Date: 20010514
Docket: 2000-1099-IT-I
BETWEEN:
BIKKAR S. RANDHAWA,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Bowman, A.C.J.
[1] This appeal from an assessment for the 1997 taxation year is concerned with the disallowance of expenses of $11,003 relating to a rental property owned by the appellant. The appellant was represented by his son Balvinder Randhawa who was the only witness and who appears to have been the person most closely involved in the decisions about the property.
[2] I should emphasize at the outset that, mercifully, this is not a reasonable expectation of profit case. The issue is whether the expenditures were laid out for the purpose of gaining or producing income (paragraph 18(1)(a)), were capital (paragraph 18(1)(b)) or were personal (paragraph 18(1)(h)).
[3] In 1990 the appellant bought for $250,000 a single residential house as a rental property at 1151 Priory Court, Oakville.
[4] The assumptions upon which the expenses were disallowed in 1997 were the following.
(a) at all material times, the Appellant owned 1151 Priory Court, a single family residential property;
(b) the Appellant acquired 1151 Priory Court in 1990 at a cost $250,000.00;
(c) the Appellant reported rental income and claimed rental losses for the 1990 to 1997 taxation years as follows:
Year Income Loss
1990 $ 850.00 ($ 5,527.00)
1991 $15,600.00 ($ 8,087.00)
1992 $16,800.00 ($10,426.00)
1993 $17,400.00 ($ 4,556.00)
1994 $17,400.00 ($ 3,718.00)
1995 $17,400.00 ($ 2,330.00)
1996 $17,400.00 ($ 7,456.00)
1997 $ 5,150.00 ($15,051.00)
(d) in the 1997 taxation year, 1151 Priory Court was occupied by tenants for the months of January, February, two weeks in March and the month of June;
(e) in July 1997, the Appellant moved into 1151 Priory Court, and commenced using it as his principal residence;
(f) in the 1997 taxation year, the Appellant claimed maintenance and repairs expenses in the amounts of $11,003.00 (the "Expenses");
(g) the Expenses were incurred in March and April 1997;
(h) the Expenses were incurred by the Appellant to put 1151 Priory Court in a suitable condition for the Appellant to move into the property;
(i) the Expenses were capital in nature;
(j) in the 1997 taxation year, the rental expenses claimed with respect to 1151 Priory Court in excess of the amounts allowed were not made or incurred, and if made or incurred, were not made or incurred for the purpose of gaining or producing income from a Property;
(k) in the 1997 taxation year, the rental expenses in excess of the amounts allowed with respect to 1151 Priory Court were personal or living expenses of the Appellant.
[5] Paragraphs (a) to (g) are accepted as correct, except for (d) in which Mr. Randhawa says there is a slight inaccuracy in that the house was also occupied in the last week of May.
[6] The property was bought and used as a rental property right up to the point at which the appellant moved into it in July 1997. All of the losses claimed in the years 1990 to 1996 were allowed, as was the loss claimed in 1997, except for the $11,003 in issue here. It is not disputed that this amount was spent.
[7] Throughout most of the period up to the end of February 1997 the house was rented to one family with three or four small children. They did not take care of the house. Indeed they left it in a dreadful mess. The carpets were ruined, the walls were filthy, the vinyl floor tiles were broken and the kitchen counter was damaged.
[8] The repairs in issue are the following
- repainting the inside of the house
- replacing the carpets
- replacing the kitchen counter
- new ceramic tiles in the kitchen, hall and two bathrooms.
[9] After the repairs were completed the appellant put up a for rent sign on the front lawn and rented it to a tenant in the latter part of May and the month of June. The appellant sold his house in Burlington and moved into 1151 Priory Court, Oakville in July.
[10] The appellant's problem is one of timing, although this is not articulated in the reply. Had the repairs not been made shortly before the appellant moved into the rental property I doubt that the assessment would have been made. In an ongoing rental operation the type of repairs involved here are routinely made without challenge by the revenue authorities. Landlords periodically replace carpet or tiles, paint the walls, fix or replace counters or cabinets in kitchens or bathrooms and no one ever suggests that such expenditures are on capital account. I shall not repeat the extensive jurisprudence on revenue versus capital expenditures that has been developed over the last century or so in Canada, Australia and the United Kingdom. One can toss around forever felicitous phrases like "enduring benefit of the trade", "once and for all" and a myriad of other expressions that have been used without getting any closer to an answer in a particular case.
[11] These expenses arose out of the rental operation that the appellant carried on. They were a direct and necessary incident of that operation and were expenses that have to be satisfied out of the circulating capital of the business.
[12] I can do no better than cite a portion of the judgment of Estey J. in the leading case of Johns-Manville Canada Inc. v. The Queen, 85 DTC 5373 at 5383-4:
In applying the law to the above stated observations, one is thrown back to the pronouncement by Lord Wilberforce in Tucker v. Granada Motorway Services, [1979] 2 All E.R. 801, where he said at p. 804:
It is common in cases which raise the question whether a payment is to be treated as a revenue or as a capital payment for indicia to point different ways. In the end the courts can do little better than form an opinion which way the balance lies. There are a number of tests which have been stated in reported cases which it is useful to apply, but we have been warned more than once not to seek automatically to apply to one case words or formulae which have been found useful in another. ... Nevertheless reported cases are the best tools that we have, even if they may sometimes be blunt instruments. (emphasis added)
We must also remember the previously cited words of Lord Pearce in B.P. Australia, supra, at p. 264:
It is a commonsense appreciation of all the guiding features which must provide the ultimate answer.
If we were to apply the three-step test adopted by the Australian court in Sun Newspapers, supra, these expenditures would qualify as expenses rather than being capital in nature. The character of the advantage sought is that of an advantage in the current operations of the taxpayer. The practice was recurring and the manner in which the object of the expenditures was applied was directly incorporated into the mining operations of the taxpayer. Finally, the means adopted by the taxpayer to gain this advantage was the periodic outlay of its funds which would formerly have been classified, in the vocabulary of that day, as circulating capital. In the words of Dixon J., as he then was, in Sun Newspapers, supra, at p. 362, we are here concerned with an expenditure of a revenue nature because:
... its purpose brings it within the very wide class of things which in the aggregate form the constant demand which must be answered out of the returns of a trade or its circulating capital and that actual recurrence of the specific thing need not take place or be expected as likely.
The same judge in Hallstroms Pty. Ltd., supra, at p. 648, reminds us that the classification of such expenditures "... depends on what the expenditure is calculated to effect from a practical and business point of view rather than upon the juristic classification of legal rights ...", supra. The old rule of "once and for all" as well as the "common sense" test, supra, lead us to a result favourable to the taxpayer's contention.
[13] The expenditures with which we are concerned here are not capital. They are clearly on revenue account.
[14] Nor do I accept that they were incurred for the purpose of putting the property in a suitable condition so that the appellant could move into it. They were incurred at a time when the appellant intended to continue the rental operation as, indeed, he did briefly. They were not personal or living expenses. They were an integral part of the rental operation.
[15] Mr. Randhawa was subjected to a searching and extremely skilful cross-examination by counsel for the respondent and his evidence was not shaken.
[16] Notwithstanding the able presentation by Ms. Sugunasari of the Crown's case I have concluded that the expenses of $11,003 incurred in 1997 were current expenses of the rental operation and are therefore deductible in computing the appellant's income for that year.
[17] The appeal is allowed and the assessment for 1997 is referred back to the Minister of National Revenue for reconsideration and reassessment to permit the deduction of the $11,003 claimed.
[18] The appellant is entitled to his costs if any in accordance with the tariff.
Signed at Toronto, Canada, this 14th day of May 2001.
"D.G.H. Bowman"
A.C.J.