Gold Bar Developments LTD v. Minister of National Revenue, [1985] 2 CTC 2174, 85 DTC 513

Brulé, TCJ [ORALLY]:—The facts in this case are not in dispute. They are as set out in the notice of appeal. The appellant called two witnesses to elaborate on the facts. Basically the issue is whether or not part of the exterior of a commercial and residential building which had to be replaced was an expense item or on capital account.

The distinction between capital and revenue expenditures is not well defined and no less easy to determine within the meaning of section 18 of the Income Tax Act. One taxpayer will treat the matter in one manner while another will arrive at the opposite conclusion.

As Christie, TCJ so aptly said in Sydney Harold Healey v MNR, [1984] CTC 2004 at 2007; 84 DTC 1017 at 1019 with slight changes I have made,

The kind of paradox which can flow from applying general legal principles or hypothetical facts to actual fact situations in particular cases was, in the realm of Current versus capital expenditures, exemplified on this appeal. In the course of argument, counsel for the appellant and respondent both relied on Shabro [Investments Ltd v The Queen, [1979] CTC 125; 79 DTC 5104] and both recited the same passages from the judgment in suport of the correctness of their positions which, of course, were diametrically opposed.

In our tax system it then remains for Revenue Canada to interpret in a consistent fashion the actions of the taxpayer based on the facts involved.

If the matter is not settled there, the different courts dealing with these matters must follow the same consistency. The facts in each case, and their interpretation, however, tend to give different results.

Counsel for the appellant placed the problem facing the Court in perspective when he quoted Chief Justice Jackett in the Shabro case at 128 (DTC 5106) as follows:

I know of no single test to distinguish between (a) “repairs”, the cost of which is a revenue expenditure in the year during which they are carried out, and (b) additions or improvements, the cost of which is an outlay on account of capital.

Different cases suggest different criteria, and I have examined all the cases presented by counsel. As said before, they present completely opposite views.

One must adopt tests to be applied to the facts. A most important one can be taken from the Supreme Court of Canada decision of MNR v Haddon Hall Realty Inc, [1961] CTC 509; 62 DTC 1001, wherein Mr Justice Abbott said at 511 (DTC 1002):

Among the tests which may be used in order to determine whether an expenditure is an income expense or a capital outlay, it has been held that an expenditure made once and for all with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade of a capital nature.

A second important test is a commonsense one, and derives from whether or not the so-called repairs were of a nature that can qualify under section 18 of the Income Tax Act which reads in part:

18. (1) In computing the income of a taxpayer from a business or property, no deduction shall be made in respect of

(a) an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property

Are the people properly within paragraph 18(1 )(b) which prohibits the deduction from income of any outlay, loss or replacement of capital?

Both counsel cited tests from various authorities, none of which are absolute. One asks, “Would the building have had the same value in the marketplace when the problem of the falling bricks existed, as compared to a value after the problem was remedied?" I think not.

A correction to the capital asset was needed; the expenditure was not of a recurring nature, but was made to bring about an advantage of an enduring nature to the capital asset.

The expenditure was not a current expense made in the ordinary course of the company’s business operation to earn income. Returning once again to the Haddon Hall case, Mr Justice Abbott said at 511 (DTC 1002),

Expenditures to replace capital assets which have become worn out or obsolete are something quite different from those ordinary annual expenditures for repairs which fall naturally into the category of income disbursements.

While in this case, there is no replacement of a worn out or obsolete capital asset there is a major expenditure made to put the capital asset in a proper condition, and certainly the expenditure is not an ordinary annual one.

Applying then both a commonsense approach to classify the expenditure and the test in the Haddon Hall case, I find that the expenditure in this case is of a capital nature and, accordingly, this appeal is dismissed.

Appeal dismissed.