Ko v. The Queen, docket 2002-455(GST)I (Informal Procedure)

Date: 20021126

Docket: 2002-455-GST-I

BETWEEN:

TIN CHOON KO, TIN SEIN KO, MURIEL KO, MEE TIN KO,

Appellants,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Little, J.

A.             FACTS

[1]            The appeals were heard together on common evidence in Vancouver on August 7, 2002.

[2]            In 1991, Tin Choon Ko and his wife Muriel Ko ("Mr. and Mrs. Ko"), as joint tenants and Htay-Myint and Shwe Myint (the "Htay-Myints") as joint tenants, each acquired an undivided 1/2 interest in a parcel of land located at 8017-124th Street, Surrey, British Columbia (hereinafter referred to as the "Property").

[3]            In 1997 the Htay-Myints sold their 1/2 undivided interest in the Property to Tin Sein Ko and Mee Tin Ko. Tin Sein Ko and Mee Tin Ko are the brother and sister respectively of Tin Choon Ko and are hereinafter referred to as the "Siblings".

[4]            Mr. and Mrs. Ko and the Siblings are collectively referred to as the Appellants.

[5]            On or about the 20th day of January 1998 the Appellants subdivided the Property.

[6]            Prior to the subdivision, a single unit residential house was located on the Property.

[7]            On the 5th day of April 1998 Mr. and Mrs. Ko and the Siblings registered with the Canada Customs and Revenue Agency ("CCRA") under Part IX of the Excise Tax Act (the "Act") and were assigned a Goods and Service Tax ("GST") registration number.

[8]            Mr. and Mrs. Ko and the Siblings were registered with the CCRA for GST purposes as a Partnership (the "Partnership"). The GST registration form that was filed indicated that the Partnership's main business activity was land development.

[9]            The Partnership subdivided the Property into five separate lots.

[10]          After the subdivision was completed Lot 2 contained the original residence and Lots 1, 3, 4 and 5 were vacant lots.

[11]          The five lots were disposed of by the Partnership as follows:

(a)            Lot 1

                In July 1998, Lot 1 was sold to an unrelated third party for $146,000.00 plus GST of $10,220.00. The GST was reported on the Partnership's GST returns for the period ending June 30, 1998.

(b)            Lot 2

                In November 1998, Lot 2 was sold to an unrelated third party for $205,000.00. Since the Appellant's former residence was located on Lot 2 no GST was charged on this transaction because the transaction was exempt under Part I of Schedule V of the Act.

(c)            Lot 3

                In December 1998, Lot 3 was sold to the Siblings for "NIL" consideration.

(d)            Lot 4

                In August 1998, Lot 4 was sold to an unrelated third party for $128,000.00 plus GST of $8,960.00. The GST was reported on the Partnership's GST returns for the period ending June 30, 1999.

(e)            Lot 5

                In October 1998, Lot 5 was sold to Mr. and Mrs. Ko for "NIL" consideration.

[12]          The Minister of National Revenue (the "Minister") determined that GST should have been collected by the Partnership on the transfer of Lot 3 to the Siblings and on the transfer of Lot 5 to Mr. and Mrs. Ko. The Minister also determined that the fair market value of each of Lot 3 and Lot 5 at the time of disposition was not less than $128,000.00 for a total fair market value for the two lots of $256,000.00. (Note: The Appellants did not contest the fair market value of $256,000.00 for the two lots as determined by the Minister.)

[13]          On the 6th day of March 2001 the Minister issued a Notice of Reassessment against the Appellants imposing GST of $17,920.00 with respect to the transfer of Lot 3 and Lot 5 as outlined above. The said Reassessment also imposed interest of $2,138.02 and penalties of $2,563.42.

B.             ISSUE

[14]          Are the Appellants required to pay GST on the transfer of Lot 3 to the Siblings and on the transfer of Lot 5 to Mr. and Mrs. Ko?

C.             ANALYSIS

[15]          In considering whether the Appellants are subject to GST on the transfer of Lot 3 and Lot 5 we must examine certain definitions in the Act.

[16]          The relevant definitions found in subsection 123(1) of the Act read as follows:

                "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" means a supply that is made in the course of a commercial activity;

                "commercial activity" of a person means

                            (a)                 a business carried on by the person (other than a business carried on without a reasonable expectation of profit by an individual, a personal trust or a partnership, all of the members of which are individuals), 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 without a reasonable expectation of profit by an individual, a personal trust or a partnership, all of the members of which are individuals), 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;

"individual" means a natural person;[1]

                "person" means an individual, a partnership, a corporation, the estate of a deceased individual, a trust, or a body that is a society, union, club, association, commission or other organization of any kind;

                "exempt supply" means a supply included in Schedule V;

"business" includes a profession, calling, trade, manufacture or undertaking of any kind whatever, whether the activity or undertaking is engaged in for profit, and any activity engaged in on a regular or continuous basis that involves the supply of property by way of lease, licence or similar arrangement, but does not include an office or employment;

"builder" of a residential complex or of an addition to a multiple unit residential complex means a person who

(a) at a time when the person has an interest in the real property on which the complex is situated, carries on or engages another person to carry on for the person

(i) in the case of an addition to a multiple unit residential complex, the construction of the addition to the multiple unit residential complex,

(ii) in the case of a residential condominium unit, the construction of the condominium complex in which the unit is situated, and

(iii) in any other case, the construction or substantial renovation of the complex,

(b) acquires an interest in the complex at a time when

(i) in the case of an addition to a multiple unit residential complex, the addition is under construction, and

(ii) in any other case, the complex is under construction or substantial renovation,

[17]          It will be noted that the definition of "business" states that business is defined to include an undertaking of any kind. In my opinion the subdivision of the Property and the sale by the Partnership of three of the lots to third parties and the transfer of the other two lots to the Appellants in the manner as outlined above is an undertaking and therefore qualifies as a business. It also follows that the subdivision of the Property and the sale of the lots comes within the definition of a commercial activity.

[18]          The Minister maintains that the Appellants were operating as a Partnership when they subdivided the Property and sold three lots to unrelated third parties at a profit and transferred one lot to Mr. and Mrs. Ko and one lot to the Siblings.

[19]          The Appellants deny that they were engaged in a partnership and deny that a self-supply occurred in this situation.

[20]          The question as to whether a partnership existed between the Appellants is a question that involves an interpretation of the law of the province in which the transaction occurred (i.e., in this case we must interpret the laws of the Province of British Columbia).

[21]          In Dale v. R., 97 DTC 5252 at 5255 Robertson J.A. said:

In determining whether a legal transaction will be recognized for tax purposes one must turn to the law as found in the jurisdiction in which the transaction is consummated. Often that determination will be made without the aid of guiding precedents which are on point and, hence, the effectiveness of a transaction may depend solely on the proper application of general common law and equitable principles. In some instances it will be necessary for the Tax Court to interpret the statutory law of a province.

[22]          Section 2 of the Partnership Act of British Columbia (R.S.B.C. 1996, c. 348) provides as follows:

2.              Partnership is the relation which subsists between persons carrying on business in common with a view of profit.

Section 6 of the Partnership Act defines "business" to include any trade, occupation or profession.

[23]          In considering whether the Appellants constituted a partnership the following points should be noted:

(a)            The Appellants registered with the CCRA as a Partnership for the purpose of the Act.

(b)            GST returns were filed by the Partnership with respect to the sale of Lot 1 and Lot 4 and GST was paid by the Partnership on these sales.

(c)            All four Appellants were co-owners of the five lots that were created by the subdivision.

(d)            All four Appellants transferred the three lots (Lot 1, Lot 2 and Lot 4) to third parties.

(e)            The Appellants realized a profit on the sale of the three lots to third parties (Note: Original cost of land $300,000.00). Amount received by the Appellants from the sale of the three lots:

                Lot 1                                        $146,000.00

                                Lot 2                                        $205,000.00

                                Lot 4                                        $128,000.00

                                                                                $479,000.00

                Gross Profit $479,000.00 - $300,000.00 = $179,000.00 (Note: This profit of $479,000.00 does not recognize the value of Lot 3 and Lot 5 transferred to the Appellants).

                                Lot 3                                        $128,000.00

                                Lot 5                                        $128,000.00

                                                                                $256,000.00

In summary the Appellants purchased the Property for $300,000.00. After the subdivision the five lots created by the subdivision had an estimated fair market value of $479,000.00 + $256,000.00 or $735,000.00[2].

[24]          In my opinion the Appellants were engaged in a business with a view of sharing in the profit when they subdivided the Property and transferred three lots to third parties and transferred Lot 3 to the Siblings and Lot 5 to Mr. and Mrs. Ko. I have also concluded that the Appellants were operating as a partnership when they subdivided the Property and sold the five lots as outlined above.

[25]          Section 133 of the Act defines "Agreement" as supply as follows:

Agreement as supply - For the purposes of this Part, where an agreement is entered into to provide property or a service,

                (a) the entering into of the agreement shall be deemed to be a supply of the property or service made at the time the agreement is entered into; and

                (b) the provision, if any, of property or a service under the agreement shall be deemed to be part of the supply referred to in paragraph (a) and not a separate supply.

[26]          In this situation the Property in question i.e., Lot 3 was transferred by the Partnership to the Siblings on December 1, 1998 and Lot 5 was transferred by the Partnership to Mr. and Mrs. Ko in October 1998. Pursuant to section 133 of the Act the transfer of Lot 3 is deemed to be a supply of the Property in December 1998 and the transfer of Lot 5 is deemed to be a supply of the Property in October 1998.

[27]          For the purposes of the period in question "taxable supply" is defined in subsection 123(1) of the Act to mean:

"taxable supply" means a supply that is made in the course of a commercial activity;

Since I have concluded that the supply was made by the Partnership in the course of a business or commercial activity as defined in subsection 123(1) of the Act, we must determine whether the supply is an exempt supply.

[28]          "Exempt supplies" are defined in subsection 123(1) of the Act as those supplies included in Schedule V of the Act. Part 1 of Schedule V concerns supplies of real property. This provision distinguishes between supplies made by builders and supplies made by persons who are not builders.

[29]          The exemption from "builder" status for individuals found in subsection 123(1)(b) does not apply to the Partnership because as noted above an "individual" is defined in subsection 123(1) as a natural person, which the Partnership is not.

[30]          The Appellant maintains that the supply of Lot 5 comes within the section 3 exempt category. "Residential complex" is defined in subsection 123(1) of the Act as follows:

"residential complex" means

(a)            that part of a building in which one or more residential units are located, together with

(i)      that part of any common areas and other appurtenances to the building and the land immediately contiguous to the building that is reasonably necessary for the use and enjoyment of the building as a place of residence for individuals, and

(ii)     that proportion of the land subjacent to the building that that part of the building is of the whole building,

(b)         that part of a building that is

             (i)      the whole or part of a semi-detached house, rowhouse unit, residential condominium unit or other similar premises that is, or is intended to be, a separate parcel or other division of real property owned, or intended to be owned, apart from any other unit in the building, and

             (ii)     a residential unit,

together with that proportion of any common areas and other appurtenances to the building and the land subjacent or immediately contiguous to the building that is attributable to the unit and that is reasonably necessary for its use and enjoyment as a place of residence for individuals,

(c)          the whole of a building described in paragraph (a), or the whole of a premises described in subparagraph (b)(i), that is owned by or has been supplied by way of sale to an individual and that is used primarily as a place of residence of the individual, an individual related to the individual or a former spouse of the individual, together with

             (i)      in the case of a building described in paragraph (a), any appurtenances to the building, the land subjacent to the building and that part of the land immediately contiguous to the building, that are reasonably necessary for the use and enjoyment of the building, and

             (ii)     in the case of a premises described in subparagraph (b)(i), that part of any common areas and other appurtenances to the building and the land subjacent or immediately contiguous to the building that is attributable to the unit and that is reasonably necessary for the use and enjoyment of the unit,

(d)         a mobile home, together with any appurtenances to the home and, where the home is affixed to land (other than a site in a residential trailer park) for the purpose of its use and enjoyment as a place of residence for individuals, that land subjacent or immediately contiguous to the home that is attributable to the home and is reasonably necessary for that purpose, and

(e)          a floating home,

but does not include a building, or that part of a building, that is a hotel, a motel, an inn, a boarding house, a lodging house or other similar premises, or the land and appurtenances attributable to the building or part, where the building is not described in paragraph (c) and all or substantially all of the leases, licences or similar arrangements, under which residential units in the building or part are supplied, provide, or are expected to provide, for periods of continuous possession or use of less than sixty days:

It is apparent that the above definition does not include partly finished buildings. The evidence presented to the Court was to the effect that the house that was being built by Mr. and Mrs. Ko on Lot 5 was not finished and was not approved for occupancy until December 1998. It therefore follows that at the time of the transfer of Lot 5 by the Partnership to Mr. and Mrs. Ko in October 1998 there was no "residential complex" as contemplated by Schedule V, Part 1, section 3.

(Note: The Explanatory Notes published by the Minister of Finance in July 1997 state at p. 396 that the purpose of section 3 is to exempt a supply where an individual has self built a home and has used the dwelling primarily as a place of residence and then decides to sell the home.

[31]          In this situation, the home was not finished at the time of transfer by the Partnership to Mr. and Mrs. Ko. It was therefore not occupied primarily as a place of residence by Mr. and Mrs. Ko. It therefore follows that Lot 5 was not an exempt supply within the meaning of section 3.

[32]          We must next consider whether the transfer of Lot 3 to the Siblings was exempt under Schedule V, Part 1, section 9. Section 9 reads as follows:

(2) A supply of real property made by way of sale by an individual or a personal trust, other than

...

(c) a supply of a part of a parcel of land, which parcel the individual, trust or settlor of the trust subdivided or severed into parts, except where

(i) the parcel was subdivided or severed into two parts and the individual, trust or settlor did not subdivide or sever that parcel from another parcel of land, or

(ii) the recipient of the supply is an individual who is related to, or is a former spouse of, the individual or settlor and is acquiring the part for the personal use and enjoyment of the recipient

but, for the purposes of this paragraph, a part of a parcel of land that the individual, trust or settlor supplies to a person who has the right to acquire it by expropriation, and the remainder of that parcel, are deemed not to have been subdivided or severed from each other by the individual, trust or settlor, as the case may be;

[33]          The Respondent's position is that section 9 only applies to an individual and does not apply to a group of individuals or a partnership.

[34]          The Appellant refers to the Interpretation Act and states that "words in the singular include the plural and words in the plural include the singular".

[35]          As quoted above subsection 9(2) states that the supply of real property made by way of a sale by an individual is exempt other than in certain listed situations which are not applicable here.

[36]          Subsections (a) and (b) of section 9 specifically do not exempt a transaction that is carried on as part of a business or as an adventure in the nature of trade.

[37]          I have concluded that the four Appellants were operating as a partnership when they subdivided the Property and sold the three lots to third parties and transferred two lots to themselves - one lot to Mr. and Mrs. Ko and one lot to the Siblings. I have also found that the Partnership was carrying on a commercial activity or a business. It therefore follows that the Appellants do not quality for an exemption under (a) or (b).

[38]          As I have noted earlier the sale or supply of Lot 3 and Lot 5 was made by the Partnership. It is clear from examining the exemption provided by section 9 that a supply exempted by that section must be made by an individual. In this situation the supply was not made by an individual but was made by the Partnership.

[39]          It therefore follows that the supply of Lot 3 and the supply of Lot 5 by the Partnership were taxable supplies as defined by the Act.

[40]          In my opinion the penalties and interest that have been imposed should remain.

[41]          The appeals are dismissed.

Signed at Vancouver, British Columbia, this 26th day of November 2002

"L.M. Little"

J.T.C.C.

COURT FILE NO.:                                                 2002-455(GST)I

STYLE OF CAUSE:                                               Tin Choon Ko, Tin Sein Ko,

                                                                                                Muriel Ko, Mee Tin Ko and

                                                                                                Her Majesty the Queen

PLACE OF HEARING:                                         Vancouver, British Columbia

DATE OF HEARING:                                           August 7, 2002

REASONS FOR JUDGMENT BY:      The Honourable Judge L.M. Little

DATE OF JUDGMENT:                                       November 26, 2002

APPEARANCES:

Counsel for the Appellant: Lawrence Leung

Counsel for the Respondent:              Patricia A. Babcock

COUNSEL OF RECORD:

For the Appellant:                

Name:                                Lawrence Leung

Firm:                  Surrey, British Columbia

For the Respondent:                             Morris Rosenberg

                                                                                Deputy Attorney General of Canada

                                                                                                Ottawa, Canada

2002-455(GST)I

BETWEEN:

TIN CHOON KO, TIN SEIN KO, MURIEL KO, MEE TIN KO,

Appellants,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeal heard on August 7, 2002 at Vancouver, British Columbia, by

the Honourable Judge L.M. Little

Appearances

Counsel for the Appellants:                Lawrence Leung

Counsel for the Respondent:              Patricia A. Babcock

JUDGMENT

                The appeal from the assessment made under the Excise Tax Act, notice of which is dated March 6, 2001, and bears number llGU0000187, is dismissed.

Signed at Vancouver, British Columbia, this 26th day of November 2002.

"L.M. Little"

J.T.C.C.