Stephen Coleman v. Minister of National Revenue, [1984] CTC 2725, 84 DTC 1637

Taylor, TCJ:—This is an appeal heard in Toronto, Ontario on June 18, 1984 against an income tax assessment for the year 1980, in which the Minister of National Revenue had disallowed as deductible expenses in that year certain amounts expended by the taxpayer on a building he had purchased. The taxpayer took the position in his notice of appeal that the property was a rental property from the date of purchase, whereas the Minister considered it such, when it was actually rented for the last two months of the year, and disallowed a portion of the expenses accordingly in some instances, and disallowed others totally, in addition to disallowing certain ones as applicable to “capital”, not “current” expenditures. I note that Mr Coleman in filing his income tax return showed an amount as “acquisition” for that year as $24,283, and I make no attempt to reconcile this figure with his stated cost of $10,000, plus the “capital” additions he did agree to originally (separate from the total of $11,263 charged and deducted as current expenses in the year 1980 — as detailed hereunder:

The Minister did allow as current 1980 expenses a total of $1,744.86, which after considering the $715 rental income resulted in a rental loss of $1,029.86. The issue before the Court eventually became whether the amount of $7,192, (supra,

— Maintenance and Repairs) should be deductible in 1980.

There is no question that the property was a rental property from the date of its acquisition, but that does not assure Mr Coleman of deductibility of any or all expenditures made as applicable to that taxation year. A further note in his notice of appeal reads:

The Income Tax Act has specific clauses and rulings, etc that should be specifically referred to when ruling for or against someone.

The Minister did refer the taxpayer in the reply to notice of appeal to paragraph 18(l)(b) of the Income Tax Act SC 1970-71-72, c 63, as amended — and it must be read together with the “General Limitation” which apply to all items under section 18 as follows:

DEDUCTIONS

Section 18(1)

In computing the income of a taxpayer from a business or property no deduction shall be made in respect of . . . [no]

(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;

In simple terms there are no automatic deductions of any kind, save those specifically provided for in the Act.

While the appellant seems to focus on the fact that the property was not rented for several months (during repairs) as the reason for the disallowance, it is quite clear to me that the main reason is because of the nature of the expenditures disallowed by the Minister. It was common ground between the parties to this dispute that the building at the time of its acquisition by the appellant was in a very deteriorated condition, largely due to the fact that little if any normal repairs and maintenance had been done over a lengthy period of time by the previous owner. It is my perception of the testimony of Mr Coleman that the major portion of the disallowed expenditures arose out of virtual restoration of the roof, the floors and the foundation of the building. It is also my view that those elements of a rental building have a life, extending over a period of more than one year, and it is for that very reason that capital cost allowance (a depreciation charge) is permitted annually as a deduction in arriving at net rental income. Therefore, even if carried out by the vendor prior to sale, the disputed item for the renovation of the roof, the floor and the foundation would have scant opportunity to be classified as “repairs and maintenance” for purposes of income determination, and Mr Coleman would have paid for them in the capital cost of the building. I can only assume that the previous owner had depreciated the fixed asset elements of the property, and now that Mr Coleman has acquired it, and put these back into reasonable condition, he must commence again some depreciation charge process. It is for that reason that the Minister’s assessment must be upheld — the nature of the expenditures is not that of normal wear and tear on a building as a result of tenant occupancy in any one year. The expenditures are the result of depreciation and deterioration of the building in the course of time. I accept that perhaps they might have been delayed, had even normal repairs and maintenance been carried out, but that does not affect the decision in this matter.

The nature and extent of the expenditures themselves, where seen in the context of a $10,000 property acquisition, require that they be classified as on capital account. The appeal is dismissed.

Appeal dismissed.