Victorio Pugliese v. Minister of National Revenue, [1988] 2 CTC 2353, 88 DTC 1762

Couture, C.J.T.C. [Translation]:—These appeals concern the 1982 and 1983 taxation years and result from assessments issued by the respondent under which certain expenses claimed by the appellant in computing his rental income were disallowed as a group because they were capital expenses. However, the expenses thereby disallowed did benefit from the capital cost allowance provided in paragraph 20(1)(a) of the Income Tax Act (the Act).

During the years 1982 and 1983, the appellant was the owner of two buildings, one at 3357 Champdoré, Montreal and the other at 4041 Forest.

For the 1982 taxation year the appellant claimed the expenses indicated below and the respondent allowed him the expenses indicated.

3357 CHAMPDORE

	CLAIMED	ALLOWED
Property taxes	$1,912	$1,912
Repairs and Maintenance	3,906	879
Insurance	612	335
Heating	1,006	nil
	7,436	3,126
Personal Use 50%	3,718	1,563
	$3,718	$1,563

4041 FOREST
Property taxes	$ 1,865	$ 1,053
Repairs and Maintenance	6,348	2,767
Interest on Mortgage	10,002	5,645
Insurance	465	200
Electricity	1,059	363
Services	300	nil
	$20,040	$10,028

It should be pointed out that the evidence submitted by the appellant was far from complete or explanatory of the reasons behind his claims. His testimony lacked detail and on many occasions his memory of the relevant facts was far from satisfactory.

Mr. Jean-Paul Lessard of Revenue Canada, called as a witness by counsel for the respondent, established the following facts concerning the assessment for the 1982 taxation year. As a result of his audit with regard to the rue Champdoré building, he gave the following explanation of the disparity between the expenses claimed by the appellant and the expenses allowed by the respondent. Firstly, the only amount discussed by the appellant was the $879 relating to repairs and maintenance, the other amounts having been accepted by the appellant. The difference between $3,906 and $879, or $3,027, was, the witness said, capitalized as a result of his audit and a capital cost allowance was granted to the appellant on this amount. As a matter of fact, according to Mr. Lessard's evidence, during his audit the appellant provided him with additional vouchers in the amount of $290, which was included in the $3,294 and was in fact capitalized. [1]

This $3,294 was broken down as follows: $2,650 and $354 for the purchase and installation of a new furnace; $290 for insulation work on the building. All the other amounts claimed for repairs and maintenance were allowed to the appellant as expenses by the assessment.

I have no hesitation in accepting the respondent's claims with regard to the capitalization of the $3,294. Concerning the purchase and installation of a furnace, I have no doubt that this expense is a capital expense and should be capitalized for the purposes of the Act. Concerning the $290 for insulating the building, although the amount is a minimal one, I must also accept the respondent's ruling since the appellant provided no information as to the nature of the work that was done on the building for the amount in question.

Concerning the building at 4041 rue Forest for the 1982 taxation year, the disparity between the expenses claimed by the appellant and the amount allowed by the respondent related exclusively to the $6,348 in repairs and maintenance expenses.

Mr. Lessard explained in his testimony that of the $6,348, the surplus of $3,642 over and above the $2,767 allowed as expenses under the assessment was Capitalized.

This amount was broken down as follows: $2,700, which represented the replacement cost apparently allocated to the roof of the building; $600 were notary's fees for the purchase of the building, and $342 designated as the cost of renegotiating the mortgage on the building.

Once again I must concede that the respondent was correct to treat this $3,642 as an expenditure of a capital nature. An expenditure of $2,700 on the roof of the building appears to me to have a lot more to do with replacing the roof than mere repairs. It is impossible, from the information provided by the appellant in his testimony on this matter, for me to identify the precise nature of the work. As for the $600 in notary's fees, there is no doubt that this was an expenditure in the nature of capital. The record is silent as to the $342 that was capitalized, and accordingly I must accept the validity of the assessment concerning this amount as well as the two other amounts capitalized by the respondent. According to Mr. Lessard's testimony, the balance of the amounts claimed, $2,767, was allowed as expenses by the respondent. For these reasons, the appeal for the 1982 taxation year is dismissed.

For the 1983 taxation year, the situation with respect to the evidence is no better than it was for 1982. Concerning the building on rue Champdore, the appellant, who had claimed $3,245 as repairs and maintenance expenses, objected to the respondent's disallowance of $1,670.

According to Mr. Lessard's testimony, the appellant had submitted vouchers for $3,925 and not $3,245, and the respondent proceeded with his assessment on the basis of the higher figure. What the respondent disallowed the appellant as expenses is $2,350 in relation to replacing the roof of the building, an amount that he capitalized. The balance of $1,575 was allowed the appellant as expenses and deducted from his income.

Concerning the building on rue Forest for the year 1983, the only amount on which the appellant differs with the assessment relates to the repairs and maintenance expenses. He had claimed $3,244 and the respondent allowed him $3,093, disallowing $151, which was a payment to a landlords’ association that in the respondent's view had not been incurred for the purpose of earning income. No evidence was submitted by the appellant as to the nature of this expense and accordingly it cannot be allowed. On the other hand, at the hearing of this appeal, the appellant submitted vouchers for an additional $4,328, which had not been submitted to the respondent's agents.

The vouchers in question, which are 34 in number, with amounts ranging from $1.15 to $1,850 for a total of $7,572, were filed as an exhibit, but once again there was very little explanation by the appellant as to the nature of the expenditures they represented. An examination of these vouchers discloses that part of the amounts could be attributable to repairs in relation to the building on rue Forest, and as a result of this examination I conclude that $6,260 of the $7,572 is deductible in computing the appellant’s income for the 1983 taxation year, or an increase of $3,157 over the amount already allowed by the respondent.

For these reasons the appeal for the 1982 taxation year is dismissed and for the 1983 taxation year is allowed and the assessment is referred back to the respondent for him to reduce the appellant's income by $3,157. There is no order as to costs.

Appeals allowed in part.