Charron v. Agence du revenu du Québec, 2021 QCCQ 12137

The taxpayer and another individual acquired a lot for $24,500 in May 2004, and incurred various expenses during the period of construction (considered by Laurin JCQ to extend from the time of obtaining a building permit on April 4, 2004, to December 31, 2005, leased the property for one year commencing in October 2007, and the sold the property on February 1, 2011 for a price of $275,000. In subsequently assessing the taxpayer for a taxable capital gain on the sale, the ARQ did not allow the addition to the ACB of the expenses listed in the quote below, on the grounds that they were of a personal nature (analogous to such expenses not being allowed as an ACB addition for a chalet).

After referring to TA ss. 128, 129 and 135.4 to 135.6 (similar to ITA ss. 18(1)(a) and (b), and 18(3.1) to (3.3)) and before allowing the addition of these items to the taxpayers’ ACB, Laurin JCQ stated (at para. 161, TaxInterpretations translation):

Applying the jurisprudential principles and the provisions of the Taxation Act already cited, the Court concludes that the expenses that are the subject of the dispute between the parties concerning 7 Nicole Street, Cantley (municipal taxes, school taxes, insurance, electricity, interest on a line of credit and mortgage interest) were capital expenses for the period of construction of the building, which the Court has determined to be from April 4, 2004 (the construction permit) to December 31, 2005. In particular, the Court has concluded that substantially all of the work had been completed by December 31, 2005. There was some minor work to be done that did not prevent the house from being used for the purpose for which it was built. Expenditures after that date are current expenses that should have been deducted from income.

The taxpayers purchased a lot, constructed a house, leased it out for a year and then sold it at a gain. Regarding the computation of the ACB of the house for capital gains computation purposes, Laurin JCQ referred to the Quebec equivalents of ss. 18(1)(b) and 18(3.1) to (3.3), and found (contrary to the ARQ view of these items as being of a personal nature) that the taxpayers were entitled to add the costs of the following items incurred during the construction period: municipal taxes, school taxes, insurance, electricity, interest on a line of credit and mortgage interest.

He considered the construction period to commence with the receipt of the building permit and to end with the point of substantial completion, being the point at which “there was some minor work to be done that did not prevent the house from being used for the purpose for which it was built.” He further found that “[e]xpenditures after that date were current expenses that should have been deducted from income” (at para. 161, TaxInterpretations translation).