Lamarre Proulx T.C.J.:
1 The appellant is appealing from reassessments by the Minister of National Revenue (“the Minister”) for 1992 to 1995 inclusive.
2 The issue is whether repair expenses incurred by the appellant for a building are on current or capital account.
3 The facts on which the Minister relied in making his reassessments are described in Paragraph 4 of the Reply to the Notice of Appeal and are as follows:
[TRANSLATION](a) the appellant is the owner of a rental building located at 471 and 473 Ste-Madeleine, Montréal, Quebec;
(b) the appellant lives at 473 Ste-Madeleine, Montréal, Quebec;
(c) during the taxation years at issue the rental part of this building was not available for rental because of renovations to be made;
(d) the appellant incurred expenses in order to extend the useful life of his property;
(e) the appellant regarded the expenses as not ordinary annual expenses but instead as expenses for the replacement of capital items which had deteriorated and become obsolete, among other reasons because of damage caused by a fire;
(f) the large amount of the expenses made them capital expenses;
(g) the resale value of the property was improved;
- (h) the Minister accordingly:
(i) disallowed the deduction by the appellant of rental losses of $12,196, $16,135, $6,377 and $5,118 for the taxation years 1992, 1993, 1994 and 1995 respectively; and
(ii) capitalized all the expenses of $12,196, $16,135, $6,377 and $5,118 for the taxation years 1992, 1993, 1994 and 1995 respectively.
4 The appellant admitted subparagraphs 4(a) to (c) of the Reply.
5 In his testimony the appellant explained to the Court that he became the owner of a rental building located at 471 and 473 Ste-Madeleine Street, Montréal, in 1990. The appellant occupied the apartment at 473. He intended to rent the one at 471. According to his testimony, he had even found a possible tenant at a rental of $300 a month. He was unable to rent the apartment because of the extent of renovation work needed.
6 The former owner had occupied the premises at 471 until the end of July 1991, the date on which the appellant began work. He first obtained a renovation permit. Once he had started, he realized that the house had concealed defects. The former owner had made repairs after a fire in 1971, contrary to municipal by-laws, without changing the beams, part of which had been burned and were dangerous. The appellant therefore obtained a demolition and construction permit. He did the work himself and it is still not completed. The apartment has not yet been rented. The appellant attributed the delay in the work to a lack of financing.
7 In 1991, the appellant claimed $3,326.40 in rental expenses and these were allowed as reported. In 1992 the appellant claimed $12,196.50, in 1993, $16,135.24, in 1993 [ sic], $6,378.59 and in 1995, $5,118.40. These amounts, claimed as the expenses of operating a rental business, were first allowed and then disallowed by reassessments. The Minister added them to the capital cost of the rental property.
8 The appellant pleaded the enormous amount of work he had done on restoring the premises, the financial problems he had encountered and the dangerous economic situation in which dismissal of his appeal would put him, obliging him to repay money which he no longer had. The Court does not doubt that he put in a great deal of effort and that the payment of taxes owed for the years at issue might be a burden on his finances. However, as a tax court it must be guided chiefly by tax law in making its decisions. Here, in order to apply the tax legislation the Court has to determine the nature of the expenses incurred by the taxpayer in restoring the rental property.
9 Counsel for the respondent referred to the judgment of the Supreme Court of Canada in Johns-Manville Canada Inc. v. R., [1985] 2 S.C.R. 46 (S.C.C.), in which there was a lengthy review of court decisions on the characterization of expenses as to whether they were on current or capital account. She also referred to a decision of this Court in Fiore v. R., [1992] T.C.J. No. 360[(1992), [1993] 1 C.T.C. 2289 (T.C.C.), affirmed by the Federal Court of Appeal, [1993] F.C.J. No. 249 [[1993] 2 C.T.C. 68 (Fed. C.A.)].
10 I also wish to refer to the Federal Court of Appeal judgment in Canadian Reynolds Metals Co. - Société Canadienne de Métaux Reynolds Ltée v. R. (1996), 96 D.T.C. 6312 (Fed. C.A.), in which Décary J.A. for the Court indicated that in the case of expenses to repair or renovate property the purpose of the expense must be considered. He made the comment that the characterization of these expenses has been complicated by a trend in case law to focus on the physical nature of the repair rather than on the benefit conferred to the business. If the purpose of the expense is to confer a lasting benefit to the business, unless there are special circumstances leading to a different conclusion, there is no reason to conclude that it is not a capital account expense.
11 The expenses at issue in the instant appeal are obviously not related to production. They are in fact related to the process of generating income. The expenses claimed were for reconstruction of the house, not its maintenance. They were thus not in the nature of operating expenses but of expenses on capital account, and could not be deducted in calculating income because s. 18(1)(b) of the Act does not allow them to be deducted. That section reads as follows:
18.(1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of(b) 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;
12 I therefore conclude that the Minister correctly assessed the appellant in fact and in law by not including the repair expenses claimed in calculating income for the years at issue, because the repairs were not usual repairs on a property in rental condition but repairs to make the property rentable, the purpose of which was to confer a lasting benefit on the property.
13 The appeal is accordingly dismissed.
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