Properly qualifying expenses for tax purposes: a crucial difference
In a recent decision1, the Quebec Court recalls important principles regarding the qualification of expenses related to income properties.
Indeed, Mr. La Chapelle contested tax assessment notices issued by Revenu Québec (hereinafter “RQ”). The RQ’s qualification of certain expenses incurred in relation to his income properties was contested by the taxpayer, as it appears that the concepts of current expenses and capital expenses were confused during the qualification process.
Deduction of expenses
It is important to remember that according to section 128 of the Taxation Act, a taxpayer can deduct from their business or property income current expenses, which may include maintenance expenses, that do not create new capital2. However, they cannot deduct capital expenses, which contribute to increasing the value or obtaining higher rent3. Thus, the qualification of expenses can have a significant impact on tax liability.
Presumption of validity
It should be noted that tax assessment notices issued by the RQ benefit from a presumption of validity under section 1014 of the Taxation Act, but this presumption can be rebutted by the taxpayer. To do so, the taxpayer must present prima facie evidence, meaning evidence that is sufficient to demonstrate, until proven otherwise, the invalidity of the assessments being challenged4. However, in order to allow for this rebuttal of the presumption of validity, the evidence presented by RQ regarding the qualification of expenses must be based on certain elements of proof. Indeed, RQ must support its conclusions with data allowing the taxpayer to follow the reasoning that led to a certain qualification of expenses, rather than another. In the absence of this data, the taxpayer will not have the information necessary to rebut the presumption of validity5.
Legal analysis
See Judge Davignon’s conclusion regarding this decision:
[68] For all these reasons and considering that the verification of expenses claimed by Mr. La Chapelle did not undergo an individualized analysis allowing for a true appreciation of their nature, the Tribunal concludes that through the evidence presented at the hearing, the taxpayer demolishes the presumption of validity of the contested assessments.
[69] It is not for the Tribunal in the context of such an appeal to redo the entire verification exercise of hundreds of invoices, when RQ itself has chosen a general approach. From the outset, it chose to reject a multitude of expenses which it nevertheless acknowledges could have individually constituted maintenance expenses. However, RQ chose to refuse to qualify them as such solely on the grounds that they were incurred during a period when other works aimed at increasing the capital of the assets were carried out. This way of proceeding, based on assumptions that have been demolished, cannot be upheld.
[…]
[72] In these circumstances, the Tribunal concludes that it is appropriate to grant Mr. La Chapelle’s request, to cancel the contested assessments and to refer the matter back to the minister so that he may issue new appropriate assessments […]. As for the claim for interest expenses, it should follow the fate of the treatment of other claimed expenses. [Our translation]
In conclusion, this decision reminds us that it is essential to understand the concepts surrounding the qualification of expenses in order to pay our fair share of tax contributions. Indeed, not all expenses can be deducted from the income of an individual or a business. To support you, do not hesitate to consult a qualified professional who can assist you in advocating for your personal and financial interests.
Written in collaboration with Léa-Catherine Brunet, law student
1La Chapelle c. Agence du revenu du Québec, 2024 QCCQ 761.
2Motter c. Agence du revenu du Québec, 2021 QCCA 72.
3Id.
4Stewart v. M.R.N., [2000] CanLII 426 (TCC).
5Brasserie Futuriste de Laval Inc. c. La Reine, 2006 TCC 503.