Citation: 2009 TCC 598
Date: 20091121
Dockets: 2007-3914(IT)I
2007-3916(IT)I
BETWEEN:
DANIELLE COUTURE,
MARIO GRONDIN,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Jorré J.
[1]
These two appeals were
heard on common evidence. The appellants owned three apartments at
572 Valois Street in Vaudreuil‑Dorion and three apartments
at 574 Valois Street in Vaudreuil-Dorion. The appellants occupied two of
the apartments at 574 Valois Street and rented out the other four
apartments.
[2]
In their income tax
returns for the 2002 and 2003 taxation years, the appellants
reported the following gross and net incomes:
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2002
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2003
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|
|
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Gross rental income
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$23,588
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$19,378
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Net rental income
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$816
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-$2,564 (loss)
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That income was divided equally between the
appellants.
No capital cost allowance was claimed in computing the net income, and the
interest claimed was $5,483.28 in 2002, and $4,719.05 in 2003.
[3]
In making the
appellants' reassessments, the Minister disallowed some expenses, but did not
make any changes to the gross income. Disallowing some of the expenses resulted
in an increase of each appellant's net rental income by over $6,214 in 2002 and
$8,379 in 2003.
[4]
The Minister made those
net changes not only by disallowing some expenses, but also by allowing some
additional expenses. In some cases, the expenses were recategorized.
[5]
During the two years in
question, the appellant Mario Grondin worked in the construction industry and
owned an agricultural business, namely, a cedar plantation, which had a net
loss of $2,945.72 in 2002 and $3,780.73 in 2003. The appellant Danielle Couture
worked at the Centre d’action bénévole L’Actuel [L'Actuel volunteer action
centre].
[6]
Mr. Grondin
testified, as did the auditor from the Canada Revenue Agency (CRA), Alain
Cloutier. Ms. Couture did not testify.
[7]
The details of the
assessments are found in a letter dated March 22, 2006, sent to
Ms. Couture by the CRA and the documents enclosed with it.
[8]
Mr. Grondin built the
apartments at 572 and 574 Valois Street himself in 1987. The evidence shows
that, from 2000 to 2003, he intended to add new apartments on the lots at 572
and 574 Valois Street. Some pieces of evidence seem to suggest that there were
going to be four new apartments, and others seem to indicate that there were
going to be six. It is possible that the appellants changed their plans during
that period. In any case, that is not significant in resolving this matter.
[9]
Mr. Grondin did
some very significant work in two of the apartments at 572 Valois Street
during the last six months of 2003, while those two apartments were
unoccupied.
[10]
In 2004, the appellants
sold two condominiums at 572 Valois Street and one condominium at 574 Valois
Street. In 2006, the other three condominiums on Valois Street were sold.
Maintenance and repairs
[11]
The biggest changes
made during the audit concerned maintenance and repair expenses. In 2002, the
most important issue concerns the amounts claimed for tools, and in 2003, the
main issue is whether the two apartments that were unoccupied during the second
half of 2003 were (i) for sale or (ii) for sale or rent.
2002
[12]
For 2002,
Mr. Grondin claimed a total of $10,213.39 ($7,660.04 + $2,553.35) for
maintenance and repairs, and the Minister disallowed $8,390.20 ($6,851.41 +
$1,538.79) of those expenses. The largest part of that amount, namely,
$7,874.63 was for tools. A small amount was disallowed by the Minister because
there were no supporting invoices.
[13]
The tool expenses were
disallowed because the Minister was of the opinion that they were not incurred
in relation to the apartments. That conclusion was based on the fact that
Mr. Grondin was a construction worker and that some of the tools were used
for installing and working with drywall.
[14]
Mr. Grondin
testified that he did not need tools for his construction work and in support of his claim produced Exhibit A‑9, an
excerpt from the collective agreement between the Association de la construction
du Québec and the Conseil conjoint de la Fédération des travailleurs du Québec
et du Conseil provincial du Québec des métiers de la construction. Found in the
section entitled [Translation]
"Appendix E-3" on the first page of that exhibit is a very short list
of tools that Mr. Grondin had to supply.
[15]
The appellant also
testified that there were trees on the two lots and that he needed a chainsaw
to cut them down.
[16]
I accept
Mr. Grondin's testimony with respect to the tools, in particular, that
they were bought for the construction of the new apartments (which never
happened) and also for the work done in the two apartments at 572 Valois
Street in 2003.
However, I do not accept that there was no personal use.
[17]
Accordingly, the
Minister was incorrect in disallowing the tool expenses in full. However, the
tools are not current expenses, but rather depreciable property expenses. Thus,
the appellants should be reassessed, and they will be able to claim
depreciation on the tools if they wish to do so. The tools that cost less than
$200 belong to category 12, which allows for depreciation at 100%, and the
tools that cost over $200 belong to category 8, which allows for
depreciation at 20%.
[18]
To account for personal
use, the Minister will have to assume that 5% of the use of the tools was
personal.
[19]
Mr. Grondin did
not demonstrate that deducting the rest of the amounts reported as maintenance
and repairs was justified.
2003
[20]
In 2003, the appellants
claimed maintenance and repair expenses of around $13,259.01.
[21]
The biggest change
stems from the fact that the Minister capitalized the expenses of about
$6,399.51 pertaining to apartments number 1 and 3 at
572 Valois Street.
[22]
Those apartments were
unoccupied starting in June and July respectively. The Minister's position is
that, for the second half of 2003, those two apartments were for sale, not for
rent, and that, accordingly, the expenses should have been capitalized.
[23]
Mr. Grondin
testified that the two apartments were for sale or for rent and that he had
posted two signs visible from the street: one stating [Translation] "apartment for rent" and the other [Translation] "condo for
sale".
[24]
However, to determine
the intention, we must consider not only the testimony but also all of the
circumstances.
[25]
The two apartments were
sold in 2004.
[26]
Some significant work
has been done at the two apartments, including an improvement, namely, the
installation of floating floors.
[27]
The appellants placed
advertisements about selling condominiums in La Presse and the local
newspaper. They did not place rental advertisements.
[28]
The text of the
advertisement in La Presse was not filed in evidence, but the invoice
for the local newspaper contains the following text:
[Translation]
Dorion, pretty 4 1/2, ground floor, bay window. Unique 5 1/2, half
basement, garden door, available $99,900 . . .
[Emphasis added.]
[29]
Given these facts, I
find that the two apartments were for sale, not for rent.
[30]
The Minister was
therefore correct in capitalizing the amounts in question since they were
expenses incurred for two properties, namely, the apartments, that were
intended for sale,
which resulted in increasing their cost.
[31]
A $7.82 item, namely, a
[Translation] "jumbo sign
condo for sale" was disallowed as a personal expense. I cannot understand
how that expense can be classified as personal. That amount was part of the
costs paid in order to sell the two apartments the following year.
[32]
As for other disallowed
expenses in the "maintenance and repairs" category, some were
disallowed by the Minister because the appellants did not provide receipts and
others because the Minister classified the expenses as personal.
[33]
Among those other
disallowed expenses are a fisherman's glove and a beach ball. With one
exception, nothing in the evidence leads me to find that additional expenses
should be allowed.
[34]
The exception is the
$28 paid for the propane used to heat the garage while Mr. Grondin painted
the moulding.
[35]
The moulding was part
of the work done at the two unoccupied apartments, and accordingly, the $28 should
be added to the capitalized amount of $6,399.51.
[36]
No other changes should
be made with respect to maintenance and repairs in 2003.
Interest in 2002
[37]
The dispute is over the
fact that, out of the $5,483.28 claimed as interest, $2,947.04 is not related
to interest. It constitutes the expenses incurred in order to prepare the
construction project for a new two- or three-apartment building on each lot at
572 Valois Street and 574 Valois Street, for example, expenses
incurred for land surveyors or building permits.
[38]
The Minister was
correct in considering those expenses as capital expenditures, not current
expenses, because they were incurred to create a new property. Since this new
property was never created, the expenses in question cannot be added to the
cost of the property.
[39]
However, these capital
expenditures are eligible under subsection 14(5) of the Income Tax Act
(ITA), with the result that 75% of $2,947.04 will be added to the cumulative
eligible capital. The appellants could choose to deduct 7% from the cumulative
eligible amount in accordance with paragraph 20(1)(b) of the ITA.
Interest in 2003
[40]
The appellants had
claimed $4,719.05 in interest, and the Minister allowed $1,537.46 of that
amount. Some of that amount was disallowed by the Minister because the
appellants had not provided receipts,
and another $385.29 was disallowed because the Minister considered the expenses
as ineligible. An amount of $244.93 was allowed as a current expense, but as
legal fees, not interest.
[41]
All other interest
claimed was capitalized as being related to the two apartments that were
for sale. Given that I found above that the apartments were for sale, no
changes need to be made, except for the $274.37 paid to the Régie du bâtiment with respect to
the apartment construction project that was abandoned. That amount is not a
current expense, but rather an eligible capital expenditure.
Management fees and utilities
[42]
The management fees
claimed were related to telephone and automobile use. An amount of $886.86 was
claimed in 2002 and $1,031.95 in 2003. The telephone expenses were disallowed
since they were personal-use plans. The Minister allowed $171.15 in 2002 and of
$227.11 in 2003 for automobile use.
[43]
In regard to telephone
expenses, the appellants did not demonstrate which of the calls were
business-related, but I cannot agree that no amount should be attributed for
telephone use, even though the circumstances are such that it would not be
necessary to make many telephone calls concerning renting out apartments. I
would allow $80 for business-related telephone use for each year at issue.
[44]
With respect to
automobile expenses, according to Mr. Grondin's testimony, he had never
kept a mileage log and he could no longer remember how he had calculated that
the automobiles were used for business 15% of the time. Exhibit A‑15,
which he filed in support of his claim, is a calculation that he had prepared
after the fact in July 2007. He did not establish a total mileage for the
automobiles. Even if I accept the business mileage in Exhibit A‑15,
in the absence of total mileage, it is impossible to determine a use percentage
different from that used by the Minister. Thus, there is no reason to change
the automobile expenses.
[45]
At the hearing,
Mr. Grondin wanted to obtain deductions for depreciation of a Jetta. In
theory, I agree that the appellants can claim depreciation. However, there is a
factual difficulty. Mr. Grondin claimed that he had paid over $7,000 for
the automobile.
[46]
Mr. Grondin had no
receipt for the purchase of the car. However, in Exhibit A‑10, there
is a receipt for the Jetta from the Société de l’assurance automobile du Québec
(SAAQ), which reads [Translation]
"sale: $2,000", [Translation]
"value: $6,600" and [Translation]
"odometer: 213,000 km".
[47]
I do not accept
Mr. Grondin's testimony on this issue,
and I find that the purchase price was $2,000. The appellants will be able to
claim 5% of the depreciation provided for by the Act using the price of $2,000
for the car, if they wish to do so.
Gross income
[48]
Mr. Grondin
testified that there was an error in the computation of the gross income and
that the appellants had reported $584 too much, which corresponded to a month
when they did not receive rent for one apartment.
[49]
I accept Mr. Grondin’s
testimony on that point. The assessments for 2002 will have to be modified to
reduce the gross income by $584.
Other issues
[50]
Apart from some
adjustments to the division of some expenses, there is nothing in the evidence
that would warrant other modifications to the assessments.
[51]
The Minister divided
the allowed expenses between the apartments at 572 Valois Street and
574 Valois Street. Then, to take into account the personal use of two of
the three apartments at 574 Valois Street, he reduced some expenses by
66.66%. Some of the amounts thus reduced should not have been reduced, either
because of their nature or because the calculation of the eligible amount was a
calculation of the portion that applies to rental activity, like the automobile
expenses, for example.
[52]
Corrections should
therefore be made in order to eliminate some of the 66.66% reductions to the
amount attributed to 574 Valois Street.
[53]
I agree with the
respondent, who admitted that the legal, advertising, utility and automobile
costs allowed by the Minister should not be reduced by 66.66%. I would add that
this is also true for the depreciation of the Jetta.
Conclusion
[54]
Accordingly, the appeal
is allowed, and the matter is referred back to the Minister for reconsideration
and reassessment, on the basis of the following:
(a) The following expenses
are eligible capital expenditures in accordance with subsection 14(5) of the
ITA, and the appellants will be able to claim the following deductions under
paragraph 20(1)(b), if they wish to do so:
(i) the amount of
$2,947.04 discussed at paragraphs 37 and 39; and
(ii) the amount of $274.37
discussed at paragraph 41.
(b) The expenses of
$7,874.63 for tools:
(i) are expenses for
depreciable property, and depending on their cost, belong to either
category 12 or category 8 (the appellants will be able to claim
depreciation under paragraph 20(1)(a) of the ITA if they wish to do
so;
and
(ii) include 5% personal
use.
(c) The amount of $7.82
for the sign [Translation] “condo
for sale” is not a personal expense, but is part of the cost of selling the
condominiums, which were sold in 2004.
(d) The amount of $28 for
the propane must be added to the $6,399.51 capitalized by the Minister.
(e) The expenses will have
to be increased by $80 for 2002 and by $80 in 2003 to account for telephone
costs. There is no personal aspect to these two $80 amounts.
(f) The Jetta cost
$2,000, an amount that is depreciable; 5% of the use of the automobile was for
business, while 95% of its use was personal.
(g) For 2002, the rental
income must be reduced by $584.
(h) For 2002, the rental
expenses must be increased by 66.66% of $34.68, the amount allowed for
utilities.
(i) For 2003, the rental
expenses must be increased by 66.66% of the following amounts: $25.10 (advertising),
$122.47 (legal fees), $40.20 (utilities), $131.34 (automobile).
Except for the changes that result from those that I
have just listed, such as the adjustment of interest, there will be no other
changes.
Signed at Ottawa, Canada, this 21st day of November 2009.
"Gaston Jorré"
on this 7th day of
January 2010
Margarita
Gorbounova, Translator
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