Citation: 2013 TCC 338
Date: 20131025
Docket: 2011-4001(GST)I
BETWEEN:
CASA BLANCA HOMES LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Hogan J.
I. Factual Background
[1]
The
facts in this appeal are, for the most part, not in dispute.
Casa Blanca Homes Ltd. (the “Appellant”) is in the business of
construction and sales in the area of real estate. In May 2006, the Appellant entered
into 14 purchase agreements (the “Purchase Agreements”) with a
property developer (the “Developer”), under each of which the Appellant acquired
the right and took on the obligation to purchase an individual vacant lot at a
later date.
[2]
In
accordance with each
Purchase Agreement, the Appellant paid a non‑refundable deposit (the
“Deposit”) to the Developer. These Deposits constituted security with respect
to the Appellant’s obligation to purchase the lots and, failing such purchase,
were to be forfeited to the Developer as liquidated damages. Upon closing, the Deposits
were to be applied against the total purchase price of the lots.
[3]
Of
the 14 Purchase
Agreements, the Appellant sold 12 to third-party purchasers (the “Assignees”)
by way of a simple agreement binding these Assignees to fulfil the terms and
conditions of the Purchase Agreements (the “Assignment Agreements”). The Assignment Agreements required the Assignees to
pay two amounts. The first amount was a fee for the assignment of the Purchase
Agreement (the “Assignment Fee”). The second amount was a payment equal to the
value of the Deposit made under the Purchase
Agreement (the “Deposit Recovery”). Altogether, the Appellant received $820,865
from the Assignees: $186,105 in Assignment Fees and $634,760 in Deposit Recoveries.
Though the Assignment Fee and the Deposit Recovery were shown as separate
amounts in the Assignment Agreements, each Assignee paid the Appellant with a
single cheque.
[4]
The Appellant
collected goods and services tax (GST) on the Assignment Fees only, and not on
the Deposit Recoveries. The Minister of National Revenue (the “Minister”)
reassessed the Appellant for the entire amount received from the Assignees. The
issue in this appeal is whether the Appellant was required to collect GST on
the full consideration it received. In other words, are the Deposit
Recoveries subject to GST?
II.
Positions of the Parties
(A) Appellant’s
Position
[5]
The
Appellant argues that
the Deposit Recoveries are not subject to GST. In each of the Assignment Agreements, there were two separate supplies.
One supply was of an interest in land, for
which the Appellant received the Assignment Fee. The other supply was the Deposit, for which the Appellant received the
Deposit Recovery. The Deposit Recovery was
not consideration for an interest in real property
but for an assignment of the Appellant’s interest in the Deposit.
[6]
According to
the Appellant, the Deposit is a “debt security” and therefore a “financial instrument” within the meaning of subsection
123(1) of the Excise Tax Act (the “ETA”). Hence, the assignment of the Deposit from
the Appellant to the Assignee was a transfer of ownership of a financial
instrument and thus a GST-exempt supply of a financial service.
[7]
To conclude otherwise, argues the
Appellant, would result in double taxation of the Assignee in that, under the Respondent’s theory in this case, GST was
payable by an Assignee a first time when the Deposit Recovery was paid to the
Appellant and a second time when the Deposit was applied by the Developer
against the purchase price for each lot on behalf of the Assignee. As a
result, the Assignee would be taxed a
disproportionate amount of GST relative to the total purchase price of the lot.
(B) Respondent’s Position
[8]
The
Minister argues that
the Deposit Recoveries are subject to GST because the Assignment Agreements
operate to convey a single taxable supply of an interest in real property. The
Deposit was an expense incurred in securing the interest in the land. The
Deposit Recovery was a reimbursement for this expense and is subject to GST. Thus,
there was not a separate exempt supply of a financial service.
[9]
According to
the Respondent, this does not amount to double taxation on a single transaction
but a single incidence of tax on each of two separate supplies. The first
supply was between the Developer and the Appellant; the second was between the
Appellant and the Assignee. Therefore, the Appellant assigned a single interest
in property and was required to collect GST on the full amount of the consideration
received.
III
- Analysis
[10]
The
first issue to
consider is whether the Appellant made one or more supplies within the meaning
of the ETA. The Respondent contends that the Appellant made a single supply of
an interest in real property and that the consideration was the total amount
received for that supply, including the Deposit Recovery. The Appellant argues
that it made two supplies: one being an interest in land, and the other, an
interest in the Deposit, which Deposit is a financial instrument.
[11]
The relevant test
to determine whether a supplier has made a single supply or multiple supplies is
that adopted by Judge Rip (as he then was) in O.A. Brown Ltd. v. Canada.
This approach has recently been confirmed by the Supreme Court of Canada in Calgary (City) v. Canada. In O.A. Brown, the appellant
(“OAB”) bought at its own risk, livestock, to meet client specifications and
subsequently resold the livestock to the clients who had ordered it. OAB was
not an agent for its clients. In addition to the price of the livestock, OAB
charged its clients a clearing commission and its disbursements for
inoculating, branding and transporting the livestock. Livestock is a zero-rated
supply under the ETA and OAB did not collect any GST. The Minister assessed GST
on the disbursements and commission. The issue was whether OAB was making
supplies of livestock, or whether it was making not only supplies of livestock
but also other supplies, which were subject to GST.
[12]
Because
this issue had not been considered before in Canada, Judge Rip looked to
the United Kingdom’s jurisprudence on its value-added tax legislation. In that
case law, the issue
had been defined as being whether the supply in question is a compound supply
or a multiple supply. A compound supply is a single supply with a number of
constituent elements, of which, if supplied separately, some would be taxed and
some not. Multiple supplies are made and taxed separately. Judge Rip adopted
the following test to determine if a particular transaction involves a single
supply or multiple supplies:
22 . . . The test to be distilled from the English authorities is whether, in
substance and reality, the alleged separate supply is an integral part,
integrant or component of the overall supply.
. . .
[13]
A
factor indicative of a
single supply is the degree of interconnection and interdependence of the
elements of the supply in question. Judge Rip quoted the following excerpt
from Mercantile Contracts Ltd. v. Customs & Excise Commissioners (at
paragraph 23 CarswellNat):
23 .
. . one should look at the
degree to which the services alleged to constitute a single supply are
interconnected, the extent of their interdependence and intertwining, whether
each is an integral part or component of a composite whole. . . .
[14]
Conversely, a
factor indicative of multiple supplies is that each alleged separate supply
could be purchased individually and still be useful. Judge Rip stated:
23 One
factor to be considered is whether or not the alleged separate supply can be
realistically omitted from the overall supply. This is not conclusive but is a
factor that assists in determining the substance of the transaction. . . .
24 .
. . In each case it is useful to consider whether it would be possible to
purchase each of the various elements separately and still end up with
a useful article or service. For if it is not possible then it is a necessary conclusion that the supply is
a compound supply which cannot be split up for tax purposes.
[15]
In applying the
test, Judge Rip held that the disbursements and commission could not be characterized
as relating to “distinct supplies, independent of the whole activity”. Instead, Judge Rip characterized the commission and the inoculation, branding and
transportation costs as part of the consideration for the supply of the
livestock:
31 .
. . In substance and reality, the alleged separate supply, that of a
buying service, is an integral part of the overall supply, being the
supply of livestock. The alleged separate
supplies cannot be realistically omitted
from
the
overall supply and in fact are the
essence of the overall supply. The alleged separate supplies are interconnected with the supply of livestock to such a degree that the extent of their interdependence is an integral part of the
composite whole.
[16]
In 1219261
Ontario Inc. o/a Hidden Bay Lodge v. The Queen, Justice Hershfield
succinctly outlined the factors to be considered, noting that no one factor is determinative of the issue:
12 As
recognized by the English authorities cited in O.A. Brown, it would,
lacking statutory authority, be wrong to attempt to propound a rigid and
precise definition of a single (compound) supply. Factors include: the degree
of interconnectedness of constituent elements of a supply; the extent of
interdependence; and, whether each is an integral part or component of a
composite whole. Whether the services are rendered under a single contract, or
for a single undivided consideration, are matters to be considered but are not conclusive.
. . .
[17]
In Gin
Max Enterprises Inc. v. The Queen,
Justice McArthur added that common sense should not be ignored and that the
application and weighing of the relevant factors is, for the most part, fact-specific:
18 From a review of the case law, the question of whether two
elements constitute a single supply or two or multiple supplies requires an analysis of the true
nature of the transactions and it is
a question of fact determined with a generous application of common
sense. . . .
19 Similar to tests in Wiebe Door Services Ltd. v. M.N.R, regarding the classification of an employee or independent
contractor relationship, no one test is conclusive and this Court must examine and
weigh
all of the evidence.
[Emphasis added.]
[18]
In a recent article, Terry G.
Barnett challenges the Minister’s assertion that the “single supply” concept is
applicable to transactions such as the ones involved herein:
. . . there are reasons why the conclusion based on single v. multiple
supply analysis is not appropriate here. First, there is a question as
to whether the deposit and the assignment of the contract are inextricably linked. It would be entirely possible, for example, for the assignee to pay a new deposit to the vendor who would then release the original deposit to the purchaser. Thus the assignee is not destined to make a replacement deposit payment to the purchaser. The opportunity to structure the transfer of the contract
in
this manner suggests that the link between assignment of the
contract and the transfer of the entitlement to the deposit is not
inextricable.
Further, the single v. multiple
supply analysis rests on the
assumption that two or more properties or services are being
supplied together. An investigation is required because, if provided separately, the supplies
would not bear the same GST/HST status. A supply, however, is defined to
mean “the provision of property
or a service in any manner”.
The definitions of property and services each exclude money. Thus the provision of money is not a supply under
the ETA. Consequently,
it
is questionable whether the
analysis has been correctly applied to result in a sum of money
being merged with a supply of property to form a single supply.
[19]
Mr. Barnett’s
commentary challenges
the conclusion based on a single supply versus multiple supplies analysis in
two ways. First, he provides a hypothetical scenario which demonstrates that purchase
deposits are generally not inextricably linked with the assignment of a purchase
agreement. Transactions such as the Appellant’s are structured for simplicity
and in such a manner as to ensure that there are no gaps in the developer’s security.
The existence of the opportunity to structure a transaction of this nature in a
manner which would not subject the Deposit to double taxation is illustrative
of the fact that the Deposits and the Purchase Agreements are not so
interconnected as to indicate a single supply. The Respondent argues that “[t]he
need to resort to such hypotheticals to show separate supplies demonstrates the
appellant itself only had a single, indivisible interest in real property to
sell”. I disagree; Mr. Barnett’s
analysis provides compelling reasons why such transactions should be viewed as
the conveying of two distinct assets.
[20]
Considering the
evidence as a whole, I am of the opinion that two separate supplies were made
under each of the Assignment Agreements. One supply was of an interest in land,
for which the Appellant received the Assignment Fee and collected GST thereon.
The other supply was the Deposit, for which the Appellant received the Deposit
Recovery.
[21]
When the
Assignee purchased the Deposit, it inherited the right to have that money used
in one of three ways. One, if the Purchase Agreement is performed as
contemplated, the Deposit would be applied against the purchase price. Two, if
the Assignee fails to meet its obligations, the Deposit would be forfeited as
liquidated damages to the Developer. Finally, if the Developer is unable to
complete development of the lot by the completion date, the Developer would
return the Deposit to the Assignee. The third scenario assumes the refund is
available as an implied term of the Purchase Agreement, as discussed below. The
Deposit is a “debt security” and therefore a “financial instrument” within the meaning
of subsection 123(1) of the ETA.
[22]
If I
am wrong on this point, I also subscribe to Mr. Barnett’s second argument that the assignment of a deposit is a “supply” at all. Specifically, in
the present case, what the Appellant assigned to the Assignees was an interest
in money, which is neither “property” nor a “service” under the ETA. A deposit
can be characterized as a pool of money retained until such time as it is applied
in partial payment or forfeited.
[23]
The Respondent argues that the Appellant did not receive an interest in money through the assignment of the Deposit. There was no exchange of money. The Developer maintained possession of the Deposit,
which was non‑refundable. There was nothing explicit in either the Purchase Agreements or the Assignment Agreements which created a right to the refund of the Deposits in the event of default on the part of the Developer.
[24]
I
disagree. The Assignee can also be viewed as having acquired a right to money. A deposit, by its
very nature, is money held by a vendor for the benefit of a purchaser. Here,
the Appellant assigned its beneficial ownership of the money to the
Assignees. On the completion date stated in the Purchase Agreement, the Deposit
would be applied against the purchase price of the lot for the benefit of the Assignee.
If the Assignee fails to fulfil its obligation under the Purchase Agreement,
the Deposit will be used as liquidated damages from the Assignee. In the
Appellant’s reply to the Respondent’s written submissions,
the Appellant claims that the Deposits would have been refunded by the
Developer if the lots were not delivered by the completion date, even though
the Purchase Agreements explicitly stated that the Deposits were non‑refundable.
The refundable nature of a deposit is considered an implied term with regard to
deposits. In Howe v. Smith, the seminal case on the nature of deposits,
Fry L.J. held as follows:
. . . The terms
most naturally
to be implied appear to me in the case of money paid on the signing of a contract to be that in the event of the contract being performed it shall be brought into account, but if the contract is
not
performed by the
payer it shall
remain the property of
the payee.
[Emphasis added.]
[25]
In summary, I am of the
view that there are two supplies and each Deposit is a “debt security” and a
“financial instrument”. The assignment of the Deposits can also be considered
an assignment of a beneficial interest in money, which is not a “supply” within
the meaning of the ETA. In either case, the consideration paid for the
Deposit Recoveries is not subject to GST. This interpretation also avoids
double taxation, which I believe, was not intended by Parliament. For these
reasons, the appeal is allowed.
Signed at Ottawa, Canada,
this 25th day of October 2013.
“Robert J. Hogan”
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