Pauline Speek v. Her Majesty the Queen (Informal Procedure), [1994] 2 CTC 2422

Christie A.C.J.T.C.C.:— These appeals are governed by the informal procedure prescribed by section 18 and following sections of the Tax Court of Canada Acct.

The notice of appeal reads:

TAKE NOTICE THAT Pauline Speek appeals to the Court from the December 10, 1992 reassessment by Revenue Canada for the 1989 and 1990 taxation years.

(a) In the 1990 taxation year, the taxpayer’s property located at 2Lot 12, Cone. 4, Greely, Ontario incurred extensive fire damage. The costs incurred, over and above the fire insurance proceeds, amounted to $29,343. These expenses were claimed as repairs and maintenance on the taxpayer’s 1990 T1 return. Revenue Canada reassessed stating that these were of a capital nature. Furthermore, $4,786 of mortgage interest was disallowed pertaining to the eight month renovation period.

(b) The taxpayer objects to this reassessment for the following reasons:

(i) the renovations were undertaken to put the property in its original rentable condition prior to the fire;

(ii) the renovations took eight months because the owner did a great deal of the work herself to keep costs lower;

(iii) the repairs did not increase the value of the real property over its purchase price. Repair expenses were incurred to derive income and not to increase the value of the property. The taxpayer was returning the property to its original use;

and

(iv) the taxpayer will be relying on the law as set out in Le Sous-Ministre du Revenu Québec vs. Denise Goyer (198) RJQ988.

For the above reasons, the taxpayer requests that the reassessment be vacated and the expenditures of $29,343 be allowed as a current expenditure and that interest expense of $4,786 be allowed.

Paragraphs 1 to 9 inclusive of the reply to notice of appeal read:

1. He admits the facts stated in the first, third and fourth sentences of paragraph (a) of the notice of appeal; he has no knowledge of and does not admit the allegation of fact contained in the second sentence of the paragraph; and he denies the allegation of fact contained in the last sentence of paragraph (a) of the notice of appeal.

2. He denies the allegations of fact contained in paragraph (b)(i) of the notice of appeal.

3. He has no knowledge of and does not admit the allegations of fact stated in paragraph (b)(ii) of the notice of appeal.

4. He denies the allegations of fact contained in paragraph (b)(iii) of the notice of appeal.

5. The appellant's income tax returns for the 1989 and 1990 taxation years were originally assessed on April 26, 1990 and August 23, 1991 respectively.

6. In computing her income for the 1990 taxation year, the appellant deducted, among other losses, a net rental loss in the amount of $31,905 in respect of a rental property located on Lot 12, Concession 4, Greely, Ontario (the "property").

7. In reassessing the appellant for the 1990 taxation year by notice of reassessment dated December 12, 1992, the Minister of National Revenue (the "Minister") reduced, among other things, the said net rental loss by $29,343, allowing a net rental loss from the property of $2,562.

8. In reassessing the appellant for the 1989 taxation year by notice of reassessment dated December 12, 1992, the Minister disallowed, in computing the appellant’s taxable income for that year, the deduction of a 1990 non-capital loss in the amount of $5,731, which amount had previously been allowed by notice of reassessment dated February 20, 1992.

9. In so reassessing the appellant, the Minister made the following assumptions of fact:

(a) in 1985 the appellant purchased the property for $53,000;

(b) the appellant rented the property from 1985 to 1990, when it was destroyed by fire;

(c) the appellant received insurance proceeds in the amount of $53,000 in respect of the said destruction of the property;

(d) in computing her income for the 1990 taxation year, the appellant reported among other things, a rental loss of $31,905 in respect of the property calculated as follows:

Gross Rents	$ 5,400
Expenses	$37,425
Net Rental Income	$31,905

(e) the rental expenses aforementioned included the amount of $29,343 for maintenance and repairs;

(f) $10,416 of the said expenditures were not substantiated by the appellant and an amount of $538 represents personal living expenses of the appellant;

(g) the said expenditures related to construction, renovations or alterations during a period in 1990 when the property was not available for rent;

(h) the expenses were incurred with a view to bringing intoexistence an asset or advantage for the enduring benefit of the rental operations of the appellant and were Capital in nature;

(i) the decrease of the net rental loss referred to in paragraph 7 of this document reduced the 1990 non-capital loss to nil such that no amount in respect of a 1990 non-capital loss was available to be carried back to 1989.

At the outset of the hearing Mr. Howard Boits, C.A., agent for the appellant, informed the Court that there were two issues to be determined. First, whether sums expended in 1990 as the result of the fire on Lot 12, Concession 4, were on capital or revenue account. The second issue pertains to the matter of interest referred to in paragraph (a) of the notice of appeal. At the commencement of argument, Mr. Borts advised the Court that he was no longer pursuing the second issue.

Prior to January 1, 1990, the appellant rented a bungalow situated on Lot 12, Concession 4. It had a finished basement that included a bedroom. It was rented unfurnished, but a fridge, stove, washer, dryer, water softener and purifier were included. The appellant purchased the lot and dwelling thereon at the end of December 1984 for $65,000.

Apart from the cement foundation, the dwelling was entirely destroyed by fire on the evening of December 31, 1989. It was replaced on the old foundation by a new two-storey dwelling during the period January-June 1990 at a cost in the order of $115,292. The new structure was rented commencing July 1, 1990. I have no hesitation in stating that the amounts expended on the new dwelling were on capital account. These expenses cannot be regarded as outlays for the maintenance and repair of a capital asset. The pre-December 31, 1989 capital asset was destroyed and replaced by a new capital asset.

Considerably less extensive substitution of assets has been held to come within these words in paragraph 18(1 )(b) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"): “In computing the income of a taxpayer from a business or property no deduction shall be made in respect of an outlay, loss or replacement of capital, a payment on account of capital or. . . ." In M.N.R. v. Vancouver Tugboat Co., [1957] C.T.C. 178, 57 D.T.C. 1126 (Ex. Ct.), it was held that the cost of installing a new engine in a tugboat was an expenditure on account of capital. In Thompson Construction (Chemong) Ltd. v. M.N.R., [1957] C.T.C. 178, 57 D.T.C. 1114 (Ex.Ct.) the cost of a new engine in a power shovel was determined to be an outlay on account of capital. In M.N.R. v. Lumor Interests Ltd., [1959] C.T.C. 520, 60 D.T.C. 1001 (Ex. Ct.), the replacement of elevators in an office building was determined to be a capital expenditure. In Canada Steamship Lines Ltd. v. M.N.R., [1966] C.T.C. 255, 66 D.T.C. 5205 (Ex. Ct.) the Court found that the cost of replacing boilers in a freighter was a capital expenditure. In M.N.R. v. Haddon Hall Realty Inc., [1962] S.C.R.109, [1961] C.T.C. 508, 62 D.T.C. 1001, the expenses for the replacement of worn out or obsolete stoves, refrigerators and window blinds in an apartment building were found to be capital in nature.

In Canada Steamship, supra, it was held that outlays of this type were current expenses: "The expense of replacing what are, in effect, floors and walls of cargocarrying holds in certain ships and of incidental work in respect of the apparatus or members whereby such floors and walls were joined to the outside surface or ‘skin’ of the ship — such work having been made necessary by the wear and tear arising out of the loading, carrying and unloading of cargoes." But that is a far cry from the nature of the expenses incurred in the case at hand.

The appeals are dismissed.

Appeal dismissed.