Date: 19971029
Docket: 96-4168-IT-I
BETWEEN:
BERNARD LUC CHARRON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
G. Tremblay, J.T.C.C.
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.[1]
[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]
(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]
[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;
or
b) black gown and dark suit with white shirt and plain dark
tie.
A woman advocate shall likewise wear black gown and a dark
long-sleeved garment, with or without bands.
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,[2] 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 Mr.
N. v. Minister of National Revenue.[3] 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.
Guy Tremblay
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]
Translation certified true on this 28th day of
November 1997.
Mario Lagacé, Revisor
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