Donald Boucher v. Minister of National Revenue, [1991] 2 CTC 2523

Tremblay T.C.J. [Translation]:—This appeal was heard on January 28, 1991 in the city of Sherbrooke, Quebec.

1. Point at Issue

The question is whether in computing his 1982 income the appellant was correct to deduct the sum of $22,000, that is $2,000 for notary fees relating to the purchase of a property located at 70 rue Peel, Sherbrooke, Quebec, and $20,000 for consultation fees to Century 21 Direct Courtier Inc.

The appellant maintained that the reassessment was issued beyond the four-year deadline.

For his part the respondent argued that, with respect to the studies made by the brokerage firm, none of the properties which was the subject of a study was purchased by the appellant in 1982.

2. Admission

At the start of the hearing, counsel for the appellant first admitted that the appellant had authorized the respondent to make the assessment beyond the four-year deadline; and second, the appellant discontinued the appeal regarding the amount of $2,000 for notary fees.

3. Burden of Proof

3.01 The appellant has the burden of showing that the respondent's assessment is incorrect. This burden of proof results from several judicial decisions, including a judgment of the Supreme Court of Canada in Johnston v. M.N.R.,

[1948] S.C.R. 486; [1948] C.T.C. 195; 3 D.T.C. 1182.

3.02 As a consequence of the foregoing admissions, the only facts assumed by the respondent in the instant case are subparagraphs (d), (e) and (f) of paragraph 6 of the reply to the notice of appeal. They read as follows:

[Translation]

(d) the real property located at 720 Place Desormeaux, Sherbrooke, referred to by the appellant in his notice of appeal, was not covered by the profitability study mentioned above;

(e) the consultation fees in the amount of $20,000 therefore cannot be regarded as a deductible expense against the appellant's property income for the 1982 taxation year;

(f) the appellant did not establish that the expenses totalling $22,000 were made or incurred in order to earn income from a business or property. . .

4. Facts

4.01 Miss Huguette Gosselin, appeals officer and witness for the respondent, stated that the main basis of the assessment was that none of the nine properties listed by the real estate agent on the $20,000 invoice dated October 20, 1982 (Exhibit A-14) was bought in 1982. The respondent cited the notice of appeal submitted by the appellant to the Provincial Court (now the Court of Quebec) in 1985, paragraph 5 of which is to this effect.

However, in the instant notice of appeal to the Tax Court of Canada the appellant states that following the study he purchased the property at 720, rue Place Desormeaux, Sherbrooke.

4.02 As the Court is bound by the proven facts, what is the evidence before this Court in this regard as established by the testimony of the appellant, the testimony of Mr. Michel Mailhot, the real estate agent who prepared the studies, and the filing of Exhibits A-1 to A-10, which are 10 of the 12 or 13 studies made? It clearly appears that of the real properties studied, three purchases were made in 1982 totalling over 100 units.

These were:

715, 13 avenue Nord, Sherbrooke (53 units) (A-7); 70, rue Peel, Sherbrooke (24 units) (A-9); and 720, place Desormeaux (24 units) (A-10).

Further, an offer to purchase was made for 2567 Laurentide, Sherbrooke (8 units) in 1982 but the purchase was not made until 1983.

4.03 The witnesses further established that the studies made of the 12 or 13 pieces of real property were valid only for a limited time. A study of this kind must take into account many factors (the national and regional economic situations, interest rates, the amount of mortgages, the number of units, the quality of rents paid, the location of the real property, the immediate surroundings of the building and so on) and that some of these factors are very variable.

Mr. Mailhot said that such a study is valid only for a few months. The witness also recalled that the appellant had told him initially that he had $100,000 to dispose of and was looking for the most profitable investments possible for the lowest possible outlay. He had to make several studies.

4.04 The Court does not in any way question the credibility of the witnesses heard and of the appellant. The real property studies were very carefully made and the mass of documents contained in each of the files A-1 and A-10 confirms this. The gross income in the tax returns for 1982 and 1983 (A-12) confirms it. The gross income increased from $29,383 in 1982 to $299,321 in 1983. In 1983 this income came from 70 rue Peel, 71513 avenue Nord, 2567 Laurentide and 720 Place Desormeaux. The weight of the evidence in this regard is thus in the appellants favour. As the respondent based his conclusions and assessments on the fact that none of the real properties studied by Mr. Mailhot was bought in 1982, the respondent was mistaken at least on this point.

4.05 Does this also mean that the sum of $20,000 paid by the appellant for Mr. Mailhot's studies (Exhibit A-13) was not spent for the purpose of earning income? I also do not share the opinion of the Minister of National Revenue on this point.

4.06 However, should the sum of $20,000 be deducted in calculating income for the 1982 taxation year? This is a question of law and fact in applying paragraphs 18(1)(a) or (b) of the Income Tax Act. In other words, the question is whether the expense of $20,000 is a current expense deductible in 1982 or a capital expense deductible through depreciation as in the case of the $2,000 expense for notary fees. In the latter case also, the expense must have been [incurred] for the purpose of earning income.

A taxpayer buying land to build a factory to manufacture commercial products incurs an expense for the purpose of earning income. However, it is a capital expense which is not deductible in the year the factory is built. The cost of the building will nonetheless be admissible over a period of years through depreciation at the rate specified in the regulations. The expense deductible in the year when it was incurred is the one made for goods which have a relatively short duration.

In the instant case, the studies of various pieces of real estate were valid for a relatively short time. It could not even be for one year, especially with the economic recession which existed in 1982, with interest rates varying every two or three weeks and sometimes less.

There is no doubt in my mind that this is an expense which should be allowed as a deduction in calculating 1982 income.

5. Conclusion

The appeal is allowed with costs.

Appeal allowed.