the Income Tax Act ("Act") for the
1998 taxation year.
[2]
In assessing the appellants, the Minister disallowed an amount of
$15,797.77 in rental expenses with respect to two side-by-side
properties located at 817 and 819 Tavistock Road, Ottawa, which
the appellants claimed as current expenses on a 50-50 basis. The
Minister is of the view that these expenses are capital expenses
pursuant to paragraph 18(1)(b) of the Act. The
portion of the above amount relating to 817 Tavistock Road
($12,133) was further disallowed on the basis that it represented
personal or living expenses of the appellants pursuant to
paragraph 18(1)(h) of the Act.
[3]
On August 27, 1993, the appellants acquired the two properties
referred to above, 50-year-old adjoining side-by-side bungalows,
as an investment property for the purchase price of $225,000. The
two appellants agreed in a partnership agreement to divide
equally between them the rental income and the rental expenses
relating to those two properties (see Partnership Agreement for
Investment Property, Exhibit A-1).
[4]
The two appellants have lived together since 1989. They lived in
their principal residence, located at 2596 Roman Avenue, Ottawa,
which Douglas Jacques had owned since 1984. Then, in 1994,
Anna Sipos accepted a posting to Hong Kong with the Canadian
Department of Foreign Affairs. Douglas Jacques therefore took a
leave of absence from his work here in Ottawa to follow his
spouse. Following that decision, they rented their principal
residence and moved out their furniture and put it in storage. At
that time, the two properties on Tavistock Road were already
rented. Ms. Sipos' posting in Hong Kong was for a period
of three years and was extended for another year. During the
course of the fourth year, they made a request to Foreign Affairs
to be posted somewhere else in Asia. However, on April 28, 1998,
a posting confirmation was sent to them informing them that they
were going back to Ottawa (see Posting Confirmation, Exhibit
A-1).
[5]
During their four years in Hong Kong, there were a number of
tenant changes at the Tavistock Road properties, while the same
tenant occupied the residence on Roman Avenue throughout and
still occupies it.
[6]
The appellants mandated TMS Associates ("TMS"), a
residential property management company, to find tenants for the
Tavistock Road properties. On February 5, 1998, TMS faxed a
letter to Ms. Sipos in Hong Kong to advise her that the tenants
at 817 Tavistock Road had moved. (The appellants explained in
Court that those tenants had purchased a new house.) When 817
Tavistock Road became vacant, TMS prepared a list of repairs
which they felt needed to be done to attract tenants willing to
pay the rent required in order to break even on the property. In
the letter sent to Ms. Sipos on February 5, 1998, TMS said that
the items to be repaired were not such as to render the house
unlivable, but were rather maintenance items that would spruce
the house up (see letter from TMS, dated February 5, 1998, in
Exhibit A-1).
[7]
The appellants explained the work done in the following terms in
a letter sent to the Canada Customs and Revenue Agency
("CCRA") on March 15, 2001 (Exhibit A-1):
The
original, old-style wood-framed windows with single layers of
glass held in with putty had to be replaced. They suffered from
rot, aged and missing putty and there was a significant heat loss
and draft. To replace them to exactly what was originally there,
would have required that they be specially made which would have
cost more than the no-frills replacement windows which we
purchased. The windows were replaced with no-frills plain, basic
windows the exact same size. There were no enhancements or
upgrades i.e. larger windows, bay windows, etc.
Most of the
other items grouped as capital expenses which have been
disallowed are similar in nature. Fifty year old doors, sinks and
plumbing get to the point where it is cheaper to replace them
than to find somebody who knows how to repair them so that they
will stand up to the sometimes negligent treatment afforded them
by tenants. The doors, floors, etc were all no frills
replacements not upgrades. The kitchens and bathrooms were not
renovated, they were made serviceable and sanitary. Concrete
steps which had broken down after years of salt, ice and pick and
shovel treatment had to be repaired for safety
reasons.
[8]
An estimate of the work to be done on both properties was sent to
Ms. Sipos in Hong Kong by fax on March 17, 1998 by Dynamic
Building Improvements Inc. ("Dynamic") (Exhibit
R-3).
[9]
In March 1998, the appellants commissioned repairs to both rental
properties (see Reply to the Notice of Appeal, subparagraph
9(h)). An invoice for a total amount of $21,234 for the repairs
was sent to the appellants at 817 Tavistock Road in June
1998 (Exhibit R-2). Of that total, the Minister considered that
an amount of $15,797.77 was to be treated as capital expenses,
and he applied $12,133 thereof to 817 Tavistock Road and
$3,664.75 to 819 Tavistock Road (see Schedule B of the Reply
to the Notice of Appeal).
[10] During the
period when the repairs were being carried out, the tenant at 819
Tavistock Road continued to live there. The other property, 817
Tavistock Road, remained vacant. During that same period, the
appellants were in Hong Kong. According to their testimony,
it was only at the beginning of May 1998 that they learned
they would be returning to Ottawa at the end of July of that
year. They thereupon considered their options, which included
returning to their residence on Roman Avenue and therefore having
to give their tenants notice, or moving into the property at 817
Tavistock Road, which was already vacant. Mr. Douglas
explained that he was unemployed when he came back and that the
more reasonable solution financially was to move into the vacant
817 Tavistock Road property, which yielded less income than
the rental of their residence on Roman Avenue.
[11] Counsel for
the respondent is of the opinion that the appellants knew when
they started the repairs in March 1998 that they would eventually
live in the 817 Tavistock Road property when they returned
to Ottawa. For that reason, and based on the fact that it was not
rented after February 1998, counsel for the respondent argued
that all the expenses incurred with respect to the
817 Tavistock Road property were personal in
nature.
[12] On this
latter point, I do not agree with the interpretation of counsel
for the respondent. The appellants clearly stated that they
purchased the two properties on Tavistock Road for investment
purposes. Both properties had been rented, with few gaps in
between, since the date of the purchase. In February 1998, the
tenants in the 817 Tavistock Road property moved because they had
bought a house. At that time, TMS advised the appellants that the
house needed repairs. The appellants therefore took advantage of
the house being empty and commissioned Dynamic to start the
repair work on both properties. The appellants did not know at
that point that they were coming back to Canada in July 1998.
They had made a request to Foreign Affairs for another posting in
Asia and it was not until early May 1998 that they learned they
would have to return to Ottawa. By then, the work had already
begun on the two properties and had been going on for two
months.
[13] Counsel for
the respondent inferred from the fact that Dynamic sent the
invoice to the appellants at the 817 Tavistock Road address on
June 6, 1998 and that this property was not rented after
February 1998, that there was evidence that the appellants
had the intention of living there when the repairs were finished.
I do not find that this evidence disclosed that, at the time the
repairs were being done, it was the appellants' intention to
live in the property at 817 Tavistock Road. First of all,
the appellants clearly stated that TMS found no tenants for the
said property during that period. Secondly, at the time the
invoice was sent in June 1998, the appellants knew that they were
coming back to Canada. By then, the repairs were all done. The
only property not rented at that point was 817 Tavistock Road. In
my view, it made sense for the appellants to have the invoice
sent there for their attention, especially because the work
invoiced had been done on the two Tavistock Road properties. I do
not believe that this means that the work performed at
817 Tavistock Road was not done for the purpose of earning
income from that particular property. I therefore conclude that
the appellants have established on a balance of probabilities
that they incurred the expenses for the purpose of gaining or
producing income from the two properties on Tavistock Road within
the meaning of paragraph 18(1)(a) of the
Act.
[14] With
respect to the nature of the expenses as such, President Jackett
of the Exchequer Court stated in Canada Steamship Lines Ltd.
v. M.N.R., 66 DTC 5205 (Ex. Ct.) at pages 5207-8,
that:
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] I have come
to the conclusion that the expenses totalling $4,241 incurred for
the front porch partition ($610), the hall closet door ($145 +
$156), the basement plumbing ($1,100), the basement walls and
doors ($650) and the rear porch ($1,580), as detailed in Exhibit
R-2, are capital expenses. Indeed, the appellants explained that
those expenses were incurred to add something to the house that
was not there before.
[16] However,
all the other expenses that have been treated by the Minister as
capital expenses because they were incurred as part of a
renovation project are, in my opinion, current expenses. The
replacing of some doors, of wall tiles in the kitchen, of the
floor, the toilet and ceramic on the walls in the bathroom, and
of some windows constitutes in my view current expenses. In
Marklib Investments II-A Ltd. v. Canada, [1999] T.C.J.
No. 716 (Q.L.), at paragraph 26, this Court made reference
to the decision by 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, as
follows:
¶ 26 .
. . in Le Sous-Ministre du Revenu du Québec c. Denise
Goyer, [1987] A.Q. no 644, 1987 CarswellQue 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."
[17] Judge
Brulé stated further at paragraphs 35 and 36:
¶
35 It is
the purpose, rather than the result, of an expenditure that
determines whether it is characterized as a capital outlay or a
current expense; and the focus of the test is on whether or not
the expenditure brings into existence an asset of enduring value,
rather than on the determination of the frequency or recurrence
of the expenditure. The cases seem to promote the idea that as
long as the repairs were done to preserve or conserve the asset
and not to create a new asset then the repairs will be considered
current expenses.
¶
36 An
expenditure that merely maintains an asset or restores it to its
original condition is a deductible current expense. As already
seen from the cases above, this is easier said than done. There
is a lot of grey area in between the capital outlay and current
expense distinction. Furthermore, the magnitude of the expense
must be examined in the context of the value of the building.
However, simply because the amount of money expended is
significant does not in itself render the expenditure capital in
nature.
[18]
We are not dealing here with a case in which the appellants
purchased a deteriorated property and made repairs in order to
make the building usable. They had been renting the properties
for at least four years when they made the repairs. They took the
opportunity of the vacancy at 817 Tavistock, after the departure
of tenants who had purchased a house, to do the repairs.
Moreover, they did the same thing with the 819 Tavistock Road
property, which remained occupied while the repairs were being
carried out.
[19]
Furthermore, Interpretation Bulletin IT-128R, Capital Cost
Allowance - Depreciable Property, in which the CCRA lists a
number of common factors to be considered, states at subparagraph
4(d):
(d)
. . . 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.
[20]
Here, there is no evidence that the value of the properties went
up after the repairs were done. In my view, the expenses in
question were current in nature and fully deductible by the
appellants in 1998.
[21]
For these reasons, the appeals are allowed, without costs, and
the assessments are referred back to the Minister for
reconsideration and reassessment on the basis that all the
expenses incurred and claimed as rental expenses by the
appellants were incurred for the purpose of earning rental
income. Of the total expenses of $21,234.14, an amount of $4,241
is to be treated as capital expenses; the balance is to be
treated as current expenses.
Signed at
Ottawa, Canada, this 9th day of January 2003.
J.T.C.C.
COURT FILE
NO.:
2002-1280(IT)I & 2002-1281(IT)I
STYLE OF
CAUSE:
Douglas R.S. Jacques and Anna K. Sipos v.
The Queen
PLACE OF
HEARING:
Ottawa, Ontario
DATE OF
HEARING:
December 3, 2002
REASONS FOR
JUDGMENT BY: The Honourable Judge Lucie
Lamarre
DATE OF
JUDGMENT:
January 9, 2003
APPEARANCES:
For the
Appellants:
The Appellant themselves
Counsel
for the
Respondent:
Nicolas Simard
COUNSEL OF
RECORD:
For the
Appellant:
Name:
Firm:
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2002-1280(IT)I
BETWEEN:
DOUGLAS R.S.
JACQUES,
Appellant,
and
HER MAJESTY
THE QUEEN,
Respondent.
Appeal heard
on common evidence with the appeal of Anna K. Sipos
(2002-1281(IT)I) on December 3, 2002, at Ottawa, Ontario,
by
the
Honourable Judge Lucie Lamarre
Appearances
For the
Appellant:
The Appellant himself
Counsel
for the
Respondent:
Nicolas Simard
JUDGMENT
The appeal from the assessment made under the Income Tax
Act for the 1998 taxation year is allowed, without costs, and
the assessment is referred back to the Minister of National
Revenue for reconsideration and reassessment on the basis
that all the expenses
incurred and claimed as rental expenses by the appellant and his
co-partner, Anna Sipos, on a 50-50 basis were incurred for
the purpose of earning rental income. Of the total expenses of
$21,234.14, an amount of $4,241 is to be treated as capital
expenses; the balance is to be treated as current
expenses.
Signed at
Ottawa, Canada, this 9th day of January 2003.
J.T.C.C.
2002-1281(IT)I
BETWEEN:
ANNA K.
SIPOS,
Appellant,
and
HER MAJESTY
THE QUEEN,
Respondent.
Appeal heard
on common evidence with the appeal of Douglas R.S. Jacques
(2002-1280(IT)I) on December 3, 2002, at Ottawa, Ontario,
by
the
Honourable Judge Lucie Lamarre
Appearances
For the
Appellant:
The Appellant herself
Counsel
for the
Respondent:
Nicolas Simard
JUDGMENT
The appeal from the assessment made under the Income Tax
Act for the 1998 taxation year is allowed, without costs, and
the assessment is referred back to the Minister of National
Revenue for reconsideration and reassessment on the basis
that all the expenses
incurred and claimed as rental expenses by the appellant and his
co-partner, Douglas Jacques, on a 50-50 basis were incurred
for the purpose of earning rental income. Of the total expenses
of $21,234.14, an amount of $4,241 is to be treated as capital
expenses; the balance is to be treated as current
expenses.
Signed at
Ottawa, Canada, this 9th day of January 2003.
J.T.C.C.
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