Date: 19990324
Docket: 97-221-IT-G
BETWEEN:
R.E.A.D. ENTERPRISES LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for judgment
Bell, J.T.C.C.
ISSUES:
[1] The issue for the 1990, 1991, 1992, 1993, 1994 and 1995
taxation years was stated in the pleadings to be:
(a) Whether the Appellant's capital cost allowance is
properly determinable by inclusion of the building in question in
Class 6 of Schedule II of the Income Tax Regulations
("Regulations") at the rate of 10% or whether,
as the Minister of National Revenue contends, it should be
included in Class 1 of that schedule at a rate of 4%; and
(b) Whether the expenditure of $4,068 for furniture
refinishing incurred by the Appellant in the 1993 taxation year
was a deductible current expenditure or a capital outlay.
[2] At the opening of the hearing, counsel for the Respondent
made an application that the purported appeals for the 1991, 1994
and 1995 taxation years be quashed on the basis that no tax,
interest or penalty was assessed for those taxation years. The
Court quashed those purported appeals and, accordingly, the
hearing proceeded with respect to the 1990, 1992 and 1993
taxation years.
FACTS:
[3] The Appellant purchased a hotel, renovated it and opened
it for business in September, 1989. At the time the hotel was
originally constructed in approximately 1892, its
... foundations/footings were constructed at ground level and
had no foundations/footings below ground level.
[4] In 1898 the hotel and other buildings on the same street
were destroyed by fire. The hotel was rebuilt of frame
construction on its original foundation/footings. Because of:
...the reconstruction of the street and surrounding area, and
the introduction of fill consisting of fire debris and soil,
since 1898, the Hotel's foundation/footings and first floor
(now basement) have been below ground level at the front of the
building.
[5] The ground level did and presently does slope downward
toward the back of the building so that the first floor (now a
basement) sits at ground level at the back of the building.
[6] For the taxation years in question, the Appellant
determined capital cost allowance under paragraph 20(1)(a)
of the Income Tax Act ("Act") on the
basis of it being described in Class 6 in Schedule II of the
Regulations. Paragraph 1100(1)(a) provides,
inter alia, that a taxpayer is allowed, as a deduction,
such amount as he may claim in respect of property of a number of
different classes. The rate for property in Class 1 was 4% and
the rate for property in Class 6 was 10%.
Class 1 included:
Property not included in any other Class that is ... a
building or other structure, or part thereof ...
Class 6 included:
Property not included in any other class that is ... a
building of ... frame ... construction ... if the building ...
has no footings or any other base support below ground
level. (emphasis added)
APPELLANT'S SUBMISSIONS:
[7] The Appellant submitted that the intention of the original
builder was to have no base support below ground and that any
change in outside ground level after the original foundations
were built should be irrelevant. He submitted that to use any
other date would penalize people whose buildings have sunk into
the ground by a few inches either through the action of frost
heave or because the occupants put plantings against the
building. He also submitted that the date of substantial
completion should be the determinative date because to find
otherwise would force taxpayers to monitor exterior ground levels
over which they had little or no control, resulting from frost
heave, municipal works such as sidewalks, roads or plantings or,
as in the case at bar, fill.
RESPONDENT'S SUBMISSIONS:
[8] The Respondent submitted that in order for the building to
be included in Class 6 it must, in the words describing Class 6,
have:
no footings or any other base support below ground level,
[9] Respondent's counsel argued simply that the fact that
a portion of the footings or base support of the hotel was below
ground level at the front of the hotel and along part of the
side, disqualified it from inclusion in that Class.
ANALYSIS AND CONCLUSION:
[10] I do not accept Respondent's submissions that a
building is disqualified from Class 6 simply because some of
its footings or base support are below ground level. I reject the
conclusion that Respondent's counsel urged upon the Court,
namely that the requirement that it have "no footings or any
other base support below ground level" means that no
portion, however small, of the building can have footings or
other base support below ground level. That is especially so in
this case where the original footings or foundations supporting
the original building were not below ground level. In this
case, they are not below ground level at the back of the
building. No evidence was adduced to indicate how deep the
building was and what portion of the footings or other base
support were below the level of the ground as built up by virtue
of rubbish and fill. Assume that the building was 500 feet deep
and that the front ten feet of footings or base support were
below ground level and the remaining 490 feet of footings or base
support were not below ground level. Assume further that the
building was originally built with no footings or base support
below ground level. It is wholly illogical that such a building
would be disqualified from inclusion in Class 6 in those
circumstances.
[11] It seems that the words "has no footings or any
other base support below ground level" describe the manner
of construction of the entire building. If so, the
building would not be excluded from Class 6 simply because a
portion was below ground level.
[12] The interpretation sought by the Respondent does not have
great economic significance to the fiscus. The transfer from
Class 6 to Class 1 results simply in prolonging the period of
time in which the full amount of deduction may be claimed[1]. One wonders why, in
the circumstances of this case, such an exclusionary construction
of the words under examination found its way into the
reassessments.
[13] The purported appeals for the 1991, 1994 and 1995
taxation years are quashed. The claim by the Appellant that the
expenditure of $4,060 as aforesaid having been abandoned by it,
the appeal is allowed to the extent that the hotel was properly
included by the Appellant in Class 6 of Schedule II to the
Regulations.
Signed at Ottawa, Canada this 25th day of March,
1999.
"R.D. Bell"
J.T.C.C.
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