A recent decision of the Tax Court of Canada will be of interest
to those who hold rental property for the long term and who incur
expenses related to the zoning of that property. The Tax Court
found that such expenses were deductible for tax purposes, and were
not required to be capitalized to the cost of the property.
The Income Tax Act ("Act")
distinguishes between payments which are on account of income and
those which are on account of capital. The distinction is not
clear, and there has been considerable commentary and litigation on
the subject. Payments on account of income are, very generally,
deductible provided that they meet the requirements of the Act. A
key requirement is that the payments are incurred for the purpose
of earning income from a business or property.
Payments on account of capital, in contrast, are not deductible
unless there is an applicable exception in the Act. Paragraph
20(1)(cc) of the Act is relevant to re-zoning expenses. It states
that a taxpayer can deduct from business or property income the
cost of making representations to a municipal body for the purpose
of obtaining a licence or permit relating to the business carried
on by the taxpayer. Canada Revenue Agency has, in the past,
indicated that this includes a rezoning application. Unfortunately,
for certain taxpayers, holding rental property may not involve
sufficient activity to constitute a "business".
The key issue, then, is whether a payment made for re-zoning
expenses of a rental property is made on account of income or
capital. It was this issue which was before the court in Jennings v. The
The taxpayers in Jennings were two individuals who
bought a residential property in Ottawa in 1987. It had three
rental units, including one in the basement. When they bought the
property, the taxpayers relied on a report on zoning from the City
of Ottawa that indicated that there were no zoning violations.
In 1993, the taxpayers received a notice of violation of zoning
by-laws from the City. The City took the view that the property
could only have one rental unit. The taxpayers applied for rezoning
"to legalize the property as a three unit converted
dwelling". In the application, the taxpayers observed that the
property had been assessed property tax since 1980 as a three-unit
The City delayed considering the taxpayers' application for
a number of years. In 2010, the taxpayers made a new application
with the assistance of a planning consultant, incurring costs to do
so. The application was approved.
The taxpayers deducted the costs of making the 2010 application
for tax purposes. The Tax Court found that this was the correct
"According to the evidence, which I accept, the appellants
applied for the zoning amendment in 1993 and again in 2010 as the
best way of dealing with the notice of zoning violation and in
accordance with professional advice.
In my view, the expenditures should be viewed as ordinary
expenditures incurred in connection with the day-to-day management
of the rental property. It is true that the expenditures would
likely have a long term benefit in the sense that the property was
now clearly in compliance with existing by-laws. However, I do not
think that this should tip the balance to result in the
expenditures being non-deductible capital expenditures.
Defending Zoning Complaints
The Court in Jennings considered the costs incurred in
rezoning rental property. Owners may also incur legal costs in
defending zoning complaints. In a 2009 decision the Tax Court found
that such costs were incurred to allow an owner to continue to earn
rental income, rather than to preserve the taxpayer's interest
in a capital asset. Accordingly, they were deductible.
If you own rental property, and incur zoning or rezoning costs,
you should consider whether these may be deductible. In general,
each year, those who own rental properties should carefully review
and categorize costs relating to those properties to ensure the
appropriate and most beneficial tax treatment.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Russell v. Township of Georgian Bay provides a useful reminder of the fact that while municipal officials sometimes appear to hold all of the cards in disputes with home owners, that is not always the case.
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