COLCO News

Dear Minister Cauchon:

It has come to my attention that an opinion recently released by the Canada Customs and Revenue Agency (CCRA) threatens to cause additional hardship for tens of thousands of owners of leaky condominiums in British Columbia.  I am writing to request your assistance in ensuring that fairness and common sense prevail in this situation.

Homeowners who rent out their dwelling unit are normally able to deduct repair expenses on their income taxes.  As you may know, owners of leaky condominiums face repair bills averaging $22 000 to repair faulty building envelopes, including such items as rotted framing timbers, moldy insulation, improperly installed windows, and exterior cladding.

Although we have not seen a copy of the recent CCRA opinion, I understand that it interprets such repairs as non-deductible property improvements. If this opinion is followed in a subsequent formal ruling by CCRA, landlords of leaky condominiums will end up paying many thousands of dollars more in federal and provincial income tax.

The key question seems to be whether the renovation work that owners of leaky condominiums do should be considered repairs or improvements. Regardless of what CCRA contends, I submit to you the following:

* Some of the repair work for low-income owners is funded through the federal Residential Rehabilitation Assistance Program (RRAP). Canada Mortgage and Housing' Corporation's (CMHC) eligibility criteria for RRAP state that "eligible repairs are limited to mandatory repairs required to bring properties up to minimum levels of health and safety."

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The Honourable Martin Cauchon, PC, MP
 

* Statistics Canada's Census classifications and definitions consider leaky condominiums as being in need of "major repair", defined as "defective plumbing or electrical wiring, structural repairs to walls, floors or ceilings, etc."

* Far from being voluntary improvements, the vast majority of the repair work being done is related to the long-term structural integrity of the buildings and the health of the occupants.  Moreover, the province's Strata Property Act requires a strata corporation to repair and maintain the common property.  If it ever came to that, a court would likely order that the building envelope be repaired and could penalize a strata corporation that had not acted.

* Analogous repairs to new house foundations in the Montreal area, due to the unanticipated swelling of pyrite in the soils used as fill, are apparently being treated as deductible repairs rather than capital improvements.

* The general public and the property owners - many of whom go deeply into debt to pay for special assessments for the work - would not consider these improvements, but rather unavoidable repairs to make the unit habitable again.

* Capital improvements would normally lead to an increase in the property's assessed value - leaky condominium repairs do not.  In fact, the British Columbia Assessment Authority will reassess a repaired unit to, at most, the value it had before the building envelope problems were identified.  More often, assessments are lower, due to the market stigma of having been a "leaky condo".

* Research points to faulty design and workmanship - rather than inexpensive materials that need upgrading - as being primarily responsible for the premature building envelope failures.

CCRA's Interpretation Bulletin 128 offers the following guideline for determining whether an expense is a deductible repair (current) or a capital improvement.  "Where an expenditure made in respect of a property serves only to restore it to its original condition, that fact is one indication that the expenditure is of a current nature."  

 
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The Honourable Martin Cauchon, PC, MP

While some might argue that the condominiums are being restored to something better than their original condition -- in that they will hopefully no longer leak -- I think that most people would agree that this would be an unreasonably punitive interpretation.  Taking such an interpretation to its logical conclusion, CCRA would have to be willing to
retroactively grant a tax deduction to those owners whose repairs do fail a few years later (by no means uncommon), by virtue of the fact that their buildings had, as it turns out, been returned to their original leaky condition.

If Statistics Canada considers a condominium to be in need of major repair, and CMHC is willing to fund that repair as being necessary to bring the building up to minimal standards, CCRA should not be worsening the plight of these unfortunate owners by treating the expenditures as anything but repair work.

In conclusion, I urge you to ensure that the tax code is not interpreted to produce such an undesirable outcome.  As the federal Income Tax Act and Regulations obviously do not specifically deal with a situation such as British Columbia's leaky condominiums, and as a formal tax ruling is still needed, I am confident that there is room for ministerial discretion.

Yours truly,
 

Mike Farnworth
Minister

pc: The Honourable Alfonso Gagliano
 Minister Responsible for CMHC

 The Honourable David Anderson
 Minister of the Environment

        Honourable Paul Ramsey
        Minister of Finance and Corporate Relations 

        Chuck Cadman, MP
        Surrey North

        James Moore, MP
        Port Moody/Coquitlam/Port Coquitlam

        James Balderson
        Coalition of Leaky Condo Owners

bpc: Kaye Melliship, Assistant Deputy Minister, Housing Development
Division
Garry Curtis, Senior Advisor, Inter-governmental Relations
Deputy Minister's Office
Correspondence Unit
Minister's Office
Housing Policy Branch