Citation: 2008TCC618
Date: 20081113
Docket: 2008-1964(IT)I
BETWEEN:
ROGER S. LEWIN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Webb J.
[1]
The issue in this appeal is
whether the amount incurred by the Appellant to replace a deck attached to his
rental property was deductible in computing his income for 2004 or whether this
amount was a capital expenditure and should be added to the capital cost of the
rental property.
[2]
The Appellant is a medical doctor
who was practicing in Alberta. In 2003 he purchased a house in British Columbia
as a rental property with a view to eventually retiring and moving to this
property. After 2004 and prior to this hearing the Appellant did relocate to
this property.
[3]
Prior to purchasing the property
he arranged to have the property inspected. The inspection report stated that
parts of the deck that was attached to the house were rotting and that work
would have to be done to repair the deck. The estimated cost of the repairs was
$1,200.
[4]
Following the purchase of the
property, the tenants raised concerns about the condition of the deck and the
Appellant arranged to have a contractor provide an estimate of the cost of
replacing the deck. The estimated cost to replace the deck, including GST, was
$8,627. When the work was actually completed, the Appellant received credit for
some items that did not need to be replaced and additional charges for changes
that were made. The total cost of replacing the deck was $8,146.30. The
Appellant claimed this amount as an expense in computing his income for 2004.
The position of the Respondent is that this amount should be added to the
capital cost of the building and not deducted as a current expense.
[5]
Justice Lamarre Proulx of this
Court in Bergeron v. Minister of National Revenue, [1990] 2 C.T.C. 2220,
90 DTC 1505 reviewed several cases that dealt with the issue of whether amounts
incurred for repairs / renovations would be deductible as a current expense or
should be added to the capital cost of the asset. In paragraph 20 of this case
she listed the cases that she had reviewed and these were as follows:
• Minister
of National Revenue v. Vancouver Tug Boat Company Ltd., [1957] Ex. C.R.
160, [1957] C.T.C. 178, 57 D.T.C. 1126;
• Thompson
Construction (Chemong) Ltd. v. Minister of National Revenue, [1957] Ex.
C.R. 96, [1957] C.T.C. 155, 57 D.T.C. 1114;
• Minister
of National Revenue v. Haddon Hall Realty Inc., [1962] S.C.R. 109, [1961]
C.T.C. 509, 62 D.T.C. 1001;
• Canada
Steamship Lines Ltd. v. Minister of National Revenue, [1966] Ex. C.R. 972,
[1966] C.T.C. 255, 66 D.T.C. 5205;
• Minister
of National Revenue v. Algoma Central Railway, [1968] S.C.R. 447, [1968]
C.T.C. 161, 68 D.T.C. 5096;
• Dubé et
al. v. Minister of National Revenue, [1979] C.T.C. 2241, 79 D.T.C. 10;
• Shabro
Investments Ltd. v. The Queen, [1979] C.T.C. 125, 79 D.T.C. 5104;
• Healey
v. Minister of National Revenue, [1984] C.T.C. 2004, 84 D.T.C. 1017;
• S.
Coleman v. Minister of National Revenue, [1984] C.T.C. 2725, 84 D.T.C.
1637;
• Johns-Manville
Canada Inc. v. The Queen, [1985] 2 S.C.R. 46, [1985] 2 C.T.C. 111, 85
D.T.C. 5373;
• A.B.
Wager v. Minister of National Revenue, [1985] 1 C.T.C. 2208, 85 D.T.C. 222;
• J. Méthé v. Minister of National Revenue, [1986] 1 C.T.C.
2493, 86 D.T.C. 1360;
• Québec (Sous-ministre du revenu) v. Goyer, [1987] R.D.F.Q.
159;
• Gold Bar
Developments Ltd. v. The Queen (1987), 9 F.C. 303, [1987] 1 C.T.C. 262, 87
D.T.C. 5152;
• Damon Developments Ltd. v. Minister of National Revenue,
[1988] 1 C.T.C. 2266; 88 D.T.C 1128.
[6]
After reviewing these cases,
Justice Lamarre Proulx stated as follows:
33 The
principles I draw from these cases are the following:
income-related
expenses include repairs the purpose of which is to make the part or the
property repaired suitable for normal use again;
capital
expenses include work the purpose of which is to replace an asset by a new one
and work which involves such a degree of improvement to an asset that it
becomes a new one. This asset must have significant value compared to the rest
of the property or be an asset in itself; work to change the use of premises or
a room or to add new premises or a new room is usually capital in nature; the
same is true of a change in the heating system;
although the
factor of recent purchase is not significant when there is no change of use,
the increase in value of the real property over the purchase price, as a result
of the repairs, is an indication that the cost or part of the cost of the
expenses is in the nature of the purchase price of property;
expenses must
also be reasonable in the circumstances (section 67 of the Act): the question
is whether they were reasonably incurred to derive income or to increase the
value of the property, and in what proportion; future profits can be taken into
account if the expenses in question reduce subsequent expenses and also I
suppose the unforeseen scale of the costs.
[7]
Justice Brulé of this Court in Marklib
Investments II-A Ltd. v. The Queen, [2000] C.T.C. 2513, 2000 DTC 1413,
reviewed the following cases in relation to whether expenditures incurred for
repairs were operating expenses:
• B.P.
Australia Ltd. v. Commissioner of Taxation of Australia (1965), [1966] A.C.
224, [1965] 3 All E.R. 209 (Australia P.C.)
• British
Insulated & Helsby Cables Ltd. v. Atherton (1925), [1926] A.C. 205, 10
T.C. 155, [1925] All E.R. 623 (U.K. H.L.)
• Canada
Steamship Lines Ltd. v. Minister of National Revenue, [1966] Ex. C.R. 972,
[1966] C.T.C. 255, 66 D.T.C. 5205 (Can. Ex. Ct.)
• Canaport
Ltd. v. R., (sub nom. Canaport Ltd. v. Canada) [1993] 2
C.T.C. 2830, 93 D.T.C. 1226 (T.C.C.)
• Chambers
v. R. (1997), [1998] 1 C.T.C. 3273 (T.C.C.)
• Earl v. R.
(1992), (sub nom. Earl v. Canada) [1993] 1 C.T.C. 2081, 93
D.T.C. 65 (T.C.C.)
• Gold Bar
Developments Ltd. v. R., 87 D.T.C. 5152, [1987] 1 C.T.C. 262, (sub nom.
Gold Bar Devs. Ltd. v. M.N.R.) 9 F.T.R. 303 (Fed. T.D.)
• Healey v.
Minister of National Revenue (1983), [1984] C.T.C. 2004, 84 D.T.C. 1017
(T.C.C.)
• Johns-Manville
Canada Inc. v. R., [1985] 2 S.C.R. 46, 85 D.T.C. 5373, [1985] 2 C.T.C. 111,
21 D.L.R. (4th) 210, 60 N.R. 244 (S.C.C.)
• Méthé v.
Minister of National Revenue, 86 D.T.C. 1360 (Eng.), 86 D.T.C. 1364 (Fr.),
[1986] 1 C.T.C. 2493 (T.C.C.)
• Minister
of National Revenue v. Haddon Hall Realty Inc. (1961), [1962] S.C.R. 109,
[1961] C.T.C. 508, 62 D.T.C. 1001, 31 D.L.R. (2d) 201 (S.C.C.)
• Morel v.
Minister of National Revenue (1951), 51 D.T.C. 431, 5 Tax A.B.C. 213, 1951
CarswellNat 190 (Can. Tax App. Bd.)
• Québec
(Sous-ministre du Revenu) c. Goyer, [1987] R.J.Q. 988, 10 Q.A.C. 70, [1987]
R.D.F.Q. 159 (Que. C.A.)
• Shabro
Investment Ltd. v. R., [1979] C.T.C. 125, 79 D.T.C. 5104, 28 N.R. 327 (Fed.
C.A.)
• Wager v.
Minister of National Revenue, 85 D.T.C. 222, [1985] 1 C.T.C. 2208 (T.C.C.)
[8]
It is interesting to note that
while several of the cases that were reviewed by Justice Lamarre Proulx were
also reviewed by Justice Brulé, there is no reference to Bergeron in the
decision of Justice Brulé. After reviewing the cases, Justice Brulé stated
as follows:
34 This
Court is unable to find the relevance of a number of cases the respondent
relied on in his argument. The respondent relied on cases involving
newly-acquired buildings in poor condition, the need of repairs to get the
building operational, and payment of a decreased purchase price because of the
building's poor condition. All of the above cases are distinguishable from the
case at bar as all involved the taxpayer acquiring or purchasing a deteriorated
property. The taxpayers knew the state and condition of the property upon
acquisition. I have to wonder whether the respondent is extracting the
reasoning out of the cases and erecting it into general principles without
taking into consideration the specific facts of the cases. If there is one
thing that is established through the case law, I think it is that, to
determine the question of current or capital, the facts specific to the
particular situation must be examined and given some weight.
35 It
is the purpose, rather than the result, of an expenditure that determines
whether it is characterized as a capital outlay or a current expense; and the
focus of the test is on whether or not the expenditure brings into existence an
asset of enduring value, rather than on the determination of the frequency or
recurrence of the expenditure. The cases seem to promote the idea that as long
as the repairs were done to preserve or conserve the asset and not to create a
new asset then the repairs will be considered current expenses.
36 An
expenditure that merely maintains an asset or restores it to its original
condition is a deductible current expense. As already seen from the cases
above, this is easier said than done. There is a lot of grey area in between
the capital outlay and current expense distinction. Furthermore, the magnitude
of the expense must be examined in the context of the value of the building.
However, simply because the amount of money expended is significant does not in
itself render the expenditure capital in nature.
37 There
is no one test for determining whether the expenditure is of a capital nature
or a current nature. A number of factors and circumstances are to be examined
and weighed.
[9]
Justice Brulé also referred to Interpretation
Bulletin - IT128R - Capital Cost Allowance - Depreciable Property. Paragraph
4 of this Interpretation Bulletin provides as follows:
Capital
Expenditures on Depreciable Property versus current Expenditures on Repairs and
Maintenance
4. 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:
(a) Enduring
Benefit — Decisions of the courts indicate that when an expenditure on a
tangible depreciable property is made “with a view to bringing into existence
an asset or advantage for the enduring benefit of a trade”, then that
expenditure normally is looked upon as being of a capital nature. Where,
however, it is likely that there will be recurring expenditures for replacement
or renewal of a specific item because its useful life will not exceed a
relatively short time, this fact is one indication that the expenditures are of
a current nature.
(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
propeller 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.
(d) Relative
Value — The amount of the expenditure in relation to the value of the whole
property or in relation to previous average maintenance and repair costs often
may have to be weighed. This is particularly so when the replacement itself
could be regarded as a separate, marketable asset. While a spark plug in an
engine may be such an asset, one would never regard the cost of replacing it as
anything but an expense; but where the engine itself is replaced, the
expenditure not only is for a separate marketable asset but also is apt to be
very substantial in relation to the total value of the property of which the
engine forms a part, and if so, the expenditure likely would be regarded as
capital in nature. On the other hand, the relationship of the amount of the
expenditure to the value of the whole property is not, in itself, necessarily
decisive in other circumstances, particularly where a major repair job is done
which is an accumulation of lesser jobs that would have been classified as
current expense if each had been done at the time the need for it first arose;
the fact that they were not done earlier does not change the nature of the work
when it is done, regardless of its total cost.
[10]
In this particular case, the
Appellant was simply replacing a deck that was 20 years old and that
needed to be replaced. The deck was restored to its original condition with
some changes. The previous deck had a fiberglass covering to protect the
surface of the deck from the elements and the new deck had a vinyl covering to
protect the surface from the elements. As well vinyl lattice instead of wood
lattice was used in the area below the deck, a concrete step was installed
instead of a wooden step, aluminum railings were used instead of wood railings
and a vented soffit was installed under the walkway.
[11] As noted by Justice Brulé when he was referring to the
decision of Justice Jerome in Gold Bar Developments Ltd.:
22 Mr. Justice Jerome found that it was the
intention of the taxpayer to repair a condition which had become dangerous
rather than to improve the asset. Because the plaintiffs in the case went
beyond answering the defects, and made the building not only fully resistant to
the problem of falling bricks, but also substantially improved the building's
appearance does not necessarily make the expenditure capital in nature. Once
the decision to repair is forced upon the taxpayer, he does not have to ignore
advancements in building techniques and technology in carrying out the work.
However, Mr. Justice Jerome examined the building's value at the material time
compared to the sum expended on repairs and it was found that the sum in issue
represented less than 3% of the value of the asset. Therefore there was no
issue of the expenditure being so substantial as to constitute a replacement of
the asset. Not to mention that Mr. Justice Jerome found that the structure of
the building remained unchanged.
[12]
There was no indication in this
case whether the fiberglass covering that was used when the original deck was
built was still available in 2004. The Appellant stated that the material that
was generally being used to cover the floor surface area of decks in 2004 was a
vinyl material. Therefore the vinyl covering would simply be the equivalent
material that was available in 2004.
[13]
The other changes are, in my
opinion, not significant changes to the deck and should not affect the
determination of whether the amount spent on replacing the deck should be
considered to be a capital expenditure or a current expense.
[14]
The Appellant stated that the cost
of the aluminum railings was approximately the same as the wooden railings. The
cost of the vinyl lattice and the vented soffit were less than $370 (including
GST). The deck, based on the pictures that were submitted into evidence,
appears to be less than 2 feet above the ground along the back and the vinyl
lattice simply covers the opening from the deck to the ground. The cost of the
concrete step was not provided. It was only a single step made from concrete
poured into a wooden frame. It does not seem reasonable that the cost of the
concrete step would be a significant part of the $8,146 cost.
[15]
The Appellant paid $259,000 to
acquire the rental property in 2003. The amount spent on replacing the deck was
$8,146 which is approximately 3.1% of the total cost of the property. The deck
is not a separate asset but attached to and part of the rental building.
Although the Appellant knew that the deck would have to be repaired before he
bought the property and the price paid may have reflected this estimated cost,
at that time the estimate was only $1,200 to repair the deck which is less than
1% of the purchase price of $259,000 and therefore would not have resulted in a
significant reduction in the purchase price.
[16]
As a result, in my opinion, the
amount incurred by the Appellant to replace the deck in 2004 was a current
expense that was deductible by the Appellant in computing his income for 2004.
[17]
The appeal is allowed, with costs,
and the matter is referred back to the Minister of National Revenue for
reconsideration and reassessment on the basis that the Appellant is entitled to
deduct the $8,146 that he incurred in replacing the deck as an expense in
computing his income for 2004.
Signed at Ottawa, Ontario, this 13th day of November 2008.
“Wyman W. Webb”
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