The New Anchor Hotel Lid v. Minister of National Revenue, [1976] CTC 2428, 76 DTC 1325

The Assistant Chairman:—The issue in this appeal is whether the expenditures the appellant made of $500 in 1971 and $18,751.70 in 1972 were within the ambit of paragraph 12(1 )(a) of the Income Tax Act before tax reform for the 1971 taxation year and paragraph 18(1)(a) of the Income Tax Act after tax reform for the 1972 taxation year, or were they within the ambit of paragraphs 12(1)(b) and 18(1)(b) of the said Acts respectively. The appellant took the position that they were within the ambit of paragraphs 12(1)(a) and 18(1 )(a) respectively and so were deductible in each year in determining its profit from its business. The respondent however was of the view that both items were within the ambit of paragraphs 12(1)(b) and 18(1)(b) respectively and disallowed the appellant’s claim in each year, but did allow the appellant additional capital cost allowance on the outlays.

The appellant, The New Anchor Hotel Ltd, is a limited company which purchased a hotel business in Vernon, British Columbia, known as The Kalamalka Hotel on or about January 1, 1959. The appellant operated the hotel until it sold the premises and business on September 30, 1972. According to Mr Carr, who was one of two equal shareholders in the appellant company, the building of the hotel was Started in 1892 and it was finished in 1895. The hotel consisted of a basement, the main or ground floor, two upper floors and an attic. On the main floor there was a beer parlour, a lobby, a hotel office, 7 guest rooms, two stores and a barber Shop. The barber shop and two Stores were rented to tenants. On each of the second and third floors there were 21 guest rooms. There were 3 guest rooms in the attic which were used in rush periods but they were last used in 1968. When the building was purchased there was one large furnace and boiler in the basement, which boiler had a capacity of about 200 gallons. In the 1960’s three small furnaces, each with a boiler capacity of about gallons, were installed in the basement near the large furnace. The new units were in good condition in 1972. These furnaces were used solely to heat the premises. There had been complaints about the heat and the three furnaces were put in so that there would be more even heat throughout the rooms and offices. The hot water from the furnaces went through pipes to a a radiator in each room. The pipes were in the walls of the buildings and were 40 to 50 years old.

Trouble had been experienced with the heating and, in the winter of 1970-71, two pipes connected to the big boiler leaked and had to be replaced by two 4-inch pipes. There was fear that if the furnaces failed the pipes would freeze and the hotel would have to close. In 1971 Mr Carr got in touch with a heating expert, Mr Slater, to obtain his advice and suggestions as to how the company could overcome its heating problems. Mr Slater prepared the appropriate plans and gave a price list of the materials needed to do the job he recommended. Copper piping was to be used which was expected to be good for 30 or 40 years and Mr Slater guaranteed there would be no trouble in the future. The work recommended by Mr Slater started in April of 1972 and was finished by July of the same year. The old big boiler and furnace were removed and replaced by three new small furnaces which were about the same size as the other small ones then in the building. All the furnaces were then connected to one pump. The old piping, running from the furnace which was removed, was cut off and left in the walls undisturbed. New piping was installed which ran to the lobby, one store, and the rooms on the two upper floors, but there was nothing new in the attic, barber shop, beer parlour and one store. The new piping in the building was put on each floor on the outer surface of the wall and boxed in. In each of the rooms on the two upper floors, the old radiators were removed and discarded and baseboard radiation was put in each room connected to the new horizontal pipes. Mr Carr estimated that the radiation units cost about 25% of the total amount expended in 1972. The replacements which were made were undertaken as it was only known that the heating was not satisfactory; no one knew what part or portion of the old piping, if any, was good. The cost of heating with the new units was less than with the old system.

In the circumstances above outlined: Were the expenditures by the appellant repairs or were they the purchase of a capital asset? There is no doubt that there was no increase in assets to the appellant: it had furnaces and a heating plant before the renovation and it had the same things after the renovation, even though they presumably operated more efficiently and more economically. No evidence was given as to the general condition of the building but it would seem reasonable to conclude that the two shareholders of the appellant were of the view that the building, even though then about 75 years old, would still last another 30 or 40 years as that was the period of time the new furnaces and piping were to last. The appellant contended that there was not a replacement of the heating system of the hotel building, just a partial replacement. There is not a new asset, just one furnace substituted for another, which new furnace in fact does not heat as great an area as that heated by the old furnace as the attic is not heated. It was a practical, economic decision as the old system was just about worn out.

The appellant submitted that the work done was not done with a view to increasing the value of the asset for the purpose of resale. Counsel for the respondent stated he was not contending such was the case.

The respondent contended that in 1972 the appellant replaced all the heating facilities which at that time needed to be replaced in the hotel, and that constituted about half of that equipment. The balance was not replaced as it had been installed in the 1960’s and it was, in 1972, in good condition. A new system entirely was installed on the second and third floors and the equipment installed was much more modern than that which it replaced and, in addition, operated more efficiently. Counsel suggested the appellant received an enduring benefit as it was expected the life of the heating equipment installed was 30 to 40 years. Attention was also directed to the undepreciated capital cost of the building as at December 31, 1971, which was $138,113. The expenditure in 1972 was about 14% of the undepreciated capital cost.

Each counsel referred to some cases relating to the issue of a capital or repair expenditure. Counsel for the appellant cited the cases of Sara Lev inter v MNR, 5 Tax ABC 75; 51 DTC 359; Oakdale Court Limited v MNR, 10 Tax ABC 326; 54. DTC 229; and Horace D Rosenberg v MNR, 27 Tax ABC 348; 61 DTC 546. The first above-mentioned case was referred to not only as to the content of the case itself, but also because of the cases referred to in it by Mr Fisher. It is to be noted in the three cases cited, the quantum of the expenditure in dispute in so far as heating was concerned was considerably less in amount than that involved in the instant case. In addition, in holding that the expenditure with respect to heating in the Levinter case was a capital expenditure, Mr Fisher, at page 78 [361], stated:

As to the item of $4,023.11 in regard to heating and plumbing, the evidence indicated that the heating system installed in the building did not heat it properly, with the result that a larger heating unit was installed and additional plumbing was fitted in the building. I was not satisfied that the evidence in connection with these items proved that they were in the nature of repairs, and I am of the opinion that they should be treated as a capital expenditure.

While in the present case a larger heating unit was not installed, the installation took place because . the heating system installed in the building did not heat it properly . . .”. In the Oakdale case it is noted that “no radiators were changed or replaced,” while in the present appeal about 25% of the total expenditure was for radiation units. In the Rosenberg case, Mr Boisvert, at page 350 [547], refers to a portion of the reasons of Graham, J in the case of Hyman Weller v MNR, 2 Tax ABC 188 at 189; 4 DTC 303 at 304, as follows:

. . . it is well accepted that incidental repairs which neither materially add to the value of the property nor appreciably prolong its life, but which merely keep it in an ordinary, efficient operating condition, should be deducted as an expense item.

While Mr Carr suggested the expenditures with respect to the heating system did not materially add to the value of the property, it did however prolong its life as the hotel would have had to close if the furnaces broke down and the pipes froze. After the work was done it was expected to last for 30 or 40 years. It would appear that its life was prolonged. The cases referred to by counsel for the respondent included David-Aurèle Payeur v MNR, 22 Tax ABC 193; 59 DTC 344; No 709 v MNR, 24 Tax ABC 223; 60 DTC 318; Lalonde Automobile Ltée v MNR, 22 Tax ABC 11 ; 59 DTC 227; and of course MNR v Haddon Hall Realty, Inc, [1962] SCR 109; [1961] CTC 509; 62 DTC 1001, a decision of the Supreme Court of Canada. Reference was made to only one paragraph of the reasons of the Supreme Court, as that paragraph indicated the principle on which to approach the problem, the facts, and the amount in issue. That paragraph at page 111 [511, 1002] reads as follows:

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. Applying the test to which I have referred to the facts of the present case, the expenditures totalling $11,675.95, made by respondent in the year 1955 for replacing refrigerators, stoves and blinds in its appartment building were, in my opinion, clearly capital outlays within the provisions of Section 12(1)(b) of the Act.

The result is that I am of the opinion the expenditures in question were capital expenses and so not deductible in computing the appellant’s income in the 1971 or 1972 taxation years, and consequently I dismiss the appeal.

Appeal dismissed.