Date: 20000511
Docket: A-706-98
CORAM: DÉCARY J.A.
ROTHSTEIN J.A.
SHARLOW J.A.
BETWEEN:
HER MAJESTY THE QUEEN
Appellant
- and -
398722 ALBERTA LTD.
Respondent
Heard at Calgary, Alberta, on Wednesday, May 3, 2000
JUDGMENT delivered at Ottawa, Ontario, on May 11, 2000
REASONS FOR JUDGMENT BY: SHARLOW J.A.
CONCURRED IN BY: DÉCARY J.A.
ROTHSTEIN J.A.
Date: 20000511
Docket: A-706-98
CORAM: DÉCARY J.A.
BETWEEN:
HER MAJESTY THE QUEEN
Appellant
- and -
398722 ALBERTA LTD.
Respondent
SHARLOW J.A.
[1] The question in this case is whether the respondent must pay GST on the fair market value of an apartment building acquired solely to obtain approval for a new hotel development in Banff, Alberta.
[2] To appreciate the issues, it is necessary to understand several elements of the scheme of the GST and how they apply to the particular facts.
[3] The GST is a tax imposed by the Excise Tax Act, S.C. 1990, c. 45, as amended. It is payable by the recipient of a "taxable supply" (s. 165(1)). The terms "supply" and "taxable supply" are defined as follows in subsection 123(1) (as amended by S.C. 1993, c. 27, s. 10):
| [...] "supply" means [. . .] the provision of property or a service in any manner, including sale, transfer, barter, exchange, licence, rental, lease, gift or disposition.
[...] "taxable supply" means a supply that is made in the course of a commercial activity.
|
[...] "fourniture" [...]livraison de biens ou prestation de services, notamment par vente, transfert, troc, échange, louage, licence, donation ou aliénation.
[...] "fourniture taxable" Fourniture effectuée dans le cadre d'une activité commerciale.
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[4] The term "commercial activity", which is part of the definition of "taxable supply", is also defined in subsection 123(1) (as amended by S.C. 1993, c. 27, s. 10). The relevant parts of that definition read as follows:
| [...] "commercial activity" of a person means
| (a) a business carried on by the person [. . .], except to the extent to which the business involves the making of exempt supplies by the person, |
(b) [...], and
| (c) the making of a supply (other than an exempt supply) by the person of real property of the person, including anything done by the person in the course of or in connection with the making of the supply; [...]. |
|
[...] "activité commerciale" Constituent des activités commerciales exercées par une personne:
| a) l'exploitation d'une entreprise [...] sauf dans la mesure où l'entreprise comporte la réalisation par la personne de fournitures exonérées; |
| c) la réalisation de fournitures, sauf des fournitures exonérées, d'immeubles appartenant à la personne, y compris les actes qu'elle accomplit dans le cadre ou à l'occasion des fournitures. |
|
[5] The term "exempt supply"is defined as follows at subsection 123(1):
| [...] "exempt supply" means a supply included in Schedule V [...].
|
[...] "fourniture exonérée" Fourniture figurant à l'annexe V [...].
|
[6] Within the list of exempt supplies in Part I of Schedule V to the Excise Tax Act are a number of supplies relating to real property. Subsection 6(a) of Part I of Schedule V (as amended by S.C. 1993, c. 27, s. 147) reads in part as follows:
| A supply [...] of a residential complex or a residential unit in a residential complex by way of lease, license or similar arrangement for the purpose of its occupancy as a place of residence or lodging by an individual, where it is occupied by the same individual for a period of at least one month [...].
|
La fourniture [...] d'un immeuble d'habitation ou d'une habitation dans un tel immeuble, par bail, licence ou accord semblable, en vue de son occupation à titre résidentiel ou d'hébergement par un particulier donné pour une période d'au moins un mois [...].
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[7] From this provision it would follow that, for example, the owner of a residential apartment building whose business consists of renting the apartments to tenants on a month to month basis is a supplier of "exempt supplies." That business would fall outside the definition of "commercial activity".
[8] However, the sale of a newly constructed apartment building is a taxable supply. Anyone who buys a newly constructed apartment building must pay GST in respect of the purchase price. Similarly, a person who builds an apartment building and retains it in order to rent out the apartments as residences must pay GST in respect of the building under the "self-supply" rule in subsection 191(3) (S.C. 1990, c. 45). The relevant parts of subsection 191(3) read as follows:
| (3) For the purposes of this Part, where |
| (a) the construction or substantial renovation of a multiple unit residential complex is substantially completed, |
| (b) the builder of the complex |
| (i) gives possession of any residential unit in the complex to a particular person under a lease, licence or similar arrangement entered into for the purpose of its occupancy by an individual as a place of residence and the particular person is not a purchaser under an agreement of purchase and sale of the complex, or |
| (ii) where the builder is an individual, occupies any residential unit in the complex as a place of residence, and |
| (c) the builder, the particular person or an individual who is a tenant or licensee of the particular person is the first individual to occupy a residential unit in 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 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 the time the construction the construction or renovation is substantially completed and the time possession of the unit is so given to the particular person or the unit is so occupied by the builder, tax under this Division in respect of the supply, calculated on the fair market value of the complex at that time. |
|
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| (3) Pour l'application de la présente partie, lorsque la construction ou les rénovations majeures d'un immeuble d'habitation à logements multiples sont achevées en grande partie et que le constructeur transfère à une personne, qui n'est pas l'acheteur en vertu du contrat de vente visant l'immeuble, la possession d'une habitation de celui-ci aux termes d'un bail, d'une licence ou d'un accord semblable conclu en vue de l'occupation de l'immeuble à titre résidentiel, ou, étant un particulier, occupe lui-même à ce titre une habitation de l'immeuble, le constructeur est réputé, si lui-même, la personne ou un particulier locataire de celle-ci ou titulaire d'un permis de celle-ci est le premier à occuper à ce titre une habitation de l'immeuble après que les travaux sont achevés en grande partie :
| a) avoir effectué et reçu, par vente, la fourniture taxable de l'immeuble; |
| b) avoir payé à titre d'acquéreur et perçu à titre de fournisseur, relativement à la fourniture, au dernier en date du jour où les travaux sont achevés en grande partie et du jour où la possession de l'habitation est ainsi transférée à la personne ou l'habitation ainsi occupée par le constructeur, la taxe prévue à la présente section, calculée sur la juste valeur marchande de l'immeuble ce jour-là. |
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[9] A person whose business consists of providing taxable supplies may claim a refund of GST it has paid on goods acquired and services obtained for its business. Such refunds are called "input tax credits". The statutory basis for a claim for an input tax credit is subsection 169(1), the relevant parts of which read as follows (emphasis added):
| 169.(1) Subject to this Part, where property or a service is supplied to or imported by a person and, during a reporting period of the person during which the person is a registrant, tax in respect of the supply or importation becomes payable by the person or is paid by the person without having become payable, the input tax credit of the person in respect of the property or service for the period is the amount determined by the formula
A x B
where
| A is the total of all tax in respect of the supply or importation that becomes payable by the person during the reporting period or that is paid by the person during the period without having become payable; and |
| (c) in any other case, the extent (expressed as a percentage) to which the person acquired or imported the property or service for consumption, use or supply in the course of commercial activities of the person. |
|
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| 169. (1) Sous réserve de la présente partie, le crédit de taxe sur les intrants d'une personne, pour sa période de déclaration au cours de laquelle elle est un inscrit, relativement à un bien ou à un service qu'elle importe ou qui lui est fourni, correspond au résultat du calcul suivant si, au cours de cette période, la taxe relative à l'importation ou à la fourniture devient payable par la personne ou est payée par elle sans qu'elle soit devenue payable :
A x B
où :
| A représente la taxe relative à l'importation ou à la fourniture qui, au cours de la période de déclaration, devient payable par la personne ou est payée par elle sans qu'elle soit devenue payable; |
| c) dans les autres cas, le pourcentage qui représente la mesure dans laquelle la personne a acquis ou importé le bien ou le service pour consommation, utilisation ou fourniture dans le cadre de ses activités commerciales. |
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[10] Based on the formula in subsection 169(1) for input tax credits, the operator of a business that consists of renting apartments to tenants on a month to month basis (which as explained above falls outside the definition of "commercial activity") would find that, with respect to any GST it must pay on taxable supplies acquired in the course of its rental business, the amount in paragraph (c) would be zero. Thus, there would be no entitlement to input tax credits in respect of those taxable supplies.
[11] However, the builder of a newly constructed apartment building who sells the building would be providing a taxable supply. Any GST paid by the builder on the goods acquired and services obtained in the construction of the apartment building is refundable as an input tax credit. That is because the amount in paragraph (c) of subsection 169 would be 100%. The same would be true of a person who builds an apartment building and is liable for GST on completion because of the self-supply rule. That person would be entitled to input tax credits for all GST paid in respect of construction costs.
[12] Now it is necessary to apply these elements of the GST scheme to the facts of this case.
[13] The respondent is an Alberta corporation that carries on business in Banff, Alberta. In 1991 it planned to develop and operate a 63-unit hotel at 208 Bear Street in Banff. That plan required compliance with the following Town of Banff Land Use Bylaw:
| 8.18.1 When any development is proposed, including a change of use of existing development, or when any existing development is, in the opinion of a development approving authority, substantially enlarged or increased in capacity, then provision shall be made for additional new housing in accordance with the regulations and standards contained in this section, as follows: |
| (ii) for hotels with between 60 and 100 commercial accommodation units: " 1 bedroom per 8 commercial accommodation units [...] |
[14] In 1991, the respondent purchased a leasehold interest in a lot located on Beaver Street in Banff for $225,000, and then built a four unit apartment building (the "four-plex") on that lot at a cost of $223,974.
[15] The respondent claimed and was allowed input tax credits totalling $14,650, representing GST it paid on the construction costs. Its entitlement to those input tax credits is undisputed.
[16] The completion of the four-plex was a condition that had to be met before the hotel development was approved. In addition, a development agreement entered into on October 15, 1995 between the respondent and the Town of Banff provides that the respondent may have its occupancy permit for the hotel revoked if it fails to maintain the four-plex for residential purposes.
[17] Subsection 191(3) of the Excise Tax Act, the "self-supply rule", was triggered in February of 1993 when the first tenant of one of the apartments took possession. As a result, the respondent was required to pay GST based on the fair market value of the four-plex at the time of substantial completion, which was $455,000.
[18] The respondent says that its hotel business is a commercial undertaking that would not exist if the respondent had failed to build the four-plex, and would cease to exist if the apartments are not maintained for residential purposes. Therefore, the respondent argues, the operation of the four-plex is an integral part of its hotel business and thus is a "commercial activity" within the statutory definition. It would follow, if the respondent is correct, that its GST liability under the self-supply rule would be offset by an input tax credit in the same amount.
[19] The Tax Court Judge accepted this argument (decision reported at (1999), 99 G.T.C. 3006, [1998] G.S.T.C. 117 (T.C.C.)). He said, at paragraph 8 of his reasons:
| The [respondent] who was "not" in the residential development business decided to build a 63-unit hotel in the Town of Banff. The building of the 4-plex in question was a condition precedent to obtaining the necessary approvals to build the Hotel. Thus the 4-plex cannot be considered in isolation as a residential development but must be considered as part and parcel of the commercial development in the 63-unit hotel. |
[20] This is an accurate description of the commercial reality of the respondent"s situation. As findings of fact, these statements cannot be disputed. However, I respectfully disagree with the conclusion of the Tax Court Judge that these facts support the respondent's claim to an input tax credit that offsets the GST payable under the self-supply rule.
[21] In my view, the existence of an inextricable tie between the operation of the four-plex and the hotel business does not answer the question posed by the closing words of subsection 161(1), the statutory provision dealing with input tax credits, and in particular the definition of "commercial activity" as that term is used in subsection 161(1). For ease of reference, I repeat the definition (emphasis added):
| [...] "commercial activity" of a person means
| (a) a business carried on by the person (other than a business carried on by an individual or a partnership, all of the members of which are individuals, without a reasonable expectation of profit), except to the extent to which the business involves the making of exempt supplies by the person, |
| (b) an adventure or concern of the person in the nature of trade (other than an adventure or concern engaged in by an individual or a partnership, all of the members of which are individuals, without a reasonable expectation of profit), except to the extent to which the adventure or concern involves the making of exempt supplies by the person, and |
| (c) the making of a supply (other than an exempt supply) by the person of real property of the person, including anything done by the person in the course of or in connection with the making of the supply; [. . .]. |
|
|
| [...] "activité commerciale" Constituent des activités commerciales exercées par une personne:
| a) l'exploitation d'une entreprise (à l'exception d'une entreprise exploitée sans attente raisonnable de profit par un particulier ou une société de personnes dont l'ensemble des associés sont des particuliers), sauf dans la mesure où l'entreprise comporte la réalisation par la personne de fournitures exonérées; |
| b) les projets à risque et les affaires de caractère commercial (à l'exception de quelque projet ou affaire qu'entreprend, sans attente raisonnable de profit, un particulier ou une société de personnes dont l'ensemble des associés sont des particuliers), sauf dans la mesure où le projet ou l'affaire comporte la réalisation par la personne de fournitures exonérées; |
| c) la réalisation de fournitures, sauf des fournitures exonérées, d'immeubles appartenant à la personne, y compris les actes qu'elle accomplit dans le cadre ou à l'occasion des fournitures. |
|
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Thus, the question is whether the respondent's business involves, to any extent, the making of exempt supplies.
[22] Any business may consist of a number of components, each of which is integral to the business as a whole. The definition of "commercial activity" recognizes that possibility but requires, for GST purposes, that any part of the business that consists of making exempt supplies be notionally severed. The statutory definition dictates that the business of the respondent is not a "commercial activity" in so far as it consists of the rental of the units of the four-plex. On that basis I agree with the Crown that the respondent is not entitled to an input tax credit to offset the GST payable on the self-supply of the four-plex.
[23] The respondent is in exactly the same position as anyone who acquires an apartment building and rents out the apartments. It should not and does not matter whether the acquisition is motivated by the prospect of receiving rent or, as in the respondent's case, is the fulfilment of a legal obligation that must be met in order to accomplish another business objective.
[24] For these reasons the appeal should be allowed with costs, the decision of the Tax Court Judge should be set aside, and the matter should be referred back to the Minister for reconsideration and reassessment on the basis that the respondent is not entitled to an input tax credit to offset the GST payable on the self-supply of the four-plex.
Karen R. Sharlow
J.A.
"I concur
Robert Décary"
"I concur
Marshall Rothstein"
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