Taylor v. The Queen, docket 96-705-GST-G

Date: 19980727

Dockets: 96-705-GST-G; 96-706-GST-G

BETWEEN:

JUDY-ANNE TAYLOR, JOSEPH AND SANDRA REDMOND,

Appellants,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Garon, J.T.C.C.

[1] This is an appeal in the case of the Appellant Judy-Anne Taylor, from an assessment of Goods and Services Tax dated May 1, 1995, in the amount of $45,009.35 in respect of the acquisition of an interest in a townhouse situated in Vancouver.

[2] In the cases of the Appellants Joseph and Sandra Redmond, their appeals are from Goods and Services Tax assessments dated May 1, 1995 in the amount of $47,134.50 in respect of the acquisition of an interest in a townhouse situated in Vancouver.

[3] At the hearing of these appeals, a “Statement Of Agreed Facts”, together with 25 documents that were attached thereto, signed by the solicitors for the Appellants and the Respondent, were put in evidence:

The Appellant and the Respondent agree that:

1. The Appellant Judy-Anne Taylor (“Taylor") entered into an agreement on June 19, 1994 with Polygon Sandringham Development Limited (“Polygon”) to acquire as a personal residence an interest in a townhouse civically described as Unit #7 - 5650 Hampton Place, Vancouver, British Columbia and legally described as Strata Lot 7, Leasehold Strata Plan LMS1415. Attached as Tab 1 is a copy of the said agreement.

2. The townhouse was one unit of a 32 unit townhouse development which had been developed by Polygon on undeveloped land it had leased from the University of British Columbia, a public authority. The improvements made by Polygon were subject to the restrictions of Part 3 of the Condominium Act. That attached as Tab 2 is a copy of the original Ground Lease.

3. The Ground Lease for the townhouse development was converted by Polygon into individual strata lot leases as a result of the deposit by Polygon and with the consent of UBC of a leasehold strata plan pursuant to Part 3 of the Condominium Act.

4. Polygon took the position that GST was payable on the transaction. By letter dated July 12, 1994 Taylor’s solicitor disputed Polygon’s assertion that GST was payable on the purchase. Attached as Tab 3 is a copy of the letter dated July 12, 1994.

5. On July 13, 1994 Taylor’s solicitor confirmed that they would close the transaction and pay the GST demanded by Polygon under protest. Attached as Tab 4 is a copy of the letter of July 13, 1994.

6. Taylor paid $45,009.35 as GST to complete the transaction which amount was computed as 7% of $642,990.65. Attached as Tab 5 is a copy of the Taylor statement of adjustments.

7. Taylor received a registered Assignment of Lease no BG298419 on July 14, 1994 in respect of Strata Lot #7 DL 6494 Leasehold Strata Plan LMS 1415 on payment of the $642,990.65. Attached as Tab 6 is a copy of the said assignment.

8. Attached as Tab 7 is both a Certificate of Substantial Performance of the initial units of 5650 Hampton Place dated June 7, 1994 and a Certificate of Substantial Performance dated June 28, 1984 in respect of the balance of the townhouse development at 5650 Hampton Place, Vancouver, British Columbia.

9. Taylor applied for a GST rebate from Revenue Canada Taxation on July 22, 1994. The application for rebate is attached at Tab 8.

10. Taylor wrote Randy Jang of Revenue Canada Taxation on July 26, 1996 confirming Revenue Canada’s advice that she should apply for a GST Application Ruling in respect of her GST rebate. Attached as Tab 9 is a copy of the said letter.

11. Ray Ng of Revenue Canada Taxation issued, on August 18, 1994, what was described as a binding ruling. Attached as Tab 10 is a copy of the said ruling.

12. The Minister of National Revenue (“Minister”) subsequently assessed Taylor on May 1, 1995 to deny her application for a GST rebate. The said assessment is attached at Tab 11.

13. Taylor filed a Notice of Objection dated July 20, 1995 to the said assessment. The said Notice of Objection is attached as Tab 12.

14. The Minister issued a Notice of Decision dated February 8, 1996 upholding the assessment and confirming that the application for rebate of taxes paid in error had been correctly denied. The said Notice of Decision is attached at Tab 13.

15. The Appellant Joseph Redmond (on his own behalf and on behalf of the Appellant Sandra Redmond) (the “Redmonds”) entered into an agreement with Polygon on February 15, 1994 to acquire as a personal residence an interest in a townhouse civically described as Unit 1 of 5650 Place, Vancouver, British Columbia and legally described as Leasehold Strata Lot 1 of a proposed Leasehold Strata Plan subdivision of Lot 1, Block 3, District Lot 6494, Plan 22697, New Westminster District. The said agreement is attached at Tab 14.

16. Joseph Redmond obtained a GST Advance Ruling which was described as being binding from Ray Ng of Revenue Canada Taxation on July 22, 1994. The said ruling is attached as Tab 15.

17. The solicitor for Polygon wrote the solicitor for the Redmonds on July 27, 1994 advising that they did not agree to any holdback of GST funds and expected full payment of the proceeds in accordance with the Statement of Adjustments. Attached at Tab 16 is a copy of the said letter.

18. The Redmonds' Statement of Adjustments is attached at Tab 17.

19. The Redmonds paid $47,134.50 as GST in respect of their acquisition of their interest in the townhouse.

20. The Redmonds received a registered assignment of lease no BG298419 on August 3, 1994 in respect of Strata Lot 1, District Lot 6494, Leasehold Strata Plan LMS1415. The said Assignment is attached at Tab 18.

21. Joseph Redmond applied to Revenue Canada for a rebate of GST paid in respect of the acquisition of the Redmonds’ interest in the townhouse on August 5, 1994. The said application is attached as Tab 19.

22. Ray Ng of Revenue Canada Taxation wrote to Joseph Redmond on August 16, 1994 advising that the Redmonds seek their GST refund from the registered supplier. The said letter is attached as Tab 20.

23. The Minister subsequently assessed the Redmonds to deny their application for rebate on May 1, 1994. The said assessment is attached as Tab 21.

24. Joseph Redmond responded to the assessment of May 1, 1995 by letter dated May 11, 1995 which letter is attached at Tab 22.

25. Melvin Bellefontaine of Revenue Canada Taxation responded to Joseph Redmond on May 19, 1995 advising that the application of GST to supplies of Leasehold Strata Lots was under review. The letter of May 19, 1995 is attached at Tab 23.

26. The Redmonds objected to the assessments on May 19, 1995 which objection is attached at Tab 24.

27. Revenue Canada issued a Notice of Decision confirming the assessment and holding that the application for rebate of taxes paid in error by the Redmonds were correctly denied on February 8, 1996. The Notice of Decision is attached at Tab 25.

28. The Respondent’s position is that the facts admitted in paragraphs 10, 11, 16 and 22 are not relevant to this appeal.

[4] No evidence was tendered in addition to the above Statement of Agreed Facts and the material appended to the latter Agreement.

Appellant's Submission

[5] Counsel for the Appellants began by pointing out that there was an acquisition of a unit in a prepaid leasehold strata plan, as appears from the Contract of Purchase and Sale dated June 19, 1994 between Polygon Sandringham Development Limited ("Polygon") and the Appellant Taylor.

[6] The application by the University of British Columbia, Form C, which was filed in the Vancouver Land Registry Office on August 20, 1993, describes the nature of the interest in paragraph 3 as a "leasehold estate", the transferor being UBC and the transferee being Polygon. The Ground Lease and the model strata lease were attached to Form C, which has just been mentioned.

[7] Reference was made to a number of provisions in the Ground Lease dated August 20, 1993, between the University of British Columbia ("UBC") and Polygon Development XXII Limited ("Polygon") (Tab 2):

[8] In the preamble of this Indenture, UBC is described as the lessor and Polygon as the lessee. Also in the preamble, it is stated that the lessor is the owner of the lands and that the lessor has agreed to lease the lands for the Term defined in the Ground Lease in order that the lessee may erect the buildings thereon, convert the Lease under subsection 96(1) of the Condominium Act and use and enjoy the lands and the buildings thereon for the Term of the Lease.

[9] Clause 2.01 of the Ground Lease shows that the amount of $6,555,555 was to be paid by the lessee on or before the commencement date, which phrase is defined as being "the 20th day of August, 1993". In this connection, counsel for the Appellants commented that if the rent had been paid on a monthly basis, there would have been no litigation but it was paid up front. Paragraph 2.02 of the Agreement stipulates that all payments by the Lessee to the Lessor are "deemed to be Rent".

[10] The lessor is given the right in paragraph 12.01 during the Term of the lease to enter at all reasonable times the lands and buildings to examine the condition thereof. Paragraph 12.02 says that the lessor shall be entitled to display signs advertising the lands and the buildings as being available during the final 12 months of the Term, for purchase or letting.

[11] Paragraph 16.01 regarding subletting by Lessee, contains provisions which are standard clauses in a lease.

[12] Paragraph 23.01 sets out that at the expiration of the Term, Polygon shall surrender the lands and the buildings to UBC and shall not be entitled to any compensation from the lessor, except as otherwise provided in the Model Strata Lot Lease, which was attached as Schedule A to the Ground Lease.

[13] Paragraph 24.01 deals with the covenant for quiet enjoyment.

[14] Paragraph 26 of the Ground Lease speaks to the conversion of the Ground Lease under the Condominium Act by way of a leasehold strata plan into a series of individual leases incorporating the terms of the Model Strata Lot Lease, as required by paragraph 26.03 of the Ground Lease and section 96 of the Condominium Act.

[15] Certain provisions of the Model Strata Lease were reviewed.

[16] In that lease, UBC is shown as the lessor and the lessees are called the owners of the leasehold strata plan because the strata unit lessee is called, under the Condominium Act, the owner. According to counsel for the Appellants, it does not mean that the lessee owns the fee simple.

Paragraph 1.01(d) defines the basic rent, by referring to paragraph 2.01 as being "its proportionate share of the unpaid Basic Rent for each Strata Lot which shall be equal to the product of the unpaid Basic Rent under the Ground Lease divided by the number of Strata Lots".

[17] Paragraph 2.03 describes the obligation of the Lessee with regard to the payment of the basic rent.

[18] Paragraph 16.01 sets out the terms that the Lessee must comply with regarding the use of the strata lot.

[19] Paragraph 16.02 deals with subletting and assignment by the Lessee.

[20] Counsel for the Appellants completed his review of the Model Strata Lot Lease by making mention of paragraph 26.01 thereof, which is concerned with the purchase of the Lessee's interest in strata lot by the Lessor. Also, he noted that paragraph 26.01 of the Model Strata Lot Lease deals with the effect of the Condominium Act. He observed that paragraph 26.01(b) says that "for the purposes of section 97(2)(a) of the Condominium Act, this subsection 26.01(b) shall be and constitute a schedule filed with the leasehold strata plan". He further referred to the other provisions of paragraph 26.01(b) which establish a formula for determining the purchase price of the lessee's interest that is to be paid by the lessor. According to counsel for the appellants, paragraph 26.01(b) in essence is in the nature of a "reduction of rent". In this connection, he added this:[1] "You've had this land and building for 99 years. You've prepaid the rent. The end of 99 years comes up, we have an incentive for you. One of two things can happen: you can run it down, and that's really been a problem in many areas, or you can keep it up. It's in our interests that you keep it up. If you keep it up, then we're going to give you a break. We'll give you a break on the rent. We'll pay the fair market value of what we think that building is worth. But fundamentally for purposes of this appeal, that does not alter the nature of the lease itself. It's really in that rent adjustment down the road. So that is in essence what was assigned to the Appellants, this model lease." Counsel for the Appellants explained the logic of that part of the formula which provides that the fair market value of the Lessee's interest is to be determined on the basis that no value is attributable to the lands because the lands were never transferred by UBC. UBC is not going to pay anything for the lands themselves.

[21] In his review of the various provisions of the Excise Tax Act, counsel for the Appellants pointed out that under section 165 of the Act every recipient of a taxable supply made in Canada shall pay tax. To the first question: "is there a supply? He answered in the affirmative in view of the definition of “supply” which means the provision of property, including inter alia a sale or a lease. On account of the broad definition of "property" in subsection 123(1), counsel for the Appellants admitted that here there was a supply of property. He agreed that the supply by Polygon was made in the course of a commercial activity.

[22] On behalf of the Appellants, it was submitted that the supply by Polygon of its interest in the land is exempt pursuant to paragraphs (a) and (c) of section 7 of Part I of Schedule V of the Excise Tax Act. In support of this proposition, counsel for the Appellants submitted that the assignment of the lease by Polygon to the Appellants is exempt if it is the assignment of a lease that qualifies under either subparagraph (i) or (ii) of paragraph (a) of section 7. He applied these provisions to the present situation by pointing out that there was first a Ground Lease between UBC and Polygon, which was for the specific purpose of building a series of residential units. Then, there was a new supply because Polygon had to secure the consent of UBC to register a Strata Lot Lease. Therefore, according to him, each Appellant qualifies under paragraph (c) of section 7 because the lease was assigned to each of them by Polygon. In his view, the whole case of the Minister of National Revenue hinges on the concept of ownership and the existence of a sale. Counsel for the Appellants argued that a lease does not transfer ownership of any property. He referred to Polygon's specific obligation relative to the payment of rent in the Ground Lease, in the Model Strata Lease and the Assignment and to UBC’s obligation to grant quiet enjoyment.

[23] Counsel for the Appellants made very brief comments in his Reply to the Respondent's Argument on the self-supply rules found in section 191 of the Excise Tax Act after indicating that he did not rely on this section in support of his case.

[24] Finally, Counsel for the Appellants referred to the “rulings” question and pointed out at the outset that he does not raise the issue of estoppel. However, he stated that if there is doubt about the interpretation of provisions of a statute and as to how they should apply, you look to the "rulings". He stressed that the Minister should not be allowed to come before a Court having published one set of policies and interpretations and then turn around and change his mind for the taxpayers that are before the Court. In support of these observations, he relied on the decisions of the Supreme Court of Canada in Nowegijick Ltd. v. The Queen et al. 83 DTC 5041, and in Mattabi Mines Limited v. the Minister of National Revenue (Ontario), [1988] 2 C.T.C. 294. Counsel for the Appellants drew the Court's attention to the reference in the Nowegijick case to the judgment of the Supreme Court of Canada in Harel v. The Deputy Minister of Revenue of the Province of Quebec [1978] 1 S.C.R. 851.

Respondent's submissions

[25] Counsel for the Respondent submitted that Polygon sold to the Appellants its ownership of the leasehold interest in certain lands. The Respondent does not contend that the Appellants acquired from Polygon a freehold or a fee simple in the property. Rather, as result of the statutory regime that has been established by the Condominium Act, the Appellants are in fact owners of the leasehold strata lots, with all the limitations of a leasehold, having acquired that interest directly from Polygon.

[26] The Respondent takes the position that the fact that the Appellants acquired Polygon’s leasehold interest in the property by way of assignment does not mean that this was a supply by means of a lease, licence or other similar arrangement, as contemplated by 7(a) of Part I of Schedule V. According to Counsel for the Respondent, we must look at the substance of the transaction between Polygon and the Appellants and not simply to form. One has to look at what was actually conveyed. Ownership must not necessarily be fee simple ownership. She contended that it was possible to own a leasehold interest. In this connection, she suggested that the Condominium Act itself in creating strata lots derogates substantially from the common law principles attributable to ordinary ownership of fee simple interests because there are a lot of restrictions on the bundle of rights normally attributed to ownership of a condominium unit.

[27] Counsel for the Respondent referred to the provisions of the Condominium Act and pointed out first that section 95 provides that upon deposit of the leasehold strata plan, the Registrar of the appropriate land title office must register new indefeasible titles to the owner in fee simple of the land for each of the lots shown on the plan. Polygon is out of the picture with respect to a particular strata lot after it had assigned its leasehold interest in it. Mention was made of the strata lot lessee in section 92, who is equated with an owner or purchaser. By section 97 an absolute duty is imposed by the Condominium Act on the public authority to purchase the strata lot lessee’s interest in the strata lot on the termination of the lease. It was suggested that one can draw as an inference from the facts that the price each Appellant paid when they purchased their property only reflected the value of the building. In none of the transfer documents is an amount ascribed to the buildings as distinct from the land. The Appellants paid about $660,000 for their respective units. Polygon had already paid $6,655,555 to UBC prior to assigning its leasehold interest in the strata lot in question to each Appellant.

[28] It was further submitted on behalf of the Respondent that even though the Appellants did not acquire a fee simple interest in the whole property, "what they acquired is the very next closest thing to that". The equity ownership interest of the Appellants is protected by subsection 97(4), which enacts that in any case of dispute with respect to the proper value of the equity interest in a property, the matter is to go to arbitration. Section 98 of the Condominium Act requires an order for sale of the purchaser’s interest in the event that the latter defaults in any of his obligations and responsibilities. This is a further protection of the equity interest of the purchaser, quite distinct from an interest that is created by a tenant-landlord relationship.

[29] Section 69 of the Condominium Act provides inter alia where an owner developer gives possession of a residential strata lot to a person on the basis of a lease, sublease or assignment of a lease for three years or more, that the owner developer is deemed to have assigned to the occupier, all his rights, powers and obligations under this Act or by-laws. That section equates, in her view, the owner developer, Polygon in this case, with the owner as defined in section 2 of the Condominium Act. By operation of the Condominium Act, the purchasers of the owner developer’s leasehold interest are owners of that interest. It follows, according to the Respondent, that by virtue of the long duration of the term of the lease and the operation of section 97 with the protection given by section 98, the "owners are provided an opportunity to build equity in the leasehold interest, subject only to fair market value or the schedule agreed upon."

[30] Counsel for the Respondent emphasized that the owner of any estate arising from an interest created by the Condominium Act will have the incidence of exclusivity of possession and enjoyment restricted in a number of significant ways, over and above the limitations imposed on all realty by an incorporeal interest or statute. Many examples were given associated with "communal living in close proximity" that constitute an infringement upon the normal bundle of rights associated with classic ownership. Also, reference was made to section 12 of the Condominium Act which provides in substance that a share in the common property, common facilities and other assets of the strata corporation shall not be dealt with separately from the strata lot of the owner.

[31] The position of the Minister of National Revenue under the Excise Tax Act is that there was no supply by way of lease, licence or similar arrangement and consequently, in her view the supply is not exempt. According to the Minister, this is a sale of property within the meaning of section 123 of the Excise Tax Act and not a self-supply with the purview of section 191 of the same statute.

[32] Regarding the application of the Excise Tax Act, it was first argued on behalf of the Respondent that subsection 7(a) or (c) does not help the Appellants as they deal with the supply of land, separate and apart from the constructions or improvements on the land, on the ground that "the rights of the purchasers to the developer’s leasehold interest in the property are purchased by them in the contracts of purchase and sale". It was further argued on behalf of the Respondent that the substance of each transaction entered into between Polygon and the Appellants is more closely akin to a sale, which "is broad enough to include a sale by way of disposition or transfer of the ownership via a vehicle by way of an assignment" by virtue of the definition of a "sale" in subsection 123(1) of the Excise Tax Act.

[33] The Respondent’s main position on this branch of the case is that the Appellants purchased the vendor’s leasehold interest outright. That is what they end up with because that is what the vendor had to sell. The acquisition of this interest fits within the definitions of "property" and "sale" in subsection 123(1) of the Excise Tax Act.

[34] In support of the above position, she relied on the decision of this Court in the case of Granbury Developments Ltd v.Canada, [1995] G.S.T.C. 73, for the proposition enunciated at page 73-5 that "the policy of the legislator and of the administrator in respect of the definition of "sale" is that a sale included either a transfer of ownership or a transfer of possession".

[35] Because of the Minister’s view of the nature and substance of the transaction as having all attributes of a sale and none of the real attributes of a lease, counsel for the Respondent submitted that none of the exemption sections of Schedule V of the Excise Tax Act pertaining to lease conveyances or supplies by way of a lease apply.

[36] Other reasons were invoked by the Respondent in support of her position that section 7 of Part I of Schedule V of the Excise Tax Act does not apply. One reason is that section 7 deals with land as separate and apart from any structures on it. Under the Act, after deposit of the strata lot plan and after the automatic conversion, one cannot separate the land from the improvements. Also it was provided that the reference to the generic "residential unit" in section 7(a) is not intended to apply to "residential condominium units" with which we are concerned here. According to the Respondent, if paragraph 7(a) is not applicable because of the nature of the property contemplated, paragraph 7(c) does not help either. Paragraph 7(c) only expands the application of paragraph 7(a) to cases where there is an assignment of the lease, licence or similar arrangement.

[37] Another argument was made relating to subsections 7(a) and 7(c) of Part I of Schedule V of the Excise Tax Act as to why they do not apply. It is that, prior to the assignment by Polygon of its leasehold interest, the purchasers are not owners, lessees or persons in occupation or possession. On this basis, the supply by way of lease or by assignment of the lease does not fit because the Appellants were not recipients in their capacity as owners, lessees or persons in possession. The Appellants "do not become any of these things until after the transfer, after the conveyance," to adopt the language of Counsel for the Respondent.

[38] If the transaction is not a lease, licence or similar arrangement within the meaning of section 7, was it a self-supply? Section 191 sets out the self-supply rules and paragraph 4(b) of Part I of Schedule V of the Excise Tax Act exempts situations where the builder is deemed to have made a self-supply.

[39] It was not disputed by the Respondent that paragraph (1)(a) of section 191 is applicable here. Regarding paragraph (b), it was noted that the builder makes a supply of his own ownership interest in the leasehold and therefore subparagraph 191(1)(b)(i) does not apply. It is not intended to apply to transactions where the builder assigns or sells his ownership interest. This is what Polygon did here. So it is not a self-supply under subparagraph 191(1)(b)(i). Nor is it a self-supply under subparagraph 191(1)(b) (ii). The transactions in issue do not fall within subparagraph (ii) for the same reasons they did not fall within section 7 of Part I of Schedule V. Also, subparagraph 191(1)(b)(ii) of Part I of Schedule V of the Excise Tax Act contemplates a two-step transaction.

[40] It was further advanced on behalf of the Respondent that section 191 does not apply here because the supply of a strata lot lease by Polygon constitutes a supply of a leasehold interest and this is strictly in accordance with Part 3 of the Condominium Act. It is not a supply by any means by way of a sale of the building or part thereof and then a separate supply by way of lease of the land. In the opinion of the Respondent's counsel, Polygon is not the fee simple owner of either the building or the land and it could not therefore make such a transfer to an end user or purchaser. A supply made to the Appellants by Polygon by way of a lease would require that there be an ongoing relationship between them as landlord and tenant and, of course, no such relationship exists.

[41] With respect to the Property Purchase Tax Act, the evidence is that each Appellant paid property purchase tax. According to the Respondent, property purchase tax would only be payable if there was a sale of a leasehold interest rather than an assignment or a supply by way of lease. Paragraph 1(1)(d) of the Property Purchase Tax Act includes leases with a term greater than 30 years in the definition of "taxable transaction". The amount of tax with respect to that transaction is due on the day the leasehold interest is registered in the Land Title Office. In the same way, tax is due when the sale of fee simple strata lot is registered in the Land Title Office.

[42] Counsel for the Respondent then adverted to the GST Memorandum 300-4-1, dealing with "Exempt Supplies - Real Property", at paragraph 12 headed "Long Term Residential Rents". She contended that this paragraph of the GST Memorandum deals with the rental of a house or apartment, in other words, with a standard residential lease. In her view, paragraph 12 of the GST Memorandum does not apply to leases covered by section 7 of Part I of Schedule V. She is of the opinion that paragraphs 15, 16 or even 17 of the GST Memorandum 300-4-1 are perhaps more properly applicable here.

[43] Looking at the Appellant Taylor’s Contract of Purchase and Sale dated June 19, 1994, counsel for the Respondent indicated that it is a deal between Polygon and the Appellant. What is significant, in her opinion, is that the Appellant Taylor takes from Polygon and not from UBC. Money is clearly paid to Polygon and not to UBC. The second aspect in this contract is that the Appellant Taylor is identified as the Purchaser. Paragraph 5 of this contract is relevant; it is the purchase of a prepaid leasehold interest in the proposed strata lot. Also, in compliance with paragraph 7 of that contract, Polygon was required to execute closing documents only in the name of the Purchaser. The Appellant Taylor replaces Polygon for all intents and purposes. As appears from paragraph 9 of the contract of purchase and sale, the transfer of the risk from Polygon to the Appellant Taylor is a classic indication of a sale. Risk is something that follows ownership. Paragraph 20 of the Contract of Purchase and Sale, regarding the payment of the goods and services tax, was also referred to.

[44] Counsel for the Respondent subsequently turned to various provisions of the Ground Lease.

[45] By article 2, Polygon agrees to pay the basic rent in the amount of $6,555,555 on or before the commencement date, being August 20, 1993. The rent owed by Polygon to UBC was paid well in advance of the Appellants Taylor and Redmond entering into their respective contracts of purchase and sale. Once the basic rent requirement is removed, to all intents and purposes, what we have, according to counsel for the Respondent, is no more than the purchasers' agreement to reimburse UBC for any amounts that they have agreed to pay that UBC pays on their behalf. For instance, because UBC is the landowner, UBC would be getting the property tax bill. Thus the Appellants agreed to indemnify UBC in respect of the payments of municipal taxes.

[46] Attention was drawn to paragraph 7 of the Ground Lease, which stipulates that if a lessee was delinquent in making the necessary repairs, the lessor, UBC is empowered to make them and then charge them off to the lessee as additional rent. There is no basic rent left as it was paid by the commencement date, August 20, 1993.

[47] At article 3 of the Ground Lease, the Appellants as lessees are to pay taxes even those from which the lessor UBC is exempt, placing the Appellants as lessees or purchasers, in essentially the same position as any property owner.

[48] Counsel for the Respondent referred to the clause “Assignment by lessee” in paragraph 16.02 of the Ground Lease. According to the Respondent, it relates to the assignment prior to the construction being erected and it contemplates the event of Polygon assigning its interest to another party for the purposes of developing the land.

[49] Because of clause 26.04 of the Ground Lease, it was contended by the Respondent that once Polygon disposed of its interest to the Appellants, it no longer had any liability under the Ground Lease in respect of the property in issue, Polygon is off the hook, so she said .

[50] Reference was made to section 2.01 of the Model Strata Lease and paragraph 4 of the Land Title document, in the case of the Appellant Taylor, to which document was attached the agreement dated July 8, 1994, to support the position that when the Appellants acquired their interest in the leasehold strata property, "there were not any vestiges left over from the basic rent". There was no subsisting obligation on the part of the Appellants as purchasers to pay any of the basic rent. The other items that are to be paid by the Appellants as purchasers are just current expenses, such as taxes, repairs, insurance, all attributes of ownership of an interest in property.

[51] With reference to Article 26.01 of the model strata lease, it was mentioned by counsel for the Respondent that parties do not have the ability to opt out of section 97 of the Condominium Act which requires the lessor to buy back the lessee’s leasehold interest. The only leeway the parties have is in how to determine the buy-back value of the leasehold interest owned by the purchaser.

[52] The provisions in paragraph 29.07 of the Model Strata Lease pertaining to a release from liability show that Polygon was not merely transferring a leasehold interest but it was disposing of all its rights with respect to the parcels of property in question.

[53] Counsel for the Respondent also commented on clause I of the Assignment dated July 8, 1994, in the case of the Appellant Taylor, where it is stated that “the Vendor as beneficial owner hereby assigns to the Purchaser the Vendor’s interest in the Strata lot”. She made the point that this is a statement that Polygon is in fact a beneficial owner of an interest in the strata lot, which is a leasehold interest. She mentioned that in clause 2 the parties contemplated a separate demise of the Strata Lot at the rent referred to in the lease. According to the Respondent, this is an indication that "the parties involved in these transactions were contemplating an assignment of the lease as separate and apart from a sale of the leasehold interest". In her opinion, the parties were buying and selling a leasehold interest. In this connection, she noted that in a letter to Revenue Canada, dated July 22, 1994, the Appellant Taylor herself mentioned that she recently purchased a leasehold interest.

[54] Of the cases referred to by counsel for the Respondent for determining the distinction between a property held under a leasehold interest or under a lease and a property that is actually sold, the following are of interest:

Gateway Lodge Limited v. M.N.R., 67 DTC 5138

Dow Holdings v. M.N.R., 76 DTC 1199

Viceroy Rubber and Plastics Limited v. M.N.R., 93 DTC 347

[55] With respect to the advance rulings issue, the Respondent argued that these rulings are irrelevant, as they were not relied upon by the Appellants. In the case of the Appellant Taylor, the ruling was dated August 18, 1994, while the transaction was completed as of July 14, 1994. With regard to the Appellants Redmond, the Contract of Purchase and Sale was binding on them as at February 8, 1994 and the ruling applicable to them was dated July 22, 1994. The point was also made by the Respondent that advance rulings are not like Interpretation Bulletins in that they are not in the public domain and should not be given any weight by the Courts, not being an administrative policy and interpretation to which reference was made in the case Nowegijick referred to earlier. In this connection, counsel for the Respondent relied on the recent decision of the Federal Court of Appeal in Owen Holdings v. The Queen, 97 DTC 5401.

Analysis

[56] The general question to be determined is whether the supplies which Polygon made to the Appellants were taxable supplies within the provisions of Part IX of the Excise Tax Act, the Goods and Services Tax. More precisely, having regard to the submissions of the parties, did each transaction give rise to an exempt supply as regards the Appellants.

[57] Certain general provisions of the Goods and Services Tax portion of the Excise Tax Act should be kept in mind.

[58] Section 165 enacts that every recipient of a taxable supply made in Canada shall pay to the Government of Canada tax in respect of the supply equal to 7 % of the value of the consideration for the supply, unless it is a zero-rated supply.

[59] The definitions of certain terms and expressions of general import used in section 165 or elsewhere in the Excise Tax Act should be noted. These definitions are found in subsection 123(1) of this Act.

"Supply" - supply means, subject to sections 133 and 134, the provision of property or a service in any manner, including sale, transfer, barter, exchange, licence, rental, lease, gift or disposition.

"Taxable Supply" - taxable supply means "a supply that is made in the course of a commercial activity.

"Commercial Activity", 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;

"Exempt Supply" - exempt supply means a supply included in Schedule V.

[60] There are three types of supply for the purposes of the Goods and Services Tax: "Taxable Supply", "Zero-rated Supply" and "Exempt Supply".

[61] Against this general legislative background and before analyzing the enactments that are determinative of the question in issue, it is appropriate to determine first the precise nature of the supply in issue that was made here by Polygon to each Appellant.

[62] UBC leased a large area of undeveloped property to Polygon by way of a Ground Lease dated August 20, 1993 and registered in the Vancouver Land Title Office, for the purpose of developing a series of townhouses thereon by way of strata leases, in accordance with the Condominium Act of British Columbia. Polygon proceeded with the development of the townhouse project, constructed condominium units on these lots and subsequently transferred the units to individuals like the Appellants. The deposit of the leasehold strata plan with the Land Registry under the Condominium Act, operated to convert the Ground Lease between UBC and Polygon into individual strata lot leases in the name of Polygon. Also, as a result of the deposit of the leasehold strata plan, UBC was issued, as owner in fee simple, certificates of title to each of the new strata lots shown in the plan. In the present case, it is therefore beyond dispute that the underlying land is owned by UBC and leased to Polygon by way of a Ground Lease.

[63] In my view, the transactions between Polygon and the Appellants involve not only the assignment by Polygon of its interest in the strata lot leases, but also the sale by Polygon of the condominium units in question to the Appellants.

[64] The Contracts of Purchase and Sale dated February 8, 1994 and June 19, 1994 between the Appellants Redmond and the Appellant Taylor respectively and Polygon indicate that the Appellants became owners of their respective townhouses and some other items. I am referring to the identical paragraphs 9 and 20 of these two contracts, which read thus:

9. RISK: The Home and all other items included in the Purchase and Sale will be and remain at the risk of Polygon until 2:01 a.m. on the Completion Date after which time they will be at the risk of the Purchaser.

20. GOODS AND SERVICES TAX: The Purchase Price shall include any goods and services taxes payable in respect of the Sale of the Home. The Purchaser shall pay to Polygon an amount equal to any goods and services taxes payable in respect of any additional items and extras agreed to be supplied by Polygon to the Purchaser.

[65] In the Assignments of lease dated July 8, 1994 and August 3rd, 1994 made by Polygon to the Appellants respectively, where Polygon is described as the "Vendor" and the Appellants as "Purchaser", it is set out in Clause I of each assignment that "the Vendor as beneficial owner hereby assigns to the Purchaser the Vendor's interest in the Strata Lot." In clause 2 of each Assignment, it is stipulated that "The Purchaser covenants with the Vendor and the University and each of them that the Purchaser shall during all the residue now unexpired of the term of the Lease and every renewal thereof perform and observe the covenants on the part of the lessee to be performed and observed and the conditions contained in the Lease as fully and effectually as if the Lease contained a separate demise of the Strata Lot at the rent referred to in the Lease".

[66] The correctness of this conclusion is supported by subsection 97(1) of the Condominium Act which in substance provides that the lessor, in the case at hand UBC, is required to purchase the strata lot lessee's interest in the strata lot upon termination of the strata lot lease. In Article 26.01 of the Model Strata Lease, which is incorporated in the Ground Lease between UBC and Polygon dated August 20, 1993, it is stipulated that the purchase price of the lessee's interest is determined on the basis that the interest in the strata lot consists only of the building comprising the strata lot and the interest in the common property and common facilities based on the unit entitlement of the strata lot as they relate to improvements. No value is attributed to the leased land in calculating the purchase price. The precise basis on which the fair market value of the lessee's interest at the stipulated time is to be fixed is set out in the following portion of the same Article 26.01:

... For the purposes of assessing such fair market value and in furtherance to the provisions of the Condominium Act the Lessee's interest in the Strata Lot shall be determined:

(i) on the basis that the Lessee's interest in the Strata Lot consists only of that part of the Building comprising the Strata Lot and his interest in the Common Property and Common Facilities based on the Unit Entitlement of the Strata Lot as they relate to improvements on the Lands, with no value being attributable to the Lands.

(ii) on the basis that the Strata Lot is free of all liens, charges and encumbrances, and

(iii) on the basis that the Lands may be used only for the purposes set forth in this Lease, and the purchase price shall be calculated as of the date of Termination of this Lease.

[67] Also, under section 98 of the Condominium Act, the lessor, UBC is not entitled to re-enter, take possession or otherwise cause the strata lot lease to be terminated, if the lessee, each Appellant in the matter at hand, defaults on observing and performing his obligations. The lessor must apply to the Court for an order for sale. Again, this shows that each Appellant has an ownership right in the condominium unit, such that the lessor is not entitled to repossess it but must purchase it through a public auction or private sale approved by the Court.

[68] As well, the Model Strata Lot Lease has provisions for the purchasers, the Appellants here, to pay taxes, repairs, insurance and all other expenses that are incidental to ownership.

[69] In conclusion, I am of the opinion that the Appellants obtained an equity, an ownership in their respective condominium units, in addition to their respective interests in the strata lot leases.

[70] Since the transactions entered into between Polygon and the Appellants involved the sale by Polygon of the condominium units to the Appellants and the purchase by the Appellants of the units in question, it is therefore necessary to determine whether these transactions respecting the condominium units are exempt supplies for their recipients, the Appellants.

[71] Consideration should therefore be given to Schedule V of the Excise Tax Act which lists eight broad categories of exemptions which are set out in as many parts in this Schedule. Part I, entitled "Real Property" is the only one of interest for our present purposes. Since the application of section 7 of Part I of Schedule V has been the main focus of the debate at the hearing of these appeals, I will first address this issue.

[72] As noted earlier, it was asserted on behalf of the Appellants that the supply received by each of them is exempt under paragraphs 7(a) and 7(c) of Part I of Schedule V of the Excise Tax Act. Section 7 read thus at the relevant times:

7. A supply

(a) of land (other than a site in a residential trailer park) by way of lease, licence or similar arrangement for a period of at least one month, made to

(i) the owner, lessee or person in occupation or possession of a residential unit that is or is to be affixed to the land for the purpose of its use and enjoyment as a place of residence for individuals, or

(ii) a person who is acquiring possession of the land for the purpose of constructing a residential complex on it in the course of a commercial activity,

(b) of a site in a residential trailer park by way of lease, licence or similar arrangement for a period of at least one month, made to the owner, lessee or person in occupation or possession of

(i) a mobile home, or

(ii) a travel trailer, motor home or similar vehicle or trailer, situated or to be situated on the site, or

(c) of a lease, licence or similar arrangement referred to in paragraph (a) or (b) by way of assignment,

but not including any land on which the residential unit, mobile home, vehicle or trailer is or is to be affixed or situated, or any land contiguous to it, that is not reasonably necessary for the use and enjoyment of the unit, home, vehicle or trailer as a place of residence for individuals. [2]

[73] Paragraph (a) of section 7 exempts inter alia the supply of land, under a lease, licence or similar arrangement made to a person who is gaining possession of the land for the purpose of constructing a residential complex on it in the course of a commercial activity. Paragraph (c) of section 7 also exempts "a supply of lease, licence or similar arrangement referred to in paragraph (a) or (b) by way of assignment".

[74] I cannot therefore accept the Appellants' argument that the supply of a condominium unit is included within the supply of land. In effect, subparagraph (a)(ii) of section 7 speaks of the supply of land by way of a lease made to "a person who is acquiring possession of the land for the purpose of constructing a residential complex on it in the course of a commercial activity". Thus, subparagraph (a)(ii) contemplates a supply of land exclusively since the residential complex is to be constructed. Also, in subparagraph (a)(i) of section 7, the words used make it clear that the residential unit may or may not be affixed to the land at the time the supply of land is made to the owner, lessee or person described in that paragraph.

[75] It is apparent that paragraphs (a) and (c) of section 7 of Part I of Schedule V deals with the supply solely of land as separate from improvements. What is exempt is the supply of land if it is made in one of the ways described in paragraphs (a), (b) and (c). Section 7 does not deal with the supply of a residential unit that is or is to be affixed to the land, nor does it relate to a compound supply situation where the supply of the residential unit is incidental to the supply of the land.

[76] As I understand it, the general purpose of section 7 is to exempt the supply of land or a residential trailer park site, by way of lease, licence or similar arrangement, or by way of assignment of such arrangement, when that land or site is used or intended to be used for specific residential purposes.

[77] I therefore conclude that section 7 of Part I of Schedule V only exempts the supply of land and cannot therefore be of any assistance to the Appellants with respect to the part of the supply that involves the sale to them by Polygon of the subject townhouses.

[78] It has not been suggested on behalf of the parties that any other exempting provisions in Part I of Schedule V of the Excise Tax Act, might be applicable here, apart from paragraph 4(b) of Part I of the latter Schedule, which in turn refers to self-supply rules found in section 191 of the Excise Tax Act.

[79] Paragraph 4(b) of Part I of Schedule V of the Excise Tax Act is hereinafter reproduced in part:

4. A supply by way of sale of a single unit residential complex (in this section referred to as the "complex") or a residential condominium unit (in this section referred to as the "unit") or an interest in the complex or unit made by a builder of the complex or unit where

(a) ...

(b) in any case, the builder received an exempt supply of the complex or unit by way of sale or was deemed under subsection 191(1) or (2) of the Act to have received a taxable supply of the complex or unit by way of sale, and that supply was the last supply of the complex or unit made by way of sale to the builder,

[80] Subsection 191(1) reads thus:

191. (1) Self-supply of single unit residential complex or residential condominium unit - For the purposes of this Part, where

(a) the construction or substantial renovation of a residential complex that is a single unit residential complex or a residential condominium unit is substantially completed,

(b) the builder of the complex

(i) gives possession of the complex to a particular person under a lease, licence or similar arrangement (other than an arrangement, under or arising as a consequence of an agreement of purchase and sale of the complex, for the possession or occupancy of the complex until ownership of the complex is transferred to the purchaser under the agreement) entered into for the purpose of its occupancy by an individual as a place of residence,

(ii) gives possession of the complex to a particular person under an agreement for

(A) the supply by way of sale of the building or part thereof in which the residential unit forming part of the complex is located, and

(B) the supply by way of lease of the land forming part of the complex or the supply of such a lease by way of assignment,

other than an agreement for the supply of a mobile home and a site for the home in a residential trailer park, or

(iii) where the builder is an individual, occupies 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 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 possession of the complex is so given to the particular person or 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.

[81] The phrases "residential complex" and "residential condominium unit" used in paragraph 4(b) of Part I of Schedule V and in subsection 191(1) are defined in subsection 123(1). For our purposes, it is sufficient to reproduce the definition of "residential condominium unit":

"Residential Condominium Unit" - "residential condominium unit" means a residential complex that is, or is intended to be, a bounded space in a building designated or described as a separate unit on a registered condominium or strata lot plan or description, or a similar plan or description registered under the laws of a province, and includes any interest in land pertaining to ownership of the unit;

[82] It was common ground that the townhouses acquired by the Appellants come within the definition of a "residential condominium unit".

[83] Paragraph (b) of section 4 of Part I of Schedule V exempts notably the subsequent sale of a residential condominium unit by a builder where the builder last made a deemed sale to himself under subsection 191(1) of the Excise Tax Act.

[84] It is now necessary to turn to an analysis of subsection 191(1) of the Act with a view to ascertaining whether the builder made a deemed sale under subsection 191(1) of the latter statute.

[85] It is apparent that paragraphs (a) and (c) of subsection 191(1) are met in the case of each appellant. In effect, Polygon gave possession to each appellant of a "residential condominium unit", upon its substantial completion and each Appellant was the first individual to occupy it as a place of residence after substantial completion of the construction.

[86] It only remains to be determined if one of the three constituent elements of paragraph 191(1)(b) is satisfied in the appeals at hand.

[87] Having regard to the facts outlined above, only subparagraph (ii) of paragraph 191(1)(b) needs to be considered.

[88] Subparagraph (ii) of paragraph 191(1)(b) requires for its application two conditions:

(a) The first condition set out in clause A of subparagraph 191(1)(b)(ii) is that the builder of the complex gives possession of the complex to a particular person, under an agreement for the supply by way of sale of the building or part thereof in which the residential unit forming part of the complex is located. In my view, this first condition is met here when Polygon sold the residential units to the Appellants. The transaction between Polygon and the Appellant Taylor is treated as a sale of the "Home" and other items, as appears from clause 9 of the Contract of Purchase and Sale dated June 19, 1994, between Polygon and the latter Appellant. The same comment is applicable to the Contract of Purchase and Sale dated February 8, 1994 between the Appellants Redmond and Polygon, which contains an identical clause 9.

(b) The second condition is couched in an alternative form. In the second alternative, the builder of the complex is required to supply the lease of the land forming part of the complex by way of assignment. This second condition, outlined in clause (B) of subparagraph 191(1)(b)(ii) is met in the case of the appellant Taylor, since there was an assignment, agreed to by UBC, by Polygon of its leasehold interest in the land to the latter Appellant, as appears from the agreement, dated July 8, 1994, entered into between Polygon, UBC and the Appellant Taylor. The second condition is also satisfied in the case of the Appellants Redmond as there was an assignment dated August 3, 1994 made by Polygon to the Appellants Redmond to which assignment UBC had consented.

[89] As mentioned above, Counsel for the Respondent argued that subparagraph 191(1)(b)(ii) does not apply here because that subparagraph contemplates a two-step transaction and the land and the strata unit cannot be conveyed separately in view of section 12 of the Condominium Act.

[90] I do not see any clear requirement in that subparagraph 191(1)(b)(ii) for a separate conveyance of the land and of the residential unit. Rather, it seems to me that what is contemplated could be done in a single transaction consisting of two different elements, the assignment of a leasehold interest in the land and the sale of a building. In any event, here, we have two Contracts of Purchase and Sale (respectively dated February 8, 1994 and June 19, 1994), dealing with the purchase of a prepaid leasehold interest in the proposed strata lot and the purchase of a particular "Home" and other items and subsequently two assignments to which UBC had consented, respectively dated July 8, 1994 and August 3, 1994.

[91] In my view, the rationale behind subparagraph 191(1)(b)(ii) is well explained in the news release of the Department of Finance 91-032, dated March 27, 1991, which reads in part thus:

The Act will be amended to ensure that where a builder of a new residential complex supplies by way of lease the land related to the complex to a lessee or assigns his or her interest in a lease of that land to a lessee, the builder is subject to the same self-supply rules as if the builder had supplied by way of lease both the land and the building related to the complex to the lessee. At the time the builder transfers possession of the complex to the lessee, the builder shall be deemed, at that time, to have sold the land and building for their fair market value and to have paid as a recipient and collected as a supplier tax on the deemed sale ...

[92] Since the requirements laid down in subsection 191(1) are met in the case of each Appellant, the deeming provisions in paragraphs (d) and (e) are applicable. Accordingly, the builder Polygon is deemed to have made and received at the time possession of the complex was given to each Appellant, a taxable supply by way of sale of the complex and to have paid as a recipient and to have collected as a supplier tax in respect of the supply calculated on the fair market value of the complex.

[93] I am therefore of the opinion that section 7 of Part I of Schedule V of the Excise Tax Act does not exempt the part of the supply received by the Appellants that relates to the purchase of their respective residential units but only that part of the supply involving the acquisition by each Appellant of the lease of the land by way of assignment. I have also come to the conclusion that by virtue of the joint operation of paragraph 4(b) of Part I of Schedule V and subsection 191(1) of the Excise Tax Act, the part of the supply received by the Appellants that relates to their acquisition of their respective residential units is exempt under Part IX of the Excise Tax Act.

[94] Therefore, I must conclude that the Appellants are not liable under Part IX of the Excise Tax Act in respect of the assignment of the leasehold interest in the lands in question and the acquisition of their respective residential units.

[95] In view of the conclusion at which I have arrived, it is unnecessary for me to deal with the issue relative to the rulings given by the Minister of National Revenue in the cases of the Appellant Taylor and the Appellants Redmond.

[96] For those reasons, the appeals are allowed with costs and the assessments are vacated.

Signed at Ottawa, Canada, this 27th day of July, 1998.

"Alban Garon"

J.T.C.C.

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