Citation: 2011 TCC 74
Date: 20110208
Docket: 2009-2841(GST)I
BETWEEN:
TODD COATES,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Hogan J.
I. Introduction
[1]
The Appellant,
Todd Coates, built three houses in New Brunswick, moved into them and sold them in the years from 2000
to 2006. He also built the home that he currently resides in. He was assessed
goods and services tax and harmonized sales tax (“GST/HST”) in respect of the
construction of a house situated at 47 Parkin Street (the
“Subject Property”) as a self-supplying builder.
II.
Factual Background
[2]
The evidence shows that
the Appellant was an employee of a construction company when he built the four houses.
Each of the houses was constructed almost entirely by the Appellant, who
borrowed equipment belonging to his employer to carry out the work.
[3]
The Respondent alleges
that, in determining the Appellant’s net tax for the period under appeal, the
Minister of National Revenue (the “Minister”) relied on the following
assumptions of fact:
a)
the Appellant was not a GST/HST registrant
during the Period under Appeal;
b)
the Appellant was usually employed by a
construction company (the “Construction Company”) and was familiar with the
construction industry;
c)
the Appellant was laid off from the Construction
Company for periods of time each year;
d)
between 2000 and 2004, the Appellant purchased a
series of four lots on Parkin Street in Salisbury, New
Brunswick;
e)
the lots were located at 27 Parkin Street, 51
Parkin Street, 42 Parkin Street, and 47 Parkin Street (the “Subject
Property”);
f)
on each of the four lots, the Appellant built a
house;
g)
each time the Appellant sold one of the Parkin Street properties, he began building
the next house;
h)
before selling the 51
Parkin Street property, the Appellant purchased the lots
at 42 Parkin Street and the
Subject Property;
i)
the Appellant provided most of the labour to
build the houses;
j)
the Appellant employed few contractors;
k)
the Appellant borrowed equipment from the
Construction Company to build the houses;
l)
the Appellant was the first person to occupy
each of the completed houses;
m)
the Appellant occupied the house at 27 Parkin Street in September, 2000 and
sold that property in May of 2002;
n)
the Appellant occupied the house at 51 Parkin Street in the Fall of 2002 and
sold that property in August of 2004;
o)
the Appellant occupied the house at the Subject
Property in the Fall of 2004 and sold that property in September of 2006;
p)
the Appellant occupied the house at 42 Parkin Street in March of 2007;
q)
the Appellant obtained mortgages for each Parkin Street property in the following
amounts:
|
27 Parkin Street
|
51 Parkin Street
|
The Subject Property
|
42 Parkin Street
|
|
$75,000
|
$106,500
|
$120,000
|
$120,000
|
r)
the Appellant received a New Housing Rebate for
each house. The amount he received in relation to the Subject Property was
$1,612.10;
s)
the Appellant profited on the sale of each
property;
t)
the selling prices for the properties were:
|
27 Parkin Street
|
51 Parkin Street
|
The
Subject Property
|
|
$114,500
|
$145,500
|
$170,000
|
u)
the FMV of the Subject Property when the
Appellant began occupying that house was $127,500;
v)
the Appellant paid HST in the amount of
$10,155.71 in relation to construction costs and HST in the amount of $2,250 in
relation to buying the lot at the Subject Property;
w)
the Appellant registered a corporation on May 2,
2006 which attempted to claim input tax credits for building the house at
42 Parkin Street; and
x)
the Appellant’s corporation owns a different
parcel of land intended for subdivision.
[4]
The Appellant testified
that he built the subject property for the sole purpose of occupying it as his
home. When he built the property he had two children. A third child arrived
after the Subject Property was completed. I understood from his testimony that
his employment was intermittent and that he had difficulty paying interest and
other borrowing costs on personal debt and meeting other living expenses. He
listed the Subject Property for sale 18 months after occupying it. He used the
proceeds from the sale that took place six months later to repay debt, finance
the purchase of the land on which he built his current home, and to pay
personal living expenses.
III. Issues
[5]
The issues in this case
are:
1. Whether the Appellant
is a “builder” within the meaning of subsection 123(1) of the Excise
Tax Act (the “Act”);
2. If yes, whether the
personal use exception set out in subsection 191(5) applies to the
circumstances of the case.
IV. Analysis
Is the Appellant a “builder”?
[6]
In very general terms,
the Act defines a “builder” as including a person who constructs a
residential complex on real property that he owns. An individual is excluded
from the definition if that individual carries on the construction otherwise
than in the course of a business or an adventure or concern in the nature of
trade. In other words, if an individual builds a home for purely personal
reasons he will not be a builder.
[7]
The Appellant admits
that he built the Subject Property on land that he owned but denies that it was
built in the course of a business or an adventure or concern in the nature of
trade.
[8]
The phrase “an
adventure in the nature of a trade” has been considered in numerous income tax
cases. The leading case concerning the question of what constitutes an
adventure in the nature of trade is Happy Valley Farms Ltd. v. The Queen. At pages 6423-24
of that decision, Rouleau J. of the Federal Court, Trial Division, sets
forth six tests which the Court should consider in determining this question.
The tests or criteria are as follows: the nature of the property sold, the
length of ownership, the frequency or number of other similar transactions by
the taxpayer, the work performed on or in connection with the property, the
circumstances giving rise to the sale and, finally, motive.
[9]
Rouleau J. stated the
following on the subject of motive:
While all of the above factors have been considered by the
Courts, it is the last one, the question of motive or intention which has been
most developed. That, in addition to consideration of the taxpayer's whole
course of conduct while in possession of the asset, is what in the end
generally influences the finding of the Court.
This test has been carried one step
further by Canadian Courts into what has generally been referred to as the
"secondary intention" test. This has meant, in some cases, that even
where it could be established that a taxpayer's main intention was investment,
a gain on the sale of the asset would be held taxable as income if the
court believed that, at the time of acquisition, the taxpayer had in mind the
possibility of selling the asset if his investment project did not, for
whatever reason, materialize. In Racine, Demers and Nolin v. Minister of National
Revenue, 65 DTC 5098 (Ex. Ct.), Noel J. provided the following summary of the
secondary intention test at p. 5103:
... the fact alone that a person buying a property with the aim of using it as capital
could be induced to resell it if a sufficiently high price were offered to him,
is not sufficient to change an acquisition of capital into an adventure in the
nature of trade. In fact, this is not what must be understood by a
"secondary intention" if one wants to utilize this term.
To give to a transaction which involves the
acquisition of capital the double character of also being at the same time an
adventure in the nature of trade, the purchaser must have in his mind, at the
moment of the purchase, the possibility of reselling as an operating motivation
for the acquisition; that is to say that he must have had in mind that upon a
certain type of circumstances arising he had hopes of being able to resell it
at a profit instead of using the thing purchased for purposes of capital.
Generally speaking, a decision that such a motivation exists will have to be
based on inferences flowing from circumstances surrounding the transaction
rather than on direct evidence of what the purchaser had in mind.
[10]
The evidence before me
reveals a clear pattern adopted by the Appellant of building a home, living in
it for a period of time and reselling it at profit. He then starts the process
over again. The evidence shows, at the very least, that the Appellant built the
Subject Property with the secondary intention of selling it, if and when he
needed money to pay his debts or support his family, in much the same way as he
had done with the two properties that he had previously owned. This alone is
sufficient for me to conclude that the Subject Property was constructed in the
course of an adventure or concern in the nature of trade, thus making the
Appellant a “builder” within the meaning of the Act.
Does the exception in subsection 191(5) apply?
[11]
The relevant
subsections of section 191 are:
191(1) For the purposes of this Part, where
(a) the construction or substantial renovation of a
residential complex that is a single unit residential complex . . .
is substantially completed,
(b) the builder of the complex
. . .
(iii) where the builder is an individual, occupies the complex as a
place of residence, and
(c) the builder . . . is the first individual to
occupy the complex as a place of residence after substantial completion of the
construction or renovation,
the builder shall be deemed
(d) to have made and received, at the later of the time the
construction or substantial renovation is substantially completed and the time . . .
the complex is so occupied by the builder, a taxable supply by way of sale of
the complex, and
(e) to have paid as a recipient and to have collected as a
supplier, at the later of those times, tax in respect of the supply calculated
on the fair market value of the complex at the later of those times.
. . .
(5) Subsections (1) to (4) do not apply to a builder of a
residential complex or an addition to a residential complex where
(a) the builder is an individual;
(b) at any time after the construction or renovation of the
complex or addition is substantially completed, the complex is used primarily
as a place of residence for the individual . . .
(c) the complex is not used primarily for any other purpose
between the time the construction or renovation is substantially completed and
that time; and
(d) the individual has not claimed an input tax credit in
respect of the acquisition of or an improvement to the complex.
[12]
Subsection 191(1) is a
“self-supply” rule that requires the GST/HST to be paid on new homes as soon as
they are lived in. Where the “self-supply” rule applies, subsection 191(1)
requires GST/HST to be imposed on the fair market value of the property.
Subsection 191(5) operates as an exception to this rule.
[13]
It is important to note
that the tests outlined in the Happy Valley Farms case have no bearing
on the determination as to whether or not the exception in
subsection 191(5) applies. I make this comment because counsel for the
Respondent relies on a number of cases that, I believe, fail to acknowledge
this.
[14]
The wording of
subsection 191(5) makes it clear that a different test must be applied. That provision
requires that the property actually be used first by the individual (who is a
builder as defined) as a place of residence. That involves a simple factual
determination as to whether or not the property was used as a family home after
it was substantially completed. A secondary intention to resell the property at
a later date is irrelevant to the determination as to whether or not the
exception applies.
[15]
By definition, an
individual is a builder only if the property was built in the course of a
business or an adventure in the nature of trade. If the home was constructed by
the individual purely for personal reasons, the “self-supply” rule does not
apply in the first instance. The exception only comes into play after an
individual has been found to be a builder. Therefore, the exception cannot be
interpreted as requiring that the property have been built only for purely
personal reasons. This means that an individual can benefit from the exception
even if he has the secondary intention, at the time of its construction, of reselling
the property, provided he actually uses it as a place of residence after the
construction is completed.
[16]
I recognize that this
may lead to an incongruous result, with tax being avoided simply because an
individual actually uses a residential construction or home as a place of
residence and then, for example, decides to sell it at a later date. The
enactment of a change of use rule requiring the payment of GST/HST after the
home no longer serves as the builder’s place of residence would counter this type
of tax planning or behaviour. Only Parliament can attend to that.
[17]
What does the evidence
show with respect to the application or non‑application of the exception
to the “self-supply” rule found in subsection 191(5)? The evidence shows
that the Appellant and his family moved into the home before it was completed
and lived in it for roughly 24 months after it was completed. There is no
evidence to show that the Appellant listed the home for sale after it was
substantially completed or showed it to prospective buyers. The property was
not used as stock-in-trade or as a disposable asset. The use of the property
was only changed later on when the Appellant ran out of money and needed to
sell the home to meet his family’s living expenses. That occurred, at the
earliest, 18 months after the Appellant occupied the property, when he first
listed it for sale. He did use the home as a place of residence at a time after
the construction was substantially completed, as required by paragraph 191(5)(b)
of the Act. As required by paragraph 191(5)(c), the home was
not used primarily for any other purpose between the time that the construction
was substantially completed and the time that the Appellant occupied it as a
place of residence. The Appellant was the individual who built the home. He did
not claim an input tax credit in respect of the third-party costs. Therefore I
am satisfied that all of the conditions have been met for the exception in subsection
191(5) to apply.
V. Conclusion
[18]
For these reasons, the
appeal is allowed and the assessment is vacated, without costs.
Signed at Ottawa, Canada, this 8th
day of February 2011.
"Robert J. Hogan"
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