Audrey B Wager v. Minister of National Revenue, [1985] 1 CTC 2208, 85 DTC 222

Taylor, TCJ:—This is an appeal heard in Belleville, Ontario on January 10, 1985, against an income tax assessment for the year 1981 in which the Minister of National Revenue, disallowed certain amounts claimed by the appellant as expenses against rental income. The critical portions of the notice of appeal read:

My client had two rental properties during year 1981 namely

77 Grier Street, Belleville, Ontario.

65 Grier Street, Belleville, Ontario.

These properties provide room accommodation to mainly students.

During year 1981, Carr-Braint Construction a local contractor, did extensive work on these properties. The main work being on the 77 Grier Street property.

The department’s contention is that all work performed by the contractor is Capital in nature and we contend that it was a combination of both Capital Improvements and Repairs and Maintenance.

The facts are however that these properties were available for rent and rented during the period the work was performed. Mrs Wager had the contractor do additional work in addition to the major capital renovations.

For the Minister the situation was:

— the Appellant purchased 77 Grier Street and 65 Grier Street for the purpose of renting the building to tenants and in fact both buildings were rented out during the 1981 taxation year yielding gross rental incomes of $2,745 (77 Grier Street) and $590 (65 Grier Street) in that year;

— at the date of purchase 77 Grier Street was in poor condition and required certain repair work and renovations to be carried out before the building could be rented out to tenants;

— in late May and early June of 1981 the Appellant retained a firm of general contractors to prepare an estimate of renovations and repairs to be done to 77 Grier Street, which repairs and renovations were completed by the general contractor during the summer of 1981;

— in addition to carrying out repair work to 77 Grier Street, the Appellant arranged to have alterations and renovations to parts of the building, which alterations and renovations involved structural changes to the building designed to extend the useful life of the building as well as the replacement of certain existing items with items of superior quality and greater durability;

— ... “rental expenditures’’ in the amount of $12,101.17 on the basis that such expenditures were not made for the purpose of gaining or producing income from a property.

— . . . the “rental expenditures’’ in the amount of $12,101.17 claimed by the Appellant were in fact outlays or payments on account of capital the deduction of which is prohibited by paragraph 18( l)(b) of the Income Tax Act.

— . . . the “rental expenditures’’ of $12,101.17 (are properly characterized) as payments on account of capital for the reason that such expenditures were incurred by the Appellant in effecting structural changes and renovations designed to ex- tend the useful life of 77 Grier Street, and to render the building suitable for inhabitation and in replacing existing items with items of superior quality and greater durability.

The adjustments at issue arose in this way:

MRS. A. WAGER

REVISED RENTAL EXPENSES

1981

	Claimed	Proposed	Adjustment
Property Taxes	1 1,215.51	$ 1,215.51	—
Maintenance and Repairs	13,722.16	2,269.84	$11,452.32
Interest	4,566.09	4,566.09	—
Insurance	973.00	530.00	443.00
Light, Heat and Water	1,252.74	1,252.74	—
Telephone	576.19	370.34	205.85
Cableview	100.21	100.21	—
Advertising	92.33	92.33	—
Personal Portion	(2,000.00)	(2,000.00)	—
Total Expenses Proposed		$8,247.06
Proposed Adjustment to Expenses Claimed			$12,101.17

The appellant and her agent had available detailed documentation and information in support of their contentions, but it is clear that quantum, as such, was not the point in dispute. It can be said, however, that the general breakdown between “current” and “capital” of the total expenses as determined by the Minister did appear reasonable. On the main point however, the Court would note the following:

To carry the perspective of the appellant in this matter to its extreme — a taxpayer could acquire the remnant of a building — virtually little but the shell

— perhaps almost only walls and a floor, reconstruct the entire building for investment purposes, and charge the cost as “repairs and maintenance” on the basis that during the year there had been some “rental income”. That situation I believe is absurd, but that absurdity does not arise only out of the strict wording of paragraphs 18(l)(a) or 18(l)(b) of the Act. The situation must be seen in the context of the distinction between paragraphs 18(l)(a) and 18(l)(b) arising out of the relevant jurisprudence which has attempted to identify and highlight that contrast. Therefore, as I see it, the nature of an individual expenditure itself may not be, in circumstances such as this case, the sole criterion upon which the distinction is made. Clearly a replaced “door” can be a repair, but it also can be a capital expenditure in circumstances where the general overview of that accomplished by all the repairs is a total reconstruction or rehabilitation of the structure. The Minister, in assessing, is entitled to take an overview of the entire expenditure program, and it may almost be necessary, on some occasions, that the breakdown be done somewhat arbitrarily between “current” and “capital”. I am not aware of jurisprudence which would mandate for the Minister a course of accepting any or all individual items of expenditures as “current”, rather than viewing some of those expenditures as on the same continuum as the original capital asset purchase, leading toward a completion of that capital expenditure program.

The particular building at 77 Grier Street was about 80 years old when acquired by the appellant, and it was the intention of Mrs Wager to upgrade the place and provide relatively good accommodation therein. At the same time she thought in the future she might live in that building herself, whereas at present she occupied part of the other building. Counsel for the Minister referred to Stephen Coleman v MNR, [1984] CTC 2725; 84 DTC 1637, and in my view it is along the same line as this case. 1 do not see that the type of expenditures and renovations made in this case differ materially from the similar amounts in Coleman (supra) when the situation is viewed in its entirety. I would quote from Coleman (supra) at 2727 CTC (1638 DTC):

— the nature of the expenditures is not that of normal wear and tear on a building as a result of tenant occupancy in any one year. The expenditures are the result of depreciation and deterioration of the building in the course of time . . .

The appeal is dismissed.

Appeal dismissed.