Citation: 2011 TCC 246
Date: 20110506
Docket: 2010-2528(IT)I
BETWEEN:
OUMAR MBÉNAR,
Appellant,
and
HER MAJESTY THE QUEEN,
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Favreau, J.
[1]
These are appeals under
the informal procedure from reassessments dated November 10, 2008, made
under the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), as amended, in
respect of the 2004, 2005 and 2006 taxation years.
[2]
The issue is whether
the Minister of National Revenue (the Minister) was justified in considering as
capital expenditures the amounts of $53,821 for 2004, $41,885 for 2005 and
$85,952 for 2006, which the appellant claimed as rental expenses.
[3]
The reassessments made
on November 10, 2008 made the following corrections:
|
|
2004
|
2005
|
2006
|
|
Reported rental losses
|
($45,418)
|
($38,239)
|
($74,091)
|
|
Disallowed maintenance and repair expenses
|
$44,899
|
$41,885
|
$85,952
|
|
Disallowed professional fee expenses
|
$8,922
|
–
|
–
|
|
Allowed capital cost allowance
|
$3,809
|
$3,646
|
$11,717
|
|
Revised rental income
|
$4,594
|
$0
|
$145
|
[4]
In making and confirming
the reassessments, the Minister based himself on the following findings and
assumptions of fact, stated in paragraph 6 of the Reply to the Notice of
Appeal:
[Translation]
(a)
The appellant is the sole owner of two rental
buildings located at 2219, 2221 and 2225 Bardy Avenue and at 669 4th Avenue, in
the Limoilou area of Québec; (admitted)
(b)
The dispute concerns only the building at the
corner of Bardy Avenue and La Fontaine Street, purchased by the appellant on
November 29, 2002, for $98,500; (admitted)
(c)
The building was built in 1953 and is made up of
4 units; (admitted)
(d)
There was no personal use of the building; (admitted)
(e)
The gross rental income attributable to the
building was $22,261 for 2004, $22,085 for 2005 and $25,860 for 2006; (admitted
for 2005 and 2006)
(f)
At the time of its purchase, the building had
some major problems including an obsolete electrical system; large cracks,
which made it impossible to insulate rooms and caused humidity in the building;
defective sound‑proofing; railings that did not meet safety standards;
and outdated windows and doors, which were not air-tight and allowed energy
loss; (denied)
(g)
The building was to be completely rehabilitated
between September 2004 and November 2005. The main repairs done are
as follows:
·
The cracks in the foundation were repaired;
·
The vehicle parking was redone;
·
The front entrance of 2221 Bardy Avenue was
demolished and rebuilt;
·
The electrical wiring and plumbing were
completely redone;
·
The existing heating system was removed;
·
A new service room was built, including new
electrical input and new water supply;
·
The roof and the exterior wall stonework were
repaired;
·
Existing doors and windows were replaced;
·
Exterior balconies were repaired;
·
The interior was redesigned;
·
The damage done to the existing building
resulting from repairing cracks and mechanical and electrical work was also
repaired.
(admitted)
(h)
During the renovations, the unit at 2221 Bardy
Avenue was unoccupied for a period of two months between the end of September
and beginning of November 2004. The units at 2225 Bardy Avenue and 1960 La
Fontaine remained unoccupied for the entire renovation period. (denied)
Only the occupant of 2219, whose unit needed less significant
repairs, remained in the unit throughout the entire renovation period; (admitted)
(i)
The cost of the renovations was 1.75 times higher
than the purchase price for the building; (no knowledge)
(j)
The amounts of $44,899 for 2004, $41,885 for
2005, and $85,952 for 2006 claimed by the appellant under the "maintenance
and repairs" item were disallowed because they were capital expenditures;
(admitted)
(k)
The consulting engineer's, architect's and
notary's fees concerning the loan for renovations, totalling $8,922 for 2004,
were also considered to be capital expenditures; (admitted)
(l)
The auditor also reconciled the amortization
schedule for each building and granted the following deductions to the
appellant as capital cost allowance: (admitted)
|
|
2004
|
2005
|
2006
|
|
2219-2225 Bardy
|
$3,809
|
$2,543
|
$9,556
|
|
669 4th Avenue
|
$0
|
$1,103
|
$2,161
|
|
Total
|
$3,809
|
$3,646
|
$11,717
|
[5]
Paragraph 6(f) of the
Reply to the Notice of Appeal was denied because the problems with the building
were noticed not when it was purchased but rather within the year following the
purchase. Paragraph 6(h) of the Reply to the Notice of Appeal was denied
because the address of the unit mentioned in the first line was wrong: it was actually
2221 Bardy Avenue. In addition, the unit in question was unoccupied for
45 days, not two months. The second sentence of paragraph 6(h) was denied
because those two units remained unoccupied not because of the renovations but
because the tenant of 1960 La Fontaine provided a notice of resiliation of the
lease on October 12, 2004, and the tenant of 2225 Bardy Avenue was evicted on
November 15, 2004, for failure to pay rent.
[6]
The appellant testified
at the hearing. He confirmed that he had purchased the building without a legal
guarantee and without an inspection other than a cursory one by the real estate
agent. He said that he had spoken to tenants who had allegedly told him that
the building was fine. He paid $98,500 for the building although the municipal
assessment was $101,000. At the time of purchase, the building was completely
rented out. He also confirmed that the renovations were done between September 2004
and June 2005, that is, almost 2 years after the building had been purchased.
[7]
The appellant indicated
that he had put out a call for tenders and that the selected bidder was supposed
to do the work for $110,000. The appellant had to pay an additional $45,000
because of problems with the foundation. The same contractor did all of the
work without changing the building’s structure or living space.
[8]
The building in
question, which had been built in 1953, was in an advanced state of disrepair
and unsafe for tenants because of fire hazards. The expert's report on the
mechanical and electrical components by the engineering firm Genium dated
October 20, 2003 (Exhibit 1-2), recommended, among other things, to completely
replace the existing electrical system, replace the oil furnace and oil water
heater and rehabilitate the electrical input. There were also humidity and
mould problems in the building because the doors and windows were often steamed
up. In addition, there were rodents in the building.
[9]
After the renovations,
the municipal assessment for the building increased to $140,000 for the 2006 taxation
year.
Analysis
[10]
The issue is whether
the expenditures made by the appellant for the renovations were current or
capital in nature. There are no precise criteria for determining whether an
expenditure is current or capital in nature. The issue must be examined based
on the facts, the specific circumstances of the taxpayer and the nature of the
expenditures.
[11]
In Johns-Manville
Can. Inc. v. The Queen, [1985] 2 S.C.R. 46, Justice Estey of the Supreme
Court of Canada quoted the following excerpt from British Insulated and
Helsby Cables v. Atherton, [1926] A.C. 205, page 213:
. . . where an expenditure is made, not only once and for
all, but with a view to bringing into existence an asset or an advantage for
the enduring benefit of a trade, I think that there is a very good reason (in
the absence of special circumstances leading to an opposite conclusion) for
treating such an expenditure as properly attributable not to revenue but to
capital.
[12]
Based on the evidence,
the expenditures that were deducted by the appellant were related to major
renovations done in all parts of the building, inside and outside: foundation,
insulation, roof, windows and doors, electrical, heating system, plumbing,
parking lot, etc. In fact, it was a complete rehabilitation of a building that
was in total disrepair and dangerous for the tenants.
[13]
The expenditures in
question were significant, close to $175,000 in total, in comparison with the
purchase price of the building, which was $98,500, that is, 1.75 times higher
than the acquisition cost. Such expenditures cannot in any way be considered as
being for minor repairs or regular maintenance. Those expenditures were made in
order to provide a lasting benefit for the property so that the units can be
rented out safely.
Conclusion
[14]
For these reasons, I
find that the reassessments made by the Minister according to which the
expenditures made by the appellant were capital expenditures, were well founded
in fact and in law.
[15]
The appeals are
therefore dismissed.
Signed at Ottawa, Canada, this 6th day of May 2011.
“Réal Favreau”
on this 23rd day
of June 2011
Margarita
Gorbounova, Translator
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