Citation: 2007TCC331
Date: 20070709
Dockets: 2004-3149(IT)I
2004-3168(IT)I
BETWEEN:
JACQUELINE RUEST
and CLAUDE RUEST,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Angers J.
[1] The two appeals
were heard on common evidence. The two cases involve the 2000 and 2001 taxation
years, for which the Appellants’ rental expenses or losses were disallowed by
the Minister of National Revenue (the “Minister”) in reassessments made on
April 10, 2003, and confirmed on February 4, 2004. For her part, the Appellant
Jacqueline Ruest was denied the deduction of charitable donations and
employment expenses for the same two taxation years.
[2] The Appellants are
spouses and in 2001 they purchased a rental building (the building). I
reproduce below one of the two tables indicating the amounts reported and
claimed by the Appellants as well as those the Minister disallowed or allowed
for the building. I only reproduce one table because they are identical, except
for the percentage of the property interest. The only witness for the
Appellants was Ms. Ruest.
Table 1: Summary of the Appellant’s rental income
and expenses.
|
Rental income and expenses*
|
|
|
2000
|
2001
|
|
Class
|
Amount claimed
|
Amount
disallowed
|
Amount allowed
|
Amount claimed
|
Amount
disallowed
|
Amount allowed
|
|
Income
|
$2,800
|
|
$2,800
|
$4,800
|
|
$4,800
|
|
Expenses
|
|
|
|
|
|
|
|
Insurance
|
$795
|
$563
|
$232
|
$556
|
$324
|
$232
|
|
Interest
|
$589
|
|
$589
|
$2,874
|
$0
|
$2,874
|
|
Maintenance/repairs
|
$12,000
|
$12,000
|
$0
|
$3,800
|
$0
|
$3,800
|
|
Accounting/legal expenses
|
$2,944
|
$2,944
|
$0
|
N/A
|
|
Property taxes
|
$1,980
|
$1,980
|
$0
|
$2,018
|
$0
|
$2,018
|
|
Travel expenses
|
$375
|
$0
|
$375
|
$380
|
$0
|
$380
|
|
Utilities
|
$300
|
$300
|
$0
|
$300
|
$0
|
$300
|
|
Other expenses
|
$530
|
$0
|
$530
|
$550
|
$0
|
$550
|
|
Total
|
$19,513
|
$17,787
|
$1,726
|
$10,478
|
$324
|
$10,154
|
|
|
|
|
|
|
|
|
|
Income (loss)
|
($16,713)
|
|
$1,074
|
($5,678)
|
$324
|
($5,354)
|
|
Co-owner 20%
|
($3,342)
|
|
$215
|
($1,136)
|
$65
|
($1,071)
|
|
Depreciation
|
$1,088
|
|
$215
|
$933
|
$933
|
$0
|
|
Net loss
|
($4,430)
|
|
$0
|
($2,069)
|
$998
|
($1,071)
|
*Source: Replies to the Notices of Appeal.
[3] In her testimony,
Ms. Ruest did not discuss all the expenses she was denied. The items
“maintenance and repairs,” “accounting and legal expenses” and “property taxes”
are the ones she focused on. At the time of the purchase, the building was a
new home, except that the electrical cables were not installed. Therefore, the
Appellants spent money on electrical installations and $12,000 in expenses were
allowed on that basis, although the Appellants were able to provide receipts
only for $9,500 during the audit. The Appellants claimed that expense as being
a current expense, whereas the Minister described it as a capital expense and
therefore disallowed it. The legal expenses received the same treatment by the
Minister.
[4] The issue is
therefore whether the legal expenses and expenses on improvements to the
building to ensure its compliance are capital expenditures, therefore capital
expenses, which the Minister rightly disallowed in accordance with paragraph
18(1)(b) of the Income Tax Act (the “Act”).
In Produits Forestiers St-Armand Inc. v. Canada,
2003 TCC 696, Lamarre Proulx J. quoted a few excerpts from the book entitled “Les
principes de l’imposition au Canada” (13th edition, 2002), which reiterates the
traditional criterion for determining whether an expense is a capital expense
or a current expense. The excerpt reads as follows:
The
classic test for determining whether an expense is capital or current can be
expressed as follows: was the expense incurred to provide a lasting benefit to
the company or taxpayer? If so, it is a capital expense.
This
test was first developed by British Courts, more specifically by Viscount Cave
in British Insulated and Helsby Cables Ltd. v. Atherton, [1926] A.C. 205
(H.L.). It was then taken up by the Supreme Court of Canada in Montreal
Light Heat and Power Consolidated v. M.N.R. [1942] S.C.R. 89, 105. It was
again confirmed by the Supreme Court British Columbia Electric Railway Co.
v. M.N.R. [1958] CTC 21 (C.S.C.) and again in M.N.R. v. Algoma Central
Railway [1968] CTC 161 (C.S.C.).
.
. .
A
second criteria consists of determining whether an expense was incurred once
and for all, as opposed to a recurring basis. . . .
[5] This criterion was
also set out by the Supreme Court of Canada in Canada v. Johns
Manville Corp., [1985] 2 S.C.R. 46. We are dealing with work for the
improvement of a building. Lamarre J. of our Court provided a summary of the
criteria to assess in matters pertaining to improvements or renovations in Brunet
v. The Queen, no. 2002-1122(IT)I, [2003] 2 C.T.C. 2020, by
citing a number of cases and the Interpretation Bulletin IT-128R. Without
reproducing all those excerpts, suffice it to say that the fundamental issue is
whether the expense considered created a capital property different from the
property replaced. In the case at bar, it is indeed an improvement from what it
was originally to make it habitable and rentable. It cannot but be a capital
expense.
[6] With respect to the
legal expenses incurred to acquire the building, it is a capital expense. See Rona
Inc. v. The Queen, 2003 TCC 121, [2003] 4 C.T.C. 2974, and Oxford
Shopping Centres Ltd. v. The Queen, [1980] 2 F.C. 89, affirmed by
the Federal Court of Appeal. When the legal services provide a lasting benefit
for the use that is made of the property, the fees are capital expenses and
should be added to the cost of the acquired property.
[7] The Appellant was denied
the property tax expense for the 2000 taxation year. She submits that the
property taxes for the 2000 taxation year were paid the following year. While
she did not file any documentation showing the exact date of the payment, she
ultimately acknowledged during the cross-examination that the property taxes
for 2000 were paid in 2001. However, the statement of adjustments prepared when
the building was purchased (Exhibit I-4) clearly indicates that the property
taxes were paid in full until December 31, 2000, by the former owner and that
no adjustment was calculated under that item. Therefore, the Appellants are not
the ones who paid the property taxes for 2000 and the Minister was correct in
disallowing the expense for the 2000 taxation year.
[8] The Appellants did
not raise the issue of depreciation at the hearing of this case. Suffice it to
say that according to subsection 1100(11) of the Regulations, a
depreciation expense can never create or increase a rental loss. It is always
calculated after the rental loss or income for the taxation year is determined.
The appeals are accordingly dismissed for both Appellants with respect to the
expenses disallowed by the Minister in respect of the building’s rental income.
[9] The Appellant
Jacqueline Ruest was denied tax credits for charitable donations and employment
expenses for those taxation years. The employment expenses claimed were $12,201
in 2000 and $2,710 in 2001. As for the charitable donations, they were $11,000
in 2000, of which $6,373 was claimed, and $4,000 in 2001.
[10] During the years in
issue and prior to those years, the Appellant did volunteer work as a secretary
and treasurer for the Royal Canadian Legion, Branch 52 (the Legion). The
Appellant submits that, in performing this volunteer work, she incurred travel
expenses and other expenses and that the Legion issued her a receipt for income
tax purposes instead of reimbursing the expenses to her. The 2000 receipt, for
the amount of $11,000, represents expenses incurred from 1997 to 2000. However,
the Appellant cannot specify the amount for each of the years, except that she
is certain that the amount of $4,500 is for 2000. Nor can she provide a receipt
detailing the expenses she incurred for the Legion and supporting her claims.
[11] The Appellant was
incapable of showing that the Legion was in fact a charitable organization duly
registered during the years in issue. In fact, a letter from the Legion
acknowledges that the registration number was not valid during the two taxation
years. As a result, the Appellant cannot be entitled to the tax credit for
charitable donations for the amounts claimed during each of the taxation years
in issue under subsection 118.1(3) of the Act and definitions in
subsections 248(1) and 149.1(1) of the Act. In light of this finding, it is not
necessary for me to deal with the issue of the nature of the donation in the
case at bar or the issue as to whether it is truly a donation.
[12] During the years in
issue, the Appellant worked for Family Services; she therefore claimed expenses
related to that employment. The table indicates the employment expenses the
Appellant claimed and which the Minister disallowed.
Table 2: Summary of the
Appellant’s employment expenses
|
Employment expenses
|
|
|
2000
|
2001
|
|
Class
|
Amounts claimed
|
Amounts allowed
|
Amounts claimed
|
Amounts allowed
|
|
Vehicle
expenses
|
|
|
|
|
|
Fuel
|
$1,500
|
$1,500
|
$2,203
|
$2,203
|
|
Maintenance/repairs
|
$950
|
$950
|
$620
|
$620
|
|
Registration
|
$81
|
$81
|
$81
|
$81
|
|
Insurance
|
$1 346
|
$901
|
$1,698
|
$1,148
|
|
Interest
|
$1,240
|
$1,240
|
$482
|
$482
|
|
Depreciation
|
$7 812
|
$8,946
|
$10,792
|
$7,396
|
|
Total
|
$12,929
|
$13,618
|
$15,876
|
$11,930
|
|
% of the use of the vehicle for work purposes
|
x 90.1%
|
x 77.8%
|
x 40.8%
|
40.8%
|
|
Accounting/legal expenses
|
$2,500
|
$0
|
N/A
|
|
Meal expenses
|
$1,092
|
$0
|
$1,100
|
$0
|
|
Parking
|
N/A
|
$12
|
$12
|
|
Unknown amount
|
$7,555
|
$0
|
N/A
|
|
TOTAL
|
$22,796
|
$10,595
|
$7,589
|
$4,879
|
|
Portion disallowed
|
$12,201
|
$2,710
|
|
|
|
|
|
|
[13] The Minister
disallowed the following expenses for the following reasons:
(a) The
use of the vehicle by the Appellant for her work did not exceed 77.8% of
the use of the vehicle for the 2000 taxation year and 40.8% for the 2001
taxation year.
(b) Legal
expenses of $2,500 incurred by the Appellant for her 2000 taxation year are
applicable to a motor vehicle accident and are therefore not deductible under
paragraph 8(1)(b) and subsection 8(1) of the Act.
(c) The
meal expenses totalling $1,092 and $1,100 for the taxation years in issue
were meals consumed by the Appellant during her regular work days and are
personal expenses; these expenses are not deductible expenses under subsections
8(1) and (4) of the Act.
(d) Insurance
expenses of the Appellant totalling $901 for 2000 and $1,148 for 2001.
Analysis
[14] Use of the
vehicle
The
Appellant testified that during the two years in issue, she had two vehicles
and that the distance travelled is different from that indicated by the
employer on Form T2200. As for the Minister, he simply accepted the information
provided by the employer for the two years with respect to the distance
travelled by the Appellant and for which she did not receive any allowance or
reimbursement. Therefore, I have no other concrete evidence that would allow me
to modify this item, for which the burden of proof lied with the Appellant.
[15] Legal
expenses
The
section which makes it possible to deduct legal expenses from employment income
reads as follows:
8(1) Deductions allowed
In computing a taxpayer’s income for a taxation year from
an office or employment, there may be deducted such of the following amounts as
are wholly applicable to that source or such part of the following amounts as
may reasonably be regarded as applicable thereto
. . .
(b) Legal expenses of employee
amounts paid by the taxpayer in the year as or on account
of legal expenses incurred by the taxpayer to collect or establish a right to
salary or wages owed to the taxpayer by the employer or former employer of the
taxpayer;
[16] The Appellant’s arguments
that this expense is applicable to a motor vehicle accident do not satisfy the
requirements of the Act. Accordingly, the Minister rightly disallowed the
expense.
[17] Meal expenses
The provision which
allows the deduction of meal expenses reads as follows:
8(4)
Meals
(4) An amount expended in respect of a meal consumed
by a taxpayer who is an officer or employee shall not be included in computing
the amount of a deduction under paragraph 8(1)(f) or
8(1)(h) unless the meal was consumed during a period
while the taxpayer was required by the taxpayer’s duties to be away, for a
period of not less than twelve hours, from the municipality where the
employer’s establishment to which the taxpayer ordinarily reported for work was
located and away from the metropolitan area, if there is one, where it was located.
[18] The only argument
put forward by the Appellant rests on the fact that she had to eat lunch.
Accordingly, the evidence is clearly insufficient for me to conclude that the
Appellant satisfied the conditions required by the Act.
[19] Insurance expenses
At the hearing, the Appellant
withdrew the issue of insurance expenses.
[20] In view of these
conclusions, I must dismiss the appeals.
Signed at Ottawa, Canada, this 9th day of July 2007.
“François Angers”
Translation certified true
on this 26th day of July 2007.
Daniela Possamai, Translator
Email this Content