Tremblay T.C.J.:
Point at issue
1 The question is whether, in computing his net income for the 1992 and 1994 taxation years, the taxpayer was correct in claiming that the undepreciated capital cost (UCC) of a building located on Rue St-Jean in Québec was $53,488, not $32,481 as the respondent maintained. The appellant apparently purchased the building in 1982 for $50,504. The appellant contended that the respondent did not take into account improvements made in 1982 and 1983.
2 The appellant, who is a lawyer, also claimed clothing costs of $1,000 in 1992 and $2,000 in 1994. The Court Rules require obligatory and specific clothing for him for the pursuit of his occupation.
3 According to the respondent, the appellant knew that he could not claim the clothing expenses. He had made a false statement: a penalty of $217.13 was imposed pursuant to s. 163(2) of the Income Tax Act (“the Act”).
The respondent further submitted that the appellant had not purchased the building in 1982 for $40,042. She said the appellant had not established improvements supporting the alleged UCC of $81,538.
Burden of proof
4 The appellant has the burden of showing that the respondent's assessments are wrong. This burden of proof results from several judicial decisions, including a judgment of the Supreme Court of Canada in Johnston v. Minister of National Revenue.
5 In the same judgment the Court held that the facts presumed by the respondent in support of the assessments or reassessments are also assumed to be true until proven otherwise. The facts assumed by the respondent in the instant case are set out in subparagraphs (a) to (g) of Paragraph 6 of the Reply to the Notice of Appeal. That paragraph reads as follows:
[TRANSLATION]
6. In making the reassessments of January 4, 1996 for the 1992 and 1994 taxation years the Minister took into account, in particular, the following facts:(a) the appellant was co-owner of a rental building located at 260-280 Rue St-Jean in Québec;[admitted]
(b) when the building was purchased in 1982 its cost was set at $40,042; [denied]
(c) the appellant was unable to establish improvements made to the building and supporting the alleged UCC of $81,538 at 1/1/92; [denied]
(d) the clothing expenses of $1,000 and $2,000 which the appellant claimed for the 1992 and 1994 taxation years respectively were personal expenses;[denied]
(e) the appellant knew that the expenses for his clothing in 1994 were not deductible;[denied]
(f) in reporting clothing expenses of $2,000 for the 1994 taxation year the appellant knowingly or in circumstances amounting to gross negligence made or participated in, assented to or acquiesced in the making of a false statement or omission in the income tax return filed for the 1994 taxation year, such that the tax he would have been required to pay according to the information provided in the tax return filed for that year was less than the amount payable for that year; [denied]
(g) as the result of a claim by the appellant of a deduction from his income for clothing expenses of $2,000, the Minister in a Notice of Reassessment dated January 4, 1996 imposed a penalty of $217.13 on the appellant for the 1994 taxation year pursuant to s. 163(2) of the Income Tax Act (“the Act”). [denied]
Facts in evidence
6 Following the foregoing admissions [ sic] further evidence was provided by the testimony of the appellant, of Jean-Pierre Fiset, an accounting technician, and of Marc Fournier, an auditor with Revenue Canada, and by the filing of the following Exhibits A-1 to A-8:
A-1 Depreciation schedule on building at issue from 1985 to 1992 and income and expenditure statements;
A-2 Depreciation schedule on building at issue from 1982 to 1996;
A-3 Article concerning building at issue, built in 1897;
A-4 Valuation of building at August 14, 1997 = $245,000;
A-5 Promise to purchase made on September 8, 1981 between Léonce Bruneau and Bernard Luc Charron;
A-6 Judgment of the Superior Court, District of Québec, No. 200-05-003857-815, on November 13, 1981 awarding Léonce Bruneau, plaintiff, possession of the building at issue as against Claude and Diane Bechade, defendants, for non-payment of late payments following 60-day notice duly registered and served on the defendants;
A-7 Contract to purchase the building at issue on February 12, 1982 between Bernard Luc Charron, buyer, and Léonce Bruneau, seller, for $50,503.93;
A-8 Two financing applications by Bernard Luc Charron for loans of $10,000 from the Caisse populaire, Caisse d'économie Desjardins, dated 29/06/90 and 20/08/90; the loans were approved on 12/07/90 and 28/08/90.
7 The appellant bought the building in February 1982 for $50,503.93 (Exhibit A-7) from Léonce Bruneau, who wanted to dispose of the building. He had sold it to the Bechades who had defaulted on their payments. At that time the bank interest was over 20 percent. Following the judgment of November 13, 1981 (Exhibit A-6), Mr. Bruneau fulfilled his promise of September 8, 1981 (Exhibit A-5) and sold the building to the appellant.
8 As the building had been built in 1897 and the appellant wished to make it a source of income (“his pension fund”, as he said) he invested $23,593 in improvements following the purchase. This figure was obtained from the Quebec Ministère du Revenu by the accounting technician Jean-Pierre Fiset. This amount, added to the purchase price, gave a UCC of $74,097 (Exhibit A-2). The depreciation was calculated on this basis for the following years.
9 In 1990 the appellant said he made renovations amounting to $22,728.97. However, this expense is not shown on Exhibit A-2. The UCC then came to $63,101 and the annual depreciation at 5 percent continued to be recorded every year until 1996, ending with a UCC of $47,336.
10 The appellant was not familiar with all the exhibits in detail but explained the nature of the repairs. They involved the basement, which was converted into apartments, restoring the iron staircase at the back and also installing electrical outlets for washers and dryers. Two loans of $10,000 each (Exhibit A-8) were obtained from the Caisse populaire.
11 The photos in the valuation report prepared by the firm of Drouin, DesRochers & Associés (Exhibit A-4) clearly show the stairways and walkways.
12 In subparagraph 6(c) of her Reply to the Notice of Appeal the respondent seems to say that the appellant had claimed depreciation for expenses of $22,728.97 in 1990:
[TRANSLATION]
13 It therefore seems quite clear that the appellant regarded the expense of $22,728.97 as an improvement. At first glance, if the appellant had claimed it as an expense it would have been disallowed by the respondent. Also, Exhibit A-1, consisting of 10 pages, showed in the 1990 income statement an expense for “renovation of $22,728.07”.
14 Though it is recorded as “renovation of 260 St-Jean”, this expense is deducted as a current expenditure, bringing the total expenditures to $58,436.11. This amount, deducted from income of $39,920, leaves a loss before depreciation of $18,516.11. No depreciation was claimed at that time. In 1991 the pre-depreciation profit was $8,932.43, from which furniture depreciation of $84.60 and depreciation on the building of $4,291.50 were deducted, leaving a net income.
On page 1 of Exhibit A-1 the following may be seen:
[TRANSLATION]
Income schedule Quebec to 31-12-1988.
| at 31-12-1988 | 63,101.00 | | |
| 260 renovations | +22,728.97 | in 1990 | |
| $85,829.97 | at 31-12-90 | | |
| Five percent depreciation 91 | - 4,291.50 | | |
| $81,538.47 | at 31-12-91 | | |
15 In his testimony the accounting technician, Jean-Pierre Fiset, answered the question of whether the $22,728.97 expenditure in 1990 had been deducted as a current expenditure by saying “You would have to look at the financial statements”. He himself filed Exhibit A-1 containing 10 pages, page 7 of which showed the 1990 income and expenditure statement with renovations of $22,728 taken as current expenditures.
16 In the Court's view, it is quite clear that this amount could not be deducted as a current expenditure. However, it was probably accepted as such by the respondent, no doubt by mistake, and the appellant benefited from this in 1990. Part of the loss of $18,516 was probably applied against his professional income. As the appellant had a partner in ownership of the building, the following can be seen in the financial statement:
[TRANSLATION]
| DISTRIBUTION TO CO-OWNERS | |
| BERNARD CHARRON | 66.66% | ($12,344.07) |
| JEAN PROVENCHER | 33.33% | ($ 6,172.04) |
| TOTAL | ($18,516.11) | |
The appellant now cannot claim the benefit of a higher UCC in 1994 as if the renovation expense had been used to increase the UCC in 1990.17 Although the Court is surprised at the respondent's mistake, it is no less surprised at the appellant's mistake.
The Court therefore cannot take the 1990 loss into account. However, it retains as part of the UCC the sum of $23,593 invested at the time the building was purchased (para. 8).
18 As regards the cost of court clothing claimed by the appellant, the evidence showed that the Rules of Practice of the Court of Quebec (section 12), the Superior Court (section 36) and the Court of Appeal (section 32) are clear.
In order to appear in Court counsel must wear appropriate clothing, as set out in the following sections:
Court of Quebec
12. In cases contested on the merits, no advocate shall address the Court unless wearing either:a) black gown, black jacket and dark trousers with white shirt, collar and bands;
b) black gown and dark suit with white shirt and plain dark tie.
Superior Court
30. In matters contested on the merits no member of the Bar shall address the Court unless wearing either a black gown, long-sleeved black vest and dark trousers with white shirt, collar and bands or a black gown, closed in front, with raised neck opening, long sleeves and white bands.
In lieu of the foregoing, a woman advocate may wear a black gown and white bands with black long-sleeved dress or a dark skirt or trousers and a white long-sleeved blouse.
Court of Appeal
32. At hearings before the Court, the following dress is obligatory:a) For attorneys, black gown, bands, white collar, with dark suit and white shirt for men, and dark long-sleeved garment for women...
The wearing of appropriate clothing is thus mandatory for counsel to be “heard” in courts and so to represent clients.
19 Counsel for the respondent admitted that the penalty claimed may have no basis in the circumstances but argued that clothing is not deductible under the Income Tax Regulations (“the Regulations”).
20 There is in s. 1100 of the Regulations the “catch-all” clause contained in Class 8 with a deduction (20 percent) allowed for the cost of a “tangible capital property” [immobilisations matérielles] not listed but used in connection with income-producing property.
There is no definition of “tangible capital property” in the Regulations but in Quebec and Canadian law “capitalizing” [immobilisations] means, according to Hubert Reid,the following:
[TRANSLATION]
Assigning certain legal characteristics of immovable property to movables: e.g. the capitalizing of money accruing to a minor from immovable property sold during his minority.
21 In Quebec law, forks in a restaurant, a hammer in a carpentry shop, trains on railways are immovables by destination, that is, they are made immovables within the meaning of “tangible capital property”. Court clothing could undoubtedly be included with forks and trains since they are used to earn income, just as much as a secretary's typewriter.
22 As counsel for the respondent did not know any specific court decision on the point, the appellant referred to N. v. Minister of National Revenue.The case concerned a professional musician who was claiming among other things the cost of his clothing used to appear on stage. The Tax Appeal Board said the following:
[Outlay for Clothing a Capital Expenditure]
While I have no doubt that it is necessary for the appellant to dress in conformity with the custom of his profession, nevertheless the outlay for such clothing and accessories is a capital expenditure and not one that is deductible under the provisions of the Act. He is in somewhat the same position as a barrister purchasing his robe and it is well settled that such an expenditure is of a capital nature - Income Tax Case No. 625 (1946) 14 S.A.T.C.; 528 Gordon's Digest of Income Tax Cases 1945-47 p. 163.
23 As this was a capital expenditure, the Court allows depreciation of 20 percent under the “catch-all” clause in Class 8 of s. 1100 of the Regulations.
Conclusion
24 The appeal is allowed with costs on the basis that the sum of $23,593 should be considered in computing the UCC. As to court clothing, the appeal is allowed pursuant to clause 8 of Regulation 1100.
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