AON Inc. – Current vs. Capital Expenditures

On September 6, 2017, the Tax Court released its decision of AON Inc. v. Canada 2015-1043 (IT) G ruling on the issue of classification of expenditures (current vs. capital). The Honourable Justice Gaston Jorre confirmed the established legal test used to determine the nature of the expenditures.

In summary, Justice Jorre confirmed “enduring benefit” (most recently followed in Rainbow Pipe Line 1999 TCJ No. 604 (GL)) test that considers whether the benefit flowing from the expenditure endures beyond the current fiscal year. Justice Jorre also considered Professor Durnford’s commentary from his 1997 article “The Deductibility of Building Repair and Renovation Costs” as a guide that lists the factors to be considered (acquisition of independent assets vs. repair of an asset, use of new technology, quantum of work, the length of time taken incur the expenditures).

In AON, the appellant spent $4 million in expenses over a two-year period to replace a garage roof in the Citi Centre Place in Peterborough, ON. AON’s rent income from all sources for 2010 and 2011 averaged around $29,000,000 respectively. The operating costs, maintenance and repairs for all of AON’s properties averaged about $11,500,000 in 2010 and 2011. Citi Centre consists of three towers with a total of 310 apartments and about 21,000 square feet of commercial space. The Citi Centre complex has a one level underground parking garage that is approximately 92,000 square feet.

Justice Jorre held that the expenditure was current after stating that “the parking garage has the same functionality after the work as before the work. It has the same number of spaces as it had originally… On the other hand, the new roof was built with newer technology with a significantly greater awareness of the problems caused by salt than existed some 35 years earlier when Citi Centre was built… However, given that it is quite clear that there is no improvement in the functionality or profitability of the garage…”

Let’s see if the Department of Justice appeals this decision to get a more favorable outcome for the CRA and the Minister.