Chambers v. R., [1998] 1 CTC 3273

Brulé T.C.J.:

These two appeals were heard on common evidence and involve the disallowance by the Minister of National Revenue (the “Minister”) of certain items claimed by the Appellants as income deductions. All of them were made in repairing a rundown rental building and were claimed in the 1992 and 1993 taxation years. In dispute were amounts of $10,866.46 in 1992 and $1,681.00 in 1993 for each Appellant.

Issue

The sole issue is whether the total expenses disallowed by the Minister were deductible rental expenses within the provisions of the Income Tax Act (the “Act”) for the 1992 and 1993 taxation years.

Facts

The property involved is located in Chatham, Ontario, whereas the coowners, i.e. the Appellants, lived in Brampton, Ontario and this was their only rental property. The three main items of contention were: 1) repairs and maintenance; 2) telephone charges, and 3) travel expenses between Brampton and Chatham.

The Minister assessed the Appellants saying that the expenses sought to be deducted for repairs and maintenance were capital in nature and had to be treated as such. The deductions for telephone and travel were personal or living expenses of the Appellants and therefore not deductible expenses in accordance with paragraph 18(1 )(/i) of the Act.

Analysis

The Courts on considering this problem over the years have come on different occasions to different conclusions.

The Appellants dealt with the Ontario Mortgage Corporation successfully to obtain funds for the restoration of the property. This loan was for an interest free second mortgage, the interest waived by the Minister because the loan was for the purpose of producing income to the Appellants.

In argument the Agent for the Appellants referred to Interpretation Bulletin IT-128R. While the Court is aware that such bulletins do not reflect the law in its entirety, under the heading “Capital Expenditures on Depreciable Property versus Current Expenditures on Repairs and Maintenance”, we find:

The following guidelines may be used in determining whether an expenditure is capital in nature because depreciable property was acquired or improved, or whether it is currently deductible because it is in respect of the maintenance or repair of a property:

(b) Maintenance or Betterment — Where an expenditure made in respect of a property serves only to restore it to its original condition, that fact is one indication that the expenditure is of a current nature. This is often the case where a floor or a roof is replaced. Where, however, the result of the expenditure is to materially improve the property beyond its original condition, such as when a new floor or a new roof clearly is of better quality and greater durability than the replaced one, then the expenditure is regarded as capital in nature. Whether or not the market value of the property is increased as a result of the expenditure is not a major factor in reaching a decision. In the event that the expenditure includes both current and capital elements and these can be identified, an appropriate allocation of the expenditure is necessary. Where only a minor part of the expenditure is of a capital nature, the Department is prepared to treat the whole as being of a current nature.

(c) Integral Part or Separate Asset — Another point that may have to be considered is whether the expenditure is to repair a part of a property or whether it is to acquire a property that is itself a separate asset. In the former case the expenditure is likely to be a current expense and in the latter case it is likely to be a capital outlay. For example, the cost of replacing the rudder or propellor of a ship is regarded as a current expense because it is an integral part of the ship and there is no betterment; but the cost of replacing a lathe in a factory is regarded as a capital expenditure because the lathe is not an integral part of the factory but is a separate marketable asset. Between such clear-cut cases there are others where a replaced item may be an essential part of a whole property yet not an integral part of it. Where this is so, other factors such as relative values must be taken into account.

The Agent also referred the Court to the case of Gold Bar Developments Ltd. v. R. (1987), 87 D.T.C. 5152 (Fed. T.D.), wherein the purpose of the repair was considered and because it represented only part of the value of the asset the Court held the cost of repairs was a current expense.

Counsel for the Respondent referred several cases to the Court including Better Plumbing Ltd. v. Minister of National Revenue (1952), 52 D.T.C. 146 (Can. Tax App. Bd.). Here the Court considered the assets to be of a capital nature as such were to last for a long time in this rented building, not a residential premise.

The case of Minister of National Revenue v. Haddon Hall Realty Inc. (1962), 62 D.T.C. 1001 (S.C.C.), set out as follows:

...Among the tests which may be used in order to determine whether an expenditure is an income expense or a capital outlay, it has been held that an expenditure made once and for all with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade is of a capital nature.

Expenditures to replace capital assets which have become worn out or obsolete are something quite different from those ordinary annual expenditures for repairs which fall naturally into the category of income disbursements...

The Court said at page 1002 that expenditures for replacing refrigerators, stoves and blinds were clearly capital outlays.

In Boyd Building Ltd. v. Minister of National Revenue (1954), 54 D.T.C. 271 (Can. Tax App. Bd.), it was held that repairs in the nature of replacements which do appreciably prolong the life of the property and arrest deterioration should be classed as capital expenditures. Here there was an office building involved and the Court found that all repairs were of a capital nature.

In addition to the above, reference was made to the following: Coleman v. Minister of National Revenue (1984), 84 D.T.C. 1637 (T.C.C.); Wager v. Minister of National Revenue (1985), 85 D.T.C. 222 (T.C.C.); Méthé v. Minister of National Revenue (1986), 86 D.T.C. 1360 (Eng.) (T.C.C.).

It would seem that if the repairs resulted in virtually the same old building as before the repairs were undertaken then such should be properly expensed, but if on finishing the repairs a virtually new building or at least quite a different building results then the repairs should be on capital account.

One criteria to make such a determination apart from the appearance inside and out of the structure and whether or not the place had to be vacated before repairs were undertaken is the dollar amount of the repairs in relation to the value of the asset. Here these were not extraordinarily large in relation to the building. The items for travel and telephone are to be allowed. There is no way that the Appellants had any personal interest in these. All were incurred to put the property in rental condition.

The result, that apart from any refrigerators, stoves or window blinds forming part of the repairs, is that the appeal is allowed. The other items mentioned in this paragraph must be considered as capital expense. The matters are to be returned to the Minister for reconsideration and reassessment.

Appeal allowed in part.