Date: 20030109
Docket: 2002-1280-IT-I
BETWEEN:
DOUGLAS R.S. JACQUES,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
AND BETWEEN:
2002-1281(IT)I
ANNA K. SIPOS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Lamarre, J.T.C.C.
[1] These appeals heard on common evidence are against assessments made by the Minister of National Revenue ("Minister") under the Income Tax Act ("Act") for the 1998 taxation year.
[2] In assessing the appellants, the Minister disallowed an amount of $15,797.77 in rental expenses with respect to two side-by-side properties located at 817 and 819 Tavistock Road, Ottawa, which the appellants claimed as current expenses on a 50-50 basis. The Minister is of the view that these expenses are capital expenses pursuant to paragraph 18(1)(b) of the Act. The portion of the above amount relating to 817 Tavistock Road ($12,133) was further disallowed on the basis that it represented personal or living expenses of the appellants pursuant to paragraph 18(1)(h) of the Act.
[3] On August 27, 1993, the appellants acquired the two properties referred to above, 50-year-old adjoining side-by-side bungalows, as an investment property for the purchase price of $225,000. The two appellants agreed in a partnership agreement to divide equally between them the rental income and the rental expenses relating to those two properties (see Partnership Agreement for Investment Property, Exhibit A-1).
[4] The two appellants have lived together since 1989. They lived in their principal residence, located at 2596 Roman Avenue, Ottawa, which Douglas Jacques had owned since 1984. Then, in 1994, Anna Sipos accepted a posting to Hong Kong with the Canadian Department of Foreign Affairs. Douglas Jacques therefore took a leave of absence from his work here in Ottawa to follow his spouse. Following that decision, they rented their principal residence and moved out their furniture and put it in storage. At that time, the two properties on Tavistock Road were already rented. Ms. Sipos' posting in Hong Kong was for a period of three years and was extended for another year. During the course of the fourth year, they made a request to Foreign Affairs to be posted somewhere else in Asia. However, on April 28, 1998, a posting confirmation was sent to them informing them that they were going back to Ottawa (see Posting Confirmation, Exhibit A-1).
[5] During their four years in Hong Kong, there were a number of tenant changes at the Tavistock Road properties, while the same tenant occupied the residence on Roman Avenue throughout and still occupies it.
[6] The appellants mandated TMS Associates ("TMS"), a residential property management company, to find tenants for the Tavistock Road properties. On February 5, 1998, TMS faxed a letter to Ms. Sipos in Hong Kong to advise her that the tenants at 817 Tavistock Road had moved. (The appellants explained in Court that those tenants had purchased a new house.) When 817 Tavistock Road became vacant, TMS prepared a list of repairs which they felt needed to be done to attract tenants willing to pay the rent required in order to break even on the property. In the letter sent to Ms. Sipos on February 5, 1998, TMS said that the items to be repaired were not such as to render the house unlivable, but were rather maintenance items that would spruce the house up (see letter from TMS, dated February 5, 1998, in Exhibit A-1).
[7] The appellants explained the work done in the following terms in a letter sent to the Canada Customs and Revenue Agency ("CCRA") on March 15, 2001 (Exhibit A-1):
The original, old-style wood-framed windows with single layers of glass held in with putty had to be replaced. They suffered from rot, aged and missing putty and there was a significant heat loss and draft. To replace them to exactly what was originally there, would have required that they be specially made which would have cost more than the no-frills replacement windows which we purchased. The windows were replaced with no-frills plain, basic windows the exact same size. There were no enhancements or upgrades i.e. larger windows, bay windows, etc.
Most of the other items grouped as capital expenses which have been disallowed are similar in nature. Fifty year old doors, sinks and plumbing get to the point where it is cheaper to replace them than to find somebody who knows how to repair them so that they will stand up to the sometimes negligent treatment afforded them by tenants. The doors, floors, etc were all no frills replacements not upgrades. The kitchens and bathrooms were not renovated, they were made serviceable and sanitary. Concrete steps which had broken down after years of salt, ice and pick and shovel treatment had to be repaired for safety reasons.
[8] An estimate of the work to be done on both properties was sent to Ms. Sipos in Hong Kong by fax on March 17, 1998 by Dynamic Building Improvements Inc. ("Dynamic") (Exhibit R-3).
[9] In March 1998, the appellants commissioned repairs to both rental properties (see Reply to the Notice of Appeal, subparagraph 9(h)). An invoice for a total amount of $21,234 for the repairs was sent to the appellants at 817 Tavistock Road in June 1998 (Exhibit R-2). Of that total, the Minister considered that an amount of $15,797.77 was to be treated as capital expenses, and he applied $12,133 thereof to 817 Tavistock Road and $3,664.75 to 819 Tavistock Road (see Schedule B of the Reply to the Notice of Appeal).
[10] During the period when the repairs were being carried out, the tenant at 819 Tavistock Road continued to live there. The other property, 817 Tavistock Road, remained vacant. During that same period, the appellants were in Hong Kong. According to their testimony, it was only at the beginning of May 1998 that they learned they would be returning to Ottawa at the end of July of that year. They thereupon considered their options, which included returning to their residence on Roman Avenue and therefore having to give their tenants notice, or moving into the property at 817 Tavistock Road, which was already vacant. Mr. Douglas explained that he was unemployed when he came back and that the more reasonable solution financially was to move into the vacant 817 Tavistock Road property, which yielded less income than the rental of their residence on Roman Avenue.
[11] Counsel for the respondent is of the opinion that the appellants knew when they started the repairs in March 1998 that they would eventually live in the 817 Tavistock Road property when they returned to Ottawa. For that reason, and based on the fact that it was not rented after February 1998, counsel for the respondent argued that all the expenses incurred with respect to the 817 Tavistock Road property were personal in nature.
[12] On this latter point, I do not agree with the interpretation of counsel for the respondent. The appellants clearly stated that they purchased the two properties on Tavistock Road for investment purposes. Both properties had been rented, with few gaps in between, since the date of the purchase. In February 1998, the tenants in the 817 Tavistock Road property moved because they had bought a house. At that time, TMS advised the appellants that the house needed repairs. The appellants therefore took advantage of the house being empty and commissioned Dynamic to start the repair work on both properties. The appellants did not know at that point that they were coming back to Canada in July 1998. They had made a request to Foreign Affairs for another posting in Asia and it was not until early May 1998 that they learned they would have to return to Ottawa. By then, the work had already begun on the two properties and had been going on for two months.
[13] Counsel for the respondent inferred from the fact that Dynamic sent the invoice to the appellants at the 817 Tavistock Road address on June 6, 1998 and that this property was not rented after February 1998, that there was evidence that the appellants had the intention of living there when the repairs were finished. I do not find that this evidence disclosed that, at the time the repairs were being done, it was the appellants' intention to live in the property at 817 Tavistock Road. First of all, the appellants clearly stated that TMS found no tenants for the said property during that period. Secondly, at the time the invoice was sent in June 1998, the appellants knew that they were coming back to Canada. By then, the repairs were all done. The only property not rented at that point was 817 Tavistock Road. In my view, it made sense for the appellants to have the invoice sent there for their attention, especially because the work invoiced had been done on the two Tavistock Road properties. I do not believe that this means that the work performed at 817 Tavistock Road was not done for the purpose of earning income from that particular property. I therefore conclude that the appellants have established on a balance of probabilities that they incurred the expenses for the purpose of gaining or producing income from the two properties on Tavistock Road within the meaning of paragraph 18(1)(a) of the Act.
[14] With respect to the nature of the expenses as such, President Jackett of the Exchequer Court stated in Canada Steamship Lines Ltd. v. M.N.R., 66 DTC 5205 (Ex. Ct.) at pages 5207-8, that:
Things used in a business to earn the income-land, buildings, plant, machinery, motor vehicles, ships-are capital assets. Money laid out to acquire such assets constitutes an outlay of capital. By the same token, money laid out to upgrade such an asset-to make it something different in kind from what it was-is an outlay of capital. On the other hand, an expenditure for the purpose of repairing the physical effects of use of such an asset in the business-whether resulting from wear and tear or accident-is not an outlay of capital. It is a current expense.
[15] I have come to the conclusion that the expenses totalling $4,241 incurred for the front porch partition ($610), the hall closet door ($145 + $156), the basement plumbing ($1,100), the basement walls and doors ($650) and the rear porch ($1,580), as detailed in Exhibit R-2, are capital expenses. Indeed, the appellants explained that those expenses were incurred to add something to the house that was not there before.
[16] However, all the other expenses that have been treated by the Minister as capital expenses because they were incurred as part of a renovation project are, in my opinion, current expenses. The replacing of some doors, of wall tiles in the kitchen, of the floor, the toilet and ceramic on the walls in the bathroom, and of some windows constitutes in my view current expenses. In Marklib Investments II-A Ltd. v. Canada, [1999] T.C.J. No. 716 (Q.L.), at paragraph 26, this Court made reference to the decision by the Quebec Court of Appeal in Le sous-ministre du Revenu du Québec c. Denise Goyer, [1987] A.Q. no 644 (Q.L.), 1987 CarswellQue 122, as follows:
¶ 26 . . . in Le Sous-Ministre du Revenu du Québec c. Denise Goyer, [1987] A.Q. no 644, 1987 CarswellQue 122 [hereinafter Goyer], the Quebec Court of Appeal found that the replacement of decrepit balconies, plumbing, windows and doors did not constitute capital property but was rather components to capital property which only required repair, not replacement. Emphasis was placed on whether a new capital asset had been created. Justice Vallerand stated at paragraph 19:
"...as long as one is not creating new capital property, or causing the normal value of the property to be inflated, or replacing a property that has disappeared, then the work done will amount to repairs and maintenance in efforts to restore the property to its normal value."
[17] Judge Brulé stated further at paragraphs 35 and 36:
¶ 35 It is the purpose, rather than the result, of an expenditure that determines whether it is characterized as a capital outlay or a current expense; and the focus of the test is on whether or not the expenditure brings into existence an asset of enduring value, rather than on the determination of the frequency or recurrence of the expenditure. The cases seem to promote the idea that as long as the repairs were done to preserve or conserve the asset and not to create a new asset then the repairs will be considered current expenses.
¶ 36 An expenditure that merely maintains an asset or restores it to its original condition is a deductible current expense. As already seen from the cases above, this is easier said than done. There is a lot of grey area in between the capital outlay and current expense distinction. Furthermore, the magnitude of the expense must be examined in the context of the value of the building. However, simply because the amount of money expended is significant does not in itself render the expenditure capital in nature.
[18] We are not dealing here with a case in which the appellants purchased a deteriorated property and made repairs in order to make the building usable. They had been renting the properties for at least four years when they made the repairs. They took the opportunity of the vacancy at 817 Tavistock, after the departure of tenants who had purchased a house, to do the repairs. Moreover, they did the same thing with the 819 Tavistock Road property, which remained occupied while the repairs were being carried out.
[19] Furthermore, Interpretation Bulletin IT-128R, Capital Cost Allowance - Depreciable Property, in which the CCRA lists a number of common factors to be considered, states at subparagraph 4(d):
(d) . . . On the other hand, the relationship of the amount of the expenditure to the value of the whole property is not, in itself, necessarily decisive in other circumstances, particularly where a major repair job is done which is an accumulation of lesser jobs that would have been classified as current expense if each had been done at the time the need for it first arose; the fact that they were not done earlier does not change the nature of the work when it is done, regardless of its total cost.
[20] Here, there is no evidence that the value of the properties went up after the repairs were done. In my view, the expenses in question were current in nature and fully deductible by the appellants in 1998.
[21] For these reasons, the appeals are allowed, without costs, and the assessments are referred back to the Minister for reconsideration and reassessment on the basis that all the expenses incurred and claimed as rental expenses by the appellants were incurred for the purpose of earning rental income. Of the total expenses of $21,234.14, an amount of $4,241 is to be treated as capital expenses; the balance is to be treated as current expenses.
Signed at Ottawa, Canada, this 9th day of January 2003.
|
"Lucie Lamarre" |
J.T.C.C.
COURT FILE NO.: 2002-1280(IT)I & 2002-1281(IT)I
STYLE OF CAUSE: Douglas R.S. Jacques and Anna K. Sipos v.
The Queen
PLACE OF HEARING: Ottawa, Ontario
DATE OF HEARING: December 3, 2002
REASONS FOR JUDGMENT BY: The Honourable Judge Lucie Lamarre
DATE OF JUDGMENT: January 9, 2003
APPEARANCES:
For the Appellants: The Appellant themselves
Counsel for the Respondent: Nicolas Simard
COUNSEL OF RECORD:
For the Appellant:
Name:
Firm:
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2002-1280(IT)I
BETWEEN:
DOUGLAS R.S. JACQUES,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on common evidence with the appeal of Anna K. Sipos (2002-1281(IT)I) on December 3, 2002, at Ottawa, Ontario, by
the Honourable Judge Lucie Lamarre
Appearances
For the Appellant: The Appellant himself
Counsel for the Respondent: Nicolas Simard
JUDGMENT
The appeal from the assessment made under the Income Tax Act for the 1998 taxation year is allowed, without costs, and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that all the expenses incurred and claimed as rental expenses by the appellant and his co-partner, Anna Sipos, on a 50-50 basis were incurred for the purpose of earning rental income. Of the total expenses of $21,234.14, an amount of $4,241 is to be treated as capital expenses; the balance is to be treated as current expenses.
Signed at Ottawa, Canada, this 9th day of January 2003.
|
"Lucie Lamarre" |
J.T.C.C.
2002-1281(IT)I
BETWEEN:
ANNA K. SIPOS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on common evidence with the appeal of Douglas R.S. Jacques (2002-1280(IT)I) on December 3, 2002, at Ottawa, Ontario, by
the Honourable Judge Lucie Lamarre
Appearances
For the Appellant: The Appellant herself
Counsel for the Respondent: Nicolas Simard
JUDGMENT
The appeal from the assessment made under the Income Tax Act for the 1998 taxation year is allowed, without costs, and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that all the expenses incurred and claimed as rental expenses by the appellant and his co-partner, Douglas Jacques, on a 50-50 basis were incurred for the purpose of earning rental income. Of the total expenses of $21,234.14, an amount of $4,241 is to be treated as capital expenses; the balance is to be treated as current expenses.
Signed at Ottawa, Canada, this 9th day of January 2003.
|
"Lucie Lamarre" |
J.T.C.C.