Date: 19990324
Docket: 97-221-IT-G
BETWEEN:
R.E.A.D. ENTERPRISES LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for judgment
Bell, J.T.C.C.
ISSUES:
[1] The issue for the 1990, 1991, 1992, 1993, 1994 and 1995 taxation years was stated in the pleadings to be:
(a) Whether the Appellant's capital cost allowance is properly determinable by inclusion of the building in question in Class 6 of Schedule II of the Income Tax Regulations ("Regulations") at the rate of 10% or whether, as the Minister of National Revenue contends, it should be included in Class 1 of that schedule at a rate of 4%; and
(b) Whether the expenditure of $4,068 for furniture refinishing incurred by the Appellant in the 1993 taxation year was a deductible current expenditure or a capital outlay.
[2] At the opening of the hearing, counsel for the Respondent made an application that the purported appeals for the 1991, 1994 and 1995 taxation years be quashed on the basis that no tax, interest or penalty was assessed for those taxation years. The Court quashed those purported appeals and, accordingly, the hearing proceeded with respect to the 1990, 1992 and 1993 taxation years.
FACTS:
[3] The Appellant purchased a hotel, renovated it and opened it for business in September, 1989. At the time the hotel was originally constructed in approximately 1892, its
... foundations/footings were constructed at ground level and had no foundations/footings below ground level.
[4] In 1898 the hotel and other buildings on the same street were destroyed by fire. The hotel was rebuilt of frame construction on its original foundation/footings. Because of:
...the reconstruction of the street and surrounding area, and the introduction of fill consisting of fire debris and soil, since 1898, the Hotel's foundation/footings and first floor (now basement) have been below ground level at the front of the building.
[5] The ground level did and presently does slope downward toward the back of the building so that the first floor (now a basement) sits at ground level at the back of the building.
[6] For the taxation years in question, the Appellant determined capital cost allowance under paragraph 20(1)(a) of the Income Tax Act ("Act") on the basis of it being described in Class 6 in Schedule II of the Regulations. Paragraph 1100(1)(a) provides, inter alia, that a taxpayer is allowed, as a deduction, such amount as he may claim in respect of property of a number of different classes. The rate for property in Class 1 was 4% and the rate for property in Class 6 was 10%.
Class 1 included:
Property not included in any other Class that is ... a building or other structure, or part thereof ...
Class 6 included:
Property not included in any other class that is ... a building of ... frame ... construction ... if the building ... has no footings or any other base support below ground level. (emphasis added)
APPELLANT'S SUBMISSIONS:
[7] The Appellant submitted that the intention of the original builder was to have no base support below ground and that any change in outside ground level after the original foundations were built should be irrelevant. He submitted that to use any other date would penalize people whose buildings have sunk into the ground by a few inches either through the action of frost heave or because the occupants put plantings against the building. He also submitted that the date of substantial completion should be the determinative date because to find otherwise would force taxpayers to monitor exterior ground levels over which they had little or no control, resulting from frost heave, municipal works such as sidewalks, roads or plantings or, as in the case at bar, fill.
RESPONDENT'S SUBMISSIONS:
[8] The Respondent submitted that in order for the building to be included in Class 6 it must, in the words describing Class 6, have:
no footings or any other base support below ground level,
[9] Respondent's counsel argued simply that the fact that a portion of the footings or base support of the hotel was below ground level at the front of the hotel and along part of the side, disqualified it from inclusion in that Class.
ANALYSIS AND CONCLUSION:
[10] I do not accept Respondent's submissions that a building is disqualified from Class 6 simply because some of its footings or base support are below ground level. I reject the conclusion that Respondent's counsel urged upon the Court, namely that the requirement that it have "no footings or any other base support below ground level" means that no portion, however small, of the building can have footings or other base support below ground level. That is especially so in this case where the original footings or foundations supporting the original building were not below ground level. In this case, they are not below ground level at the back of the building. No evidence was adduced to indicate how deep the building was and what portion of the footings or other base support were below the level of the ground as built up by virtue of rubbish and fill. Assume that the building was 500 feet deep and that the front ten feet of footings or base support were below ground level and the remaining 490 feet of footings or base support were not below ground level. Assume further that the building was originally built with no footings or base support below ground level. It is wholly illogical that such a building would be disqualified from inclusion in Class 6 in those circumstances.
[11] It seems that the words "has no footings or any other base support below ground level" describe the manner of construction of the entire building. If so, the building would not be excluded from Class 6 simply because a portion was below ground level.
[12] The interpretation sought by the Respondent does not have great economic significance to the fiscus. The transfer from Class 6 to Class 1 results simply in prolonging the period of time in which the full amount of deduction may be claimed[1]. One wonders why, in the circumstances of this case, such an exclusionary construction of the words under examination found its way into the reassessments.
[13] The purported appeals for the 1991, 1994 and 1995 taxation years are quashed. The claim by the Appellant that the expenditure of $4,060 as aforesaid having been abandoned by it, the appeal is allowed to the extent that the hotel was properly included by the Appellant in Class 6 of Schedule II to the Regulations.
Signed at Ottawa, Canada this 25th day of March, 1999.
"R.D. Bell"
J.T.C.C.
[1] Actually it approaches infinity and is never fully claimed until disposal of all assets in the class.