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Citation: 2006TCC6
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Date: 20060106
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Docket: 2003-3715(GST)I
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BETWEEN:
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S.E.R. CONTRACTING LTD.,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
BowieJ.
[1] The Appellant was incorporated in April 1992. It is the corporate vehicle through which Barry Nurse has, since that time, carried on his business as a house builder. This appeal is from an assessment for harmonized sales tax (HST), together with interest and penalties, under Part IX of the Excise Tax Act,[1] in relation to a house built for and subsequently occupied by Mr. Nurse and his family. The reassessment under appeal was issued following the Appellant's objection to the initial assessment dated March 30, 2001. The amounts assessed initially and after objection are:
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Net Tax
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Interest
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Penalty
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Initial assessment - March 30, 2001
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$32,322.46
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$14,682.99
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$17,186.41
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Reassessment -
October 17, 2002
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$13,708.46
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$12,035.61
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$14,045.66
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[2] The Notice of Appeal was prepared and filed by the Appellant's accountant. It does little to elucidate either the facts that the Appellant relies on, or the issues between the parties. As the basis upon which the Minister of National Revenue assessed and then reassessed the Appellant, and the basis upon which he now seeks to support the reassessment have twice changed significantly, it may be helpful to reproduce paragraphs 9, 10 and 11 of the Reply to the Notice of Appeal filed by the Deputy Attorney General of Canada in their entirety.
9. In assessing the Appellant by Notice of Assessment No. 01BA0202261, the Minister relied on the following assumptions:
a) the facts stated and admitted above;
b) the Appellant is a GST registrant with GST Registration No. 138374509 RT0001;
c) the Appellant was a corporation involved in the construction of new homes;
d) Barry Nurse and Sharon Nurse (the "Nurses") were at all material times directors and officers of the Appellant;
e) the Appellant purchased land located at Lot 22 Warren Estates, 54 Joshua Street, Paradise, Newfoundland ("54 Joshua St.");
f) the Appellant constructed a residence at 54 Joshua St. for the nurses;
g) the Appellant transferred 54 Joshua St. to the Nurses on September 2, 1997 for consideration of $35,000;
h) the Nurses took out a mortgage on 54 Joshua St. of $100,000 on September 26, 1997;
i) 54 Joshua St. was substantially completed on or before September 1997;
j) 54 Joshua St. was occupied by the Nurses on or before September 30, 1997;
k) the fair market value, HST inclusive, of 54 Joshua St. was no less than $217,000 as of September 30, 1997;
l) the Appellant claimed input tax credits relating to materials purchased to construct 54 Joshua St. in the amount of $11,672.35;
m) the HST due with respect to 54 Joshua St. was calculated as follows:
Fair Market Value
as of September 30, 1997 $217,000.00
815/115
HST $ 28,304.35
n) the Appellant failed to remit HST as required to the Receiver General on account of the supply of 54 Joshua St.
10. In reassessing the Appellant by Notice of Assessment No. 01BA117679100 the Minister relied on the following assumptions:
a) The facts stated in subparagraphs 9(b) and 9(f) inclusive and 9(h) to 9(m) inclusive.
11 The Respondent says that the Minister erred in assessing the Appellant on a self-supply of a single unit residential complex and reassessing the Appellant on an appropriation of property by a shareholder. The Minister pleads the following facts:
a) The Appellant sold 54 Joshua St. to the Nurses on September 2, 1997 for consideration of $135,000;
b) The Nurses between them held all or substantially all of the outstanding shares of the Appellant;
c) 54 Joshua St. had not been occupied at the time of the sale referred to above;
d) the fair market value, HST inclusive, of 54 Joshua St. was $217,000 as of September 2, 1997;
e) the HST due with respect to 54 Joshua St. was calculated as follows:
Fair Market Value
as of September 30, 1997 $217,000.00
815/115
HST $ 28,304.35
f) the Appellant failed to remit HST as required to the Receiver General on account of the supply of 54 Joshua St.
[3] Paragraph 12 of the Reply states that the issue in the appeal is:
... whether the Appellant is liable for GST collectible on the supply of 54 Joshua St. in the amount of $28,304.35
The real issue in the appeal, however, as it emerged in the course of two days of evidence and argument, is this: did the Appellant build the house at 54 Joshua St. as the Minister contends, or did Mr. Nurse build it in his personal capacity? As is so often the case when liability for tax depends on ascertaining the true nature of transactions entered into between a corporation and the person whose mind directs it, much turns on the credibility of Mr. Nurse. I found Mr. Nurse to be an honest and forthright witness. Certainly there were details concerning the building materials used and concerning the timing of the construction as to which his memory was not perfect, but this is not surprising as some eight years or more had elapsed since the events as to which he testified. His evidence was not contradicted, and I accept it as being accurate as to the significant events concerning the ownership of the lot that became 54 Joshua St., and in most other respects as well.
[4] Mr. Nurse testified that in 1996 the Appellant purchased four building lots in a small subdivision in Paradise, Newfoundland for a total consideration of $60,000. Three of the lots fronted on a road that had been completed. The fourth was behind them, and was to front on a road that would be completed and opened in the spring of 1997. Mr. and Mrs. Nurse decided that they wanted to have a house for themselves in this subdivision. They selected lot 15, fronting on the open road, and the Appellant conveyed it to them in September 1996 for $35,000.
[5] Mr. Nurse had been obtaining building materials of various kinds for some long period of time, and storing them at his residence on Ewings Road. He had timber of various dimensions that he had cut in the woods and sawn with the assistance of a friend. He had obtained other dimension lumber, plywood, doors and windows and other materials at various auctions. Using some of this material he framed the house on lot 15 for himself and his family. As he was working on the drywalling of it in the spring of 1997, he was approached by an individual who made him an unsolicited offer to purchase it, upon completion, for $150,000. He considered this to be a good price, and so he accepted the offer. He and his wife conveyed lot 15, together with the unfinished house, to the Appellant on April 3, 1997 for $80,000. The Appellant finished the construction of the house, and then sold it to the purchaser for the agreed-upon price of $150,000.
[6] Although content to sell lot 15 and the house under construction on it, the Nurses still wanted a house for themselves in the subdivision. They selected lot 22, fronting on the proposed road. Mr. Nurse testified that he consulted his lawyer at this time and arranged for the conveyance of lot 15, and also told him that he and his wife intended to buy lot 22 from the Appellant to build their house on. His evidence was vague as to the exact reason that there was no conveyance of lot 22 to the Nurses at this time. He said that his lawyer told him "look, the $35,000 is there", presumably meaning that the funds were available for the purchase as part of the purchase price to be paid by the Appellant to the Nurses for the purchase of lot 15. The lawyer went on to say "go start your house, and when the road gets in we'll transfer the lot and everything ...". Following this advice, the Nurses obtained a building permit and commenced construction of their house. Exhibit A-7 is the surveyor's report as to the location of the foundations; it was issued on July 8, 1997 to Barry Nurse, although legal title remained in the Appellant. It was not until September 2nd that a deed was executed by the Appellant in favour of the Nurses, and it was not registered until September 30th. It is significant that the purchase price on that deed is $35,000, although Mr. Nurse had done most of the construction of the house during the summer of 1997, before that deed was executed. An occupancy permit was issued in his name for the premises on October 27th, 1997.[2]
[7] I have no doubt that from the time the Nurses made the decision to sell lot 15 and the unfinished house on it, they had resolved also to purchase lot 22 and build their new residence on it. On the advice of their lawyer, they took possession of the lot, cleared it, and began to build. Almost immediately they sold their house on Ewings Road, Mrs. Nurse and the children went to live with Mr. Nurse's parents. That was in the late spring or very early summer of 1997. Mr. Nurse moved into a trailer parked on lot 22. He stayed there all summer until the house was completed. As early as April 23rd, Mr. Nurse had obtained a proposal for wiring the house from the electrical contractor that S.E.R. used for all its houses. The proposal was made not in the name of S.E.R., but of Barry Nurse. There was evidence that proposals from the same contractor for houses on other lots were made in the name of S.E.R.
[8] There was considerable evidence as to the sources of the building materials that were incorporated into the house. Many invoices were entered into evidence. I do not place much significance on this evidence. There was still a considerable amount of lumber, plywood and other material belonging to Mr. Nurse personally that he was able to use. He purchased materials from suppliers, and on some occasions the invoices were made out in the name of the Appellant. He said that this was because he could get better prices if S.E.R. was shown as the purchaser rather than himself. Some of the invoices show materials billed to the Appellant as having been delivered to lot 22. I accept Mr. Nurse's evidence to the effect that materials for houses being built on the other lots owned by the Appellant in the subdivision were sometimes delivered to lot 22, because that was where he could receive them and store them securely in the garage. I accept Mr. Nurse's evidence that, subject to specific exceptions, he paid for all the materials that went into the house on lot 22.
[9] The question before me comes down to this - did beneficial ownership of lot 22 pass to Mr. and Mrs. Nurse before Mr. Nurse built the house on it? Essentially the same question, arising out of very similar facts, was before Sheridan J. in the recent case of Best for Less Painting & Decorating Ltd. v. The Queen.[3] At the conclusion of the hearing, I invited both counsel to make written submissions as to the applicability of that decision to the present case. Counsel for the Respondent made the following points in seeking to distinguish it. First, the Appellant in this case is in the business of building houses; second, some of the receipts for building materials that were entered in evidence suggest that the Appellant paid for some materials that were incorporated into the house; third, Mr. Nurse had some history of building houses ostensibly for personal use and selling them for a profit after a short period of time; fourth, Mr. Nurse's intention with respect to the house on lot 15 had changed when he received an offer to buy it, and presumably the same could happen again. With respect, the latter two points are not germane to the issue of ownership of the lot, but only to whether Mr. Nurse in building a house for himself and his family to move into was really engaged in an ongoing business of building houses for resale. This may be relevant to the incidence of tax on Mr. Nurse, but it does not speak to whether there had been a transfer of beneficial ownership of lot 22 from the Appellant to the Nurses.
[10] The same, I think, may be said of the first point made by counsel. There is no room to doubt that lot 15 was conveyed to Mr. and Mrs. Nurse before the first house was built on it. The real question with respect to lot 22 is one of intention, and there is no reason why their intention would have been any different in respect of lot 22 than it was in respect of lot 15. The absence of a conveyance of lot 22 from the Appellant to the Nurses is much more probably explained by the fact that the road in front of it had not been opened, than by any different intention as to whether the Appellant or the individuals would build the house. The evidence that I have referred to of the advice that the Nurses received from their lawyer strongly favours the conclusion that beneficial ownership lay with the Nurses from that time on, which covers the entire period of construction. It would, I think, have been prudent for the Appellant to have called the lawyer to testify as to this issue, but, having regard to the totality of the evidence, it is not fatal.[4] It is not logical that the Nurses would have taken ownership of lot 15 before building on it, but do the opposite when building on lot 22. I think it far more likely that there was an impediment to registering a conveyance before the road was opened. It is also very significant that when lot 22 was conveyed in September, the consideration shown on the deed was $35,000.00, exactly the amount that the Nurses had paid for the vacant lot 15 initially. The fact that Mr. Nurse lived on lot 22 in a trailer throughout the summer of 1997 while building the house is another objective fact that supports the Appellant's position.
[11] So far as the name of the Appellant appearing on invoices for materials used on lot 22 is concerned, I accept Mr. Nurse's explanation that I have already referred to at paragraph 8 above. I have little doubt that the record-keeping left a lot to be desired, but Mr. Nurse's explanations make sense from a practical perspective and I believe them.
[12] I conclude that the Appellant was a bare trustee of lot 22 for Mr. and Mrs. Nurse during the period of construction of the house on it, and that it was the Nurses and not the Appellant who built the house. The Appellant was therefore not liable to collect and remit GST in respect of a supply of the house.
[13] It is pleaded in the Reply at paragraph 17:
In the alternative, if there was no supply of Joshua St. by the Appellant, the Appellant is not entitled to claim ITCs in the amount of $11,672.35 pursuant to 169 [sic] of the Act.
It was conceded by the Appellant during the course of the hearing that these ITCs were claimed in error and should be refunded. The reassessment will therefore be referred back to the Minister for reconsideration and reassessment on the basis that the net tax should be reduced to $11,672.35, and the interest and penalty reduced accordingly. If the parties are unable to agree as to the disposition of costs then it may be spoken to.
[14] Counsel for the Appellant may prepare a judgment for my signature, to be approved as to form and content by counsel for the Respondent.
Signed at Ottawa, Canada, this 6th day of January, 2006.
Bowie J.
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