Létourneau, J.A.:—The Court has before it two applications for judicial review made pursuant to sections 28 and 18.1 of the Federal Court Act and brought against a Tax Court of Canada decision rendered orally in May 1992. That Court heard two appeals filed by the applicants from a notice of assessment sent to them by the Minister or National Revenue. The case concerned the question of whether expenses totalling $326,648 incurred by the applicants to renovate two buildings which they had bought were operating expenses, deductible from the calculation of their income, or expenses of a capital nature deductible by a capital cost allowance. The property in question has been classified by the Minister of National Revenue as property in Class 3 of Schedule II of the Income Tax Regulations.
The applicants bought these two properties in 1984 for $107,000. They were adjoining rental properties located at 1158/1166 rue Dorion and 1891/97 boulevard René-Lévesque Est in Montréal. At the time they were in poor condition and the applicants at once set about renovating them, especially as they were able at that time to take advantage of a $128,000 grant by the city of Montréal as part of a building restoration program.
Further to discussions between the applicants and the respondent held at the time the appeal was heard by the Tax Court of Canada, it was agreed between the parties that some $100,000 represented operating expenses and $41,309 was a capital expense. As to the balance of $174,150 for which the Tax Court of Canada judge held a hearing, he came to the conclusion that this too was a Capital expenditure within the meaning of subsection 18(3.1) of [the] Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"). This is the decision to which the applicants are objecting by the judicial review process.
In this Court they properly contended, and this was admitted by the respondent, that the judge erred in regard to the total cost of expenses incurred to repair the buildings. In fact, he came to a total of $458,648 when the actual amount was $326,648. They maintained that this error by the judge led him to dismiss their argument based on the ordinary capital value of the buildings, that is the value obtained by the technique using the replacement cost of the buildings. According to this argument, the renovation expenses incurred were operating or maintenance expenses as their effect was only to tend to restore the buildings to their ordinary capital value, the value the buildings would have had if they had been properly maintained. Taken to its logical conclusion, this argument by the applicants would make any expense incurred on a building an operating expense so long as the capital value of the building is not thereby increased beyond its ordinary value. The applicants based their argument on the Quebec Court of Appeal's judgment in Deputy Minister of Revenue (Québec) v. Goyer, [1987] R.J.Q. 988, in which Vallerand, J. wrote at page 992:
So long as one is not creating a new capital asset, not increasing the ordinary capital value of the property and not replacing lost property by other property, what is done is repair and maintenance the effect of which is to restore the capital to its ordinary value.
Even assuming, without deciding the point, that the ordinary capital value of a building is a factor which the judge should take into account in determining the nature of an expense incurred, we feel that in the case at bar no prejudice resulted from the fact that the judge failed to do so. Where, as in the instant case, property is bought for a price ($107,000) below its ordinary capital value at the time of the purchase ($263,380 in 1983) and the expenses are necessary because of the condition of the buildings and are incurred to restore them to their ordinary value, we consider that those expenses are capital in nature.
Further, the evidence in the record disclosed that the work done by the applicants considerably exceeded that of maintenance and repair done to preserve a Capital asset, and in fact involved a significant improvement to that asset. Whereas the ordinary capital value of the buildings purchased was $263,380 in 1983, that of the renovated buildings had risen to $437,453 in 1988. The scope of the improvements made can be seen from the 1983 and 1988 valuation reports. Accordingly, there are now poured concrete foundations that did not exist before. Hardwood floors replaced plywood floors. Ceramic tile took the place of vinyl tile and linoleum. A low-amperage, obsolete electrical system (60 amperes) was replaced by a modern and more powerful system (125 amperes). Walls and ceilings were improved by using gypsum plaster board to replace prefit, plaster and plywood.
These are only a few examples of the improvements which led the Tax Court of Canada judge to conclude that the property in question had become new property and that the expenses amounting to $174,150 were capital expenses. In the circumstances, this Court cannot find that this conclusion was arbitrary or unreasonable.
For these reasons, the applications for judicial review should be dismissed.
Appeal dismissed.
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