Date:
20021209
Docket:
2001-1661-GST-G
BETWEEN:
REID'S
HERITAGE HOMES LTD.,
Appellant,
and
HER MAJESTY
THE QUEEN,
Respondent.
Reasons
for Judgment
Campbell,
J.
[1]
This appeal is from an assessment under Part IX of the Excise
Tax Act (the "Act") for the period January
1, 1995 to October 31, 1998. The issues relate to whether the new
housing rebate has been properly calculated pursuant to
section 254.1 of the Act and whether the Minister can
use section 153(2) of the Act to re-allocate the
consideration paid in respect to servicing costs, thereby
reducing the amount of the new housing rebate that the Appellant
can claim.
[2]
The Appellant was incorporated in late 1979 and has been involved
in the development and sale of residential real estate in
Southwestern Ontario. The issues arose with respect to the sale
of residential homes between January 1, 1995 and October 31, 1998
in three different phases of a development known as the Village
by the Arboretum in the City of Guelph.
[3]
Counsel for the Appellant and the Respondent entered a Partial
Statement of Agreed Facts which I am reproducing within my
reasons for judgment as it accurately reflects the background to
the issues and why they arose:
The parties
hereby are in agreement with the following facts:
1.
The Appellant appeals to the Tax Court of Canada from the
assessment number 08EP0100386 dated June 4, 1999 (the
"Assessment") relating to adjustments made to the
Appellant's Goods and Services Tax ("GST") returns
pertaining to the period between January 1, 1995 and
October 31, 1998;
2.
In assessing the Appellant's net tax, the Respondent took the
position that the Appellant over-claimed GST New Housing Rebate
("NHR") in the amount of $182,164.61 and over-remitted
GST in the amount of $12,202.86 requiring net adjustments in the
amount of $169,961.75 as set out in Schedule A attached to the
Reply of the Respondent;
3.
The Appellant was incorporated on December 4, 1979 pursuant to
the laws of Ontario;
4.
The Appellant has been a GST registrant pursuant to the Excise
Tax Act (the "Act") since January 1, 1991 and was
assigned GST registration number 104457502;
5.
The Appellant is required by the Act to file its GST returns on a
monthly basis and has a business year end of November
30;
6.
The Appellant is a residential general contractor and carries on
a business of development and sales of residential real estate in
Southwestern Ontario;
7.
In 1994, the Appellant commenced construction of an adult
residential community (the "Development") known as
Village by the Arboretum in the City of Guelph, Province of
Ontario on unserviced land (the "Land") owned by the
University of Guelph and leased to the Appellant for a long term
lease of more than 20 years;
8.
The Appellant planned to build approximately 590 residential
homes on the Development which included single detached homes,
semi-detached homes and townhouses;
9.
For the purpose of the Development, the Land was not subdivided
into lots, but rather a site plan was prepared for the Land
showing approximately 590 land units with varying frontage (the
"Units");
10.
The Development was scheduled to proceed by phases;
11.
As of the date of the Assessment, Phases 1, 2 and 3 were underway
which included 141 Units, 99 Units and 120 Units
respectively, on which 360 residential homes were build or
planned to be built and sold;
12.
The Assessment concerns 202 single residential homes that were
sold between January 1, 1995 and October 31, 1998 which includes
102 residential homes in Phase 1, 86 residential homes in
Phase 2 and 14 residential homes in Phase 3;
13.
The Appellant put in services such as roads, sewers, water pipes,
green area, natural gas, hydro and cable. All costs relating to
such services (Development Costs) were paid for by the
Appellant;
14.
The Appellant build several models of residential homes (the
"Buildings") on the Units which buildings varied in
size, look and price;
15.
The Buildings were build by the Appellant on 20, 40, 45, 50, 55
or 60 foot frontage Units depending on the size of the
Building;
16.
The Buildings were sold to arm's length purchasers under
purchase agreements and the Units on which the Buildings were
built were leased by sublease agreements to the said arm's
length purchasers under long-term subleases of 20
years;
17.
Pursuant to the agreements referred to in paragraph 16 hereof,
each arm's length purchaser paid a lump sum amount (the
"Purchase Price") under the purchase agreement and a
monthly rent (the "Rent") under the sublease
agreement;
18.
Each arm's length purchaser became the owner of the Building
and the tenant, for a period of 20 years, of the Units on which
the Building was built;
19.
It is specifically provided in the sublease agreement that the
tenant shall deliver up vacant possession of the lot at the
expiration of the term in good order, repair and condition (par.
12 (xvii) and par. 19.1) and that the purchaser, with the
exception of the purchasers of the townhouses and semi-detached
houses, shall have the right to remove, at its expense, the
Building from the lot upon expiration of the term and fill in the
excavation, compact the fill and restore the grading to its
former state (par. 19.2);
20.
The Rent paid by each arm's length purchaser under the
sublease agreement was comprised of Basic Rent which reflected
the market value of the unserviced Unit (the "Land
Value") on which the Building was build and Additional Rent
as the proportionate share of operating costs and a contribution
to the Capital Reserve Fund;
21.
The Purchase Price paid by the arm's length purchaser under
the purchase agreement included all other costs related to the
construction of a Building on a Unit and notably the construction
costs directly related to the construction of the Buildings (the
"Net Direct Project Costs") and the Development Costs
including the servicing costs to connect the Building to the
municipal services;
22.
The Appellant self-assessed the GST at the time possession of the
residential complex was given to each arm's length purchaser
pursuant to subparagraph 191(1)(b)(ii) of the
Act;
23.
The respective purchaser claimed the NHR in respect of the
purchase pursuant to section 254.1 of the Act and under the terms
of the purchase agreement, the NHR was assigned by each purchaser
to the Appellant;
24.
The NHR as claimed was calculated by the Appellant on the
Purchase Price including the Net Direct Project Costs and the
Development Costs;
25.
The only item that was not considered in the calculation of the
NHR by the Appellant was the Land Value allocated to each Unit
depending on its size.
[4]
The Minister assessed the Appellant on the basis that the total
consideration to be used in computing the rebate should include
only those amounts payable by the purchaser to the Appellant for
the supply of the building less the costs of servicing, which the
Minister re-allocated and regarded as rent for the supply
of leased land.
[5]
The Appellant relied on two witnesses: Alfred Artinger, a
professional engineer who was engaged by the Appellant as manager
of land development, and Ronald James Moore, a chartered
accountant who acted as chief financial officer for the
Appellant. Both witnesses had been employed by the Appellant for
a number of years and both had extensive knowledge respecting the
planning, construction and costing in the field of residential
home construction and more specifically of the Village by the
Arboretum.
[6]
Counsel for the Appellant referred to these two witnesses as
candid and truthful and I do not disagree with her
characterization. A joint Book of Documents containing 56
documents was entered. Both witnesses were referred to a number
of these documents to support their explanation of this
development as a lifestyle gated community for individuals over
55 years of age. They emphasized that it was not a subdivision in
the normal sense that one would employ that term but it was a
site plan approved by the municipality for construction of
residential units on lots with varying frontages. Services were
installed throughout the site plan by the Appellant, which
included plumbing, sewer, hydro, cable, streets and street
lighting. According to the pricing or costing sheet contained at
Tab 50 of the Book of Documents, construction costs were the
"brick and mortar" of the unit according to witness,
Alfred Artinger, while the development costs included the costs
of servicing the units within the site plan. An amount was
segregated from the dwelling costs as contribution respecting a
recreation centre for the site plan. Mr. Artinger explained that
to arrive at a price for each unit sold, the servicing costs,
which were part of the Appellant's costs, were allocated
proportionately to each purchaser, depending on lot frontage and
type of dwelling. He stated that the purchasers did not have
title to the roads, sewers, etc. installed throughout the
development but that the only way the Appellant could recapture
these costs was to include them in the price of the
building.
[7]
Mr. Moore confirmed Mr. Artinger's evidence that the dwelling
price included the actual construction costs of each dwelling
(the net direct project costs) together with an apportionment of
servicing costs (the development costs) including those common to
the development. Mr. Moore confirmed that generally accepted
accounting principles had been used to match project costs to
revenues in the recapture of these servicing costs.
[8]
The Respondent called one witness, the appeals officer,
David Thorpe. In his evidence, he referred to two property
appraisals contained in the Joint Book of Documents (Tabs 12 and
20) which were completed in respect to this development. Both
appraisals, one by a Wayne Eagle in the CCRA's appraisal
section and another by A. Tonin, a real estate appraisal
consultant in the Kitchener office, reached the same conclusion:
that the overall declared values when compared to other freehold
sales in the area appeared reasonable but that the declared
allocation of the consideration between land and buildings was
not reasonable. Mr. Tonin's memo stated
that the homes in this development were of average quality but
that the value used by the Appellant was similar to better
quality homes on freehold lots in the same area. This he said
indicated that the price used for each dwelling was overstated.
Both appraisals concluded that in view of the quality of the
homes and the price assigned, the costs of development had been
incorporated into the purchase price of the dwelling. Mr. Thorpe
testified that unlike the rebates in sections 254 and 256 of the
Act, under paragraph 254.1(2)(h) it was relevant
whether the development costs were part of the building or the
land, as no part of the rebate could be attributable to rent for
land. He confirmed that the CCRA had used subsection 153(2)
to allow the reallocation of the consideration paid for servicing
costs, from the supply of the dwelling to the supply of the
land.
The
Appellant's Position
[9]
Counsel pointed out that there is no issue under subsection
254.1(2) to the entitlement by the purchasers of these dwellings
to the new housing rebate but that the problem arises in the
interpretation of paragraph 254.1(2)(h). For this
paragraph to apply, the fair market value of the residential unit
must be less than $374,500.00. She argued that the rebate should
be calculated on the consideration paid for the dwelling without
apportioning some of the consideration to the land, as the
paragraph contains no other reference to fair market value except
the above noted. Counsel argued that all of the legal
documentation support the contention that the amount paid for
each dwelling as specified in the bill of sale was the actual
amount used to calculate the rebate and that no portion of the
amount paid for the dwelling could reasonably be regarded as rent
for the supply of land for which no rebate could be paid.
Appellant counsel argued that it was the legal documentation that
determined the legal relationship between the parties and
therefore the servicing costs relate to the dwellings located on
each parcel of land. Counsel argued that the Minister simply
considered what the value was, whether it was reasonable and how
it should be allocated, based on the appraisals of Mr. Tonin and
Mr. Eagle, instead of correctly applying the wording of paragraph
254.1(2)(h). To support this position, she argued that all
of the purchasers were at arm's length, which was not
disputed, and that this many purchasers would not pay an inflated
price for their dwellings. Therefore, no part of the amount paid
by each purchaser for the dwelling can reasonably be regarded as
rent for the supply of land.
[10] Appellant
counsel referred me to the following definition of
"land" as contained in Black's Law
Dictionary Fifth Edition:
In the most
general sense, comprehends any ground, soil, or earth whatsoever;
including fields, meadows, pastures, woods, moors, waters,
marshes, and rock. ...
She argued
that the Act contains no definition of "land" and that
subsection 254.1(2) does not specifically state whether land
includes vacant land, serviced land or unserviced land. Since
Black's Law Dictionary definition refers to land in a
very general sense, then, she stated, even if this subsection
excludes "land" and not just "rent for land",
it would exclude raw land only without the services in
calculating rebates.
[11] Appellant
counsel compared the wording in GST memorandum 19.3.2 to 19.3.1.
Counsel argued that these memoranda supported the Appellant's
position, that no part of the rebate calculation can be
attributed to land, as the only amount to be excluded, by
reference to these memoranda, is an amount paid or payable as
rent for land.
[12] Finally,
the Appellant addressed the use of subsection 153(2) by the CCRA
to re-allocate that portion of the consideration attributable to
servicing costs from the supply of the dwelling to the supply of
land. Counsel submitted that this section did not apply in this
case because there was only one consideration payable pursuant to
the purchase agreement and the bill of sale and
subsection 153(2) requires that two considerations are
necessary for the section to be used.
The
Respondent's Position
[13] The
Respondent's position was that this case involved two
supplies - one for the sale of a building and one for
land and that the supply of land was for serviced land by way of
sublease. He argued that with respect to a lease or sublease the
consideration for a supply is the amount of rent in accordance
with the value of the land and that subsection 254.1(2)
excludes rent in calculating new housing rebates. He contended
that the Appellant based the rent on raw land only, as indicated
by both Mr. Artinger's testimony and the handwritten
notation at the bottom of a document at Tab 4 of the Book of
Documents containing the Appellant's own closing and lease
rate information. This notation stated that the lease was for raw
land only. He submitted that the supply was one for a serviced
lot not an unserviced lot.
[14] Counsel
maintained that the words in paragraph 254.1(2)(b) "...
other than consideration that can reasonably be regarded as rent
for the supplies of the land ..." and more specifically
the word "reasonably" imports that one must interpret
this in the context of plain common sense and reality, both
accounting reality and economic reality.
[15]
Counsel's position was that the allocation provided by the
builder was strictly prohibited by paragraph 254.1(2)(b)
because it was not reasonable and that subsection 153(2) allowed
the Minister to re-allocate the net development costs as being
consideration that could reasonably be regarded as rent for the
supply of land.
[16] Respondent
counsel also argued that the tenant/purchaser should not be
treated like a purchaser who purchases a new home together with
the lot of land, because there are clearly two sections (sections
254 and 254.1) meant to deal separately with purchased land and
leased land.
Analysis
[17] The GST
aspect of each sale is the ability to receive a GST new housing
rebate, calculated pursuant to section 254.1 of the Act.
This section provides a new housing rebate to those individuals
who purchase a dwelling to be used as their primary place of
residence but which is built on leased land. This section differs
from section 254 because this latter section is used to
calculate a rebate where individuals pay an amount to purchase
both dwelling and the land upon which the dwelling is built. The
facts of this case bring the purchasers of the development within
the wording of paragraph 254.1(2)(h) of the
Act which reads as follows:
254.1(2) Where
...
the Minister shall,
subject to subsection (3), pay a rebate to the particular
individual equal to
...
(h) where the fair
market value referred to in paragraph (c) is not more than
$374,500, an amount equal to the lesser of $8,750 and 2.34% of
the total (in this subsection referred to as the "total
consideration") of all amounts each of which is the
consideration payable by the particular individual to the builder
for the supply by way of sale to the particular individual of the
building or part of a building referred to in paragraph (a) or of
any other structure that forms part of the complex, other than
consideration that can reasonably be regarded as rent for the
supplies of the land attributable to the complex or as
consideration for the supply of an option to purchase that land,
and
...
[18] The
question here is whether the servicing costs can reasonably be
regarded as rent for the supply of the subleased land.
[19] Samples of
several agreements to lease and purchase, subleases, bills of
sale and cost ledger reports between the Appellant and several
purchasers were included in the Joint Book of Documents. The
Agreement to lease and purchase, between each purchaser and the
Appellant, referred to two sub-agreements within the body
of the document. The first was the agreement to lease the land
upon which a dwelling would be constructed for a monthly rental
and the second referred to the agreement to purchase the
residential unit for a specified price. Because of the nature of
the acquisition of a home in this development, the sale of each
home was comprised of two documents: A bill of sale containing
the purchase price of the building and a sublease for the land
upon which the building was constructed. The bill of sale is a
short one page recital of the purchase price of the residential
unit, that it is situated on leased land and that the Appellant
vendor is warranting title to the unit. No reference to servicing
costs or breakdown of these costs was included in the bill of
sale. The sublease between the Appellant/landlord, and each
purchaser/Tenant, contained the many standard clauses one would
expect for the sublease of land upon which a dwelling is built.
Article 19 of each sublease governs surrender of the lease at the
expiration of the term and reads as follows:
19.1
Surrender
The Tenant
shall, at the expiry of the Term or other termination of this
Lease, surrender the Demised Land to the Landlord in good order,
repair and condition.
19.2
Removal of Residential Dwelling Unit [Delete if multiple
residential block]
Subject to
the performance and observance of all covenants on the part of
the Tenant herein contained, the Tenant shall, upon expiry of the
Term or other termination of this Lease, have the right to
remove, at its expense, the Residential Dwelling Unit from the
Demised Land. The Tenant shall conduct such removal under the
control and supervision of the Landlord and shall retain
contractors qualified and experienced in the relocating of
houses. The Tenant shall obtain insurance in a form and amount
satisfactory to the Landlord acting reasonably with regard to the
removal of the Residential Dwelling Unit prior to commencing such
removal and shall keep that insurance in place through removal.
The Tenant shall fill in the excavation on the Demised Land,
compact the fill, and restore grading of the Demised Land as far
as practicable to its former state. The Tenant shall be liable
for any and all loss, damages, costs or expenses suffered by any
person resulting from such removal. The Tenant shall indemnify
and save harmless the Landlord against any and all claims,
actions, damages, loss, liabilities and expenses (including
without limitations those in connection with bodily injury
(including death), personal injury or damage to property) arising
from any removal of the Residential Dwelling Unit. Failing
removal of the Residential Dwelling Unit within thirty (30) days
from the date of expiry or termination of this Lease, the
Residential Dwelling Unit shall, at the option of the Landlord
(notwithstanding the Landlord's rights in paragraph 18
herein), become the property of the Landlord and the Landlord
shall have the right to sell, lease or demolish such Residential
Dwelling Unit.
[20] The
purchaser of the dwelling at the termination of the term could
remove the dwelling from the land, leaving behind the utilities
and basement portion of the building.
[21] In addition
to the above referenced documentation, the head lease between the
University of Guelph (the Landlord) and the Appellant (the
Tenant), formed part of the Book of Documents. It is a lengthy
document but the wording of several of its articles is of
particular importance. They are:
Article 1
(1.1)
(s)
"Improvements" means the Buildings, the Site
Services and all other improvements of any kind whatsoever now or
at any time and from time to time constructed, situated or laid
out upon the Phase 1 Land and including all site preparation work
in regard to any of the foregoing;
(ac)
"Premises" means the Phase 1 Land together with
the Improvements made thereon by the Tenant during the
Term;
(am)
"Residential Unit" means living accommodation
comprising a single housekeeping unit designed or intended for
use by one individual or by individuals living together as a
single housekeeping unit and consisting of a room or suite of
rooms in which both culinary and sanitary facilities are provided
for the exclusive use of such individual or
individuals;
(ao)
"Site Services" means all of the above ground
and underground services required to accommodate the proposed
development on the Phase 1 Land including, without limitation,
water mains, sanitary sewers, storm sewers, storm drainage
improvements, roads, sidewalks, and lighting;
Article
2
2.6
Title to Improvements
(a)
Except as provided in subsection (b), the Landlord and the Tenant
agree that the Improvements are and shall be fixtures to and upon
the Phase 1 Land and are intended to be and shall be upon the
expiration or other termination of this Lease or upon the
Landlord exercising any of its remedies under Article 19, the
absolute property of the Landlord, free from all encumbrances of
any kind whatsoever and without compensation to the Tenant.
However, the Improvements shall, during the Term, be deemed, as
between the Landlord and the Tenant, to be the separate property
of the Tenant and not of the Landlord, but shall be subject to
and governed by all of the provisions of this Lease. Provided
always that, except as provided in subsection (b), the
Landlord's absolute right of property in the Improvements
which will arise upon the expiration or termination of this
Lease, or upon the exercise of its remedies as aforesaid, shall
take priority over any other interest in the Improvements which
may now or hereafter be created by the Tenant and that all
dealings by the Tenant with the Improvements which in any way
affect title thereto, shall be made expressly subject to the
rights of the Landlord and the Tenant shall not assign, encumber,
or otherwise deal with the Improvements separately from any
permitted dealing with the leasehold interest under this Lease to
the intent that no person shall hold or enjoy any interest in
this Lease who does not at the same time hold a like interest in
the Improvements.
(b)
Notwithstanding subsection (a):
(i)
Subject to the provisions of Section 16.7, the rights of
subtenants of lands or Residential Units within the Premises
shall not be extinguished or affected by the expiry or early
termination of this Lease or any exercise by the Landlord of any
of its remedies under Article 19; and
(ii)
Residential Units within the Premises which are sold to
residential subtenants of land within the Premises shall remain
the property of the purchasers notwithstanding the expiry or
early termination of this Lease or any exercise by the Landlord
of any of its remedies under Article 19.
Article
4
4.2
Construction of Site Services
The Site Services and the other Common Areas and Facilities to be
provided pursuant to Section 4.1(a) and all additions, changes,
alterations and replacements (except those undertaken by the
Landlord) shall be completed:
(a)
at the sole expense of the Tenant;
...
(c)
strictly in accordance with the design drawings and working
drawings previously approved in writing by the Landlord pursuant
to the Project Agreement;
...
(h)
subject to the reasonable regulation, supervision, control and
inspection of the Landlord; and
Article
11
11.1 Maintenance
of Site Services
The Tenant covenants and agrees to maintain and keep in a proper
state of repair and operation, and to replace if and whenever
required, throughout the Term all of the Site Services including
above-ground services (this includes roadway pavements, curbs,
sidewalks, manholes and catch basins) and the underground
services (this includes storm sewers, sanitary sewers, watermains
and the appurtenances associated with them) and all other Common
Areas and Facilities constructed or installed by the Tenant.
Further, the Tenant covenants and agrees to maintain all sewers,
manholes and catch basins free of road materials, building debris
and other foreign matters and to clear such material from the
system throughout the Term. Such obligations shall include
obligations to replace or reconstruct above-ground and
below-ground services when required.
11.5
Inspection
The Tenant covenants with the Landlord to permit the Landlord or
its agents, at all reasonable times during the Term to view the
state of repair of the Site Services, the Buildings (except the
interior of units sold to residential subtenants) and any other
improvements on the Phase 1 Land.
Article
14
14.5 Buildings
Owned by Residential Subtenants
Notwithstanding any other provision in this Article 14 to the
contrary, where the Improvements which are damaged or destroyed
are one or more Buildings which have been sold to residential
subtenants and are insured under one or more policies effected
and maintained by the owners of those Buildings, the following
provisions shall apply:
(a)
the parties acknowledge that the proceeds of the insurance policy
will not be paid to the Landlord;
(b)
repair, reconstruction or replacement of any such Building will
be the responsibility of the owner of that Building and, where
applicable, the Tenant in accordance with the terms of the
residential sublease between the Tenant and the home owner;
and
(c)
the Tenant shall require that the repair, replacement or
reconstruction be completed diligently and in accordance with the
provisions of this Article 14.
Article
16
16.1 Residential
Subleases
Subject to the provisions of Section 16.2, the Tenant shall be
entitled, without the prior consent of the Landlord:
(a)
to enter into residential subleases with respect to Residential
Units constructed on the Premises; and
(b)
to enter into residential subleases for parts of the Phase 1 Land
on which a Residential Unit has been or will be constructed and
agreements with the residential subtenants whereby such
subtenants purchase the Residential Unit constructed or to be
constructed on the subleased land.
The
Tenant's ability to enter into such residential subleases or
other agreements is conditional upon compliance with the
subdivision control provisions of the Planning
Act.
Article
22
22.1
Surrender
The Tenant shall, at the expiry of the Term or other termination
of this Lease, surrender the Phase 1 Land and all of its interest
in the Premises to the Landlord, the Phase 1 Land and all
Improvements thereon to be in good order, repair and condition,
reasonable wear and tear excepted.
[22] Paragraph
19 of the sublease allows a purchaser to remove the dwelling at
the expiration of the land lease, provided certain conditions are
met. It is clear that the services that connect the dwelling to
the municipality remain with the land and there is no
reimbursement of any kind contemplated to the purchaser upon
removal of the dwelling. This would indicate that the services
belong with the land not the building. Another indication that
the services were to form part of the land is contained in
paragraph 6.3 of the sublease where the Tenant of the land is
directed by the word "shall" to pay utilities and other
charges when due. Paragraph 6.4 goes on to instruct each Tenant
to deliver copies of receipts for such payments to the Appellant
when requested to do so. The Appellant retained some control over
the payment for services as the head lease required the Appellant
to maintain and repair the site services for the duration of the
lease. At the termination of the lease the services reverted to
the University of Guelph. All of this indicates that the
University of Guelph and the Appellant viewed the services as
part of the land.
[23] The bill
of sale between the Appellant and each purchaser is for the sale
of the dwelling and makes no reference to services at all. Each
contract was strictly for the building.
[24] The above
point to the services being part of the land but I do not believe
that one can look only at the provisions of the sublease to reach
an answer to this question. The sublease does not operate as a
legal document on its own without reference to the head lease
from which the Appellant obtained its authority to provide each
purchaser with a sublease for the land upon which their dwelling
was built. Although neither counsel relied upon these documents
or used them to any great extent in their analysis and
presentations to any extent, they are relevant to my reasons for
judgment.
[25] Throughout
the head lease, site services and residential units are clearly
differentiated. Site services were defined at the beginning of
the head lease as all of the above ground and underground
services. Residential Units were described as the living
accommodations of each Tenant of a sublease. The term
"improvements" was defined and used in the lease to
include both the buildings and site services. Clearly however in
Article 2(2.6) the title to the improvements, excepting the
residential units, are to remain with the land and to be the
property of the University of Guelph at the termination of the
lease. More specifically it states that these improvements are to
be considered fixtures to and upon the land. Article 4(4.2)
reserves to the University the right to approve, control and
inspect the construction of the site services, even though they
remain the expense of the Appellant. There is an additional clear
reference in Article 14(14.5) to ownership of the residential
unit or dwelling by the purchasers under each sublease. This
provision clearly points to the insurance proceeds on each unit
as being the property of the purchaser of a unit, not the
landlord. Here again is a clear delineation between ownership of
the residential unit and the site services. Article 16
specifically refers to residential subleases and talks about the
subleases being in respect to residential units constructed on
the leased land. Again with the definitions provided in this
document there is clearly a differentiation made between the
residential units and the site services. The provisions of the
head lease establish that the residential units are the property
of the purchaser but that the site services once constructed and
installed by the Appellant remained part of and with the land and
ultimately the property of the University of Guelph.
[26] Appellant
counsel referred to the importance of the wording of the final
part of paragraph 254.1(2)(h): "... other than
consideration that can reasonably be regarded as rent for the
supplies of the land ...". Her argument was that this
subsection excluded "rent", not land, from the rebate
applicability and that even if it did exclude land, the
definition of land which she quoted from Black's Law
Dictionary meant raw land only. As such the servicing costs
relate to the building and not the land. It was her premise that
all of the purchasers were arm's length and knew that they
were purchasing only the building and not the land. Therefore
they would not pay an inflated value. According to the Appellant,
the rebate had to be calculated by using the consideration
specified in the legal documentation.
[27] Appellant
counsel referred to the definition of land contained in the
Fifth Edition of Black's Law Dictionary. However,
I note that in the Seventh Edition, land is defined
as:
1. An immovable and indestructible three-dimensional
area consisting of a portion of the earth's surface, the
space above and below the surface, and everything growing on or
permanently affixed to it.
The final words
"or permanently affixed to it" would appear to address
the facts of this case where the services required to connect the
dwelling to the municipal services become affixed to the leased
land. This definition supports the argument that land here is
more than raw land. Certainly the building too becomes
"permanently affixed" to the land but the legal
documentation here provides for the severing of the building from
the land at the termination of the sublease. Since the site
services stay with the land according to the provisions of both
the head lease and the sublease, the land includes both the raw
land and the site services.
[28] Section
254.1 expressly excludes consideration that is rent paid for
land. The rent paid here was pursuant to the lease and sublease.
"Lease" is defined in Black's Law
Dictionary as:
A contract by which a
rightful possessor of real property conveys the right to use and
occupy that property in exchange for consideration, usu.
rent.
[29]
"Rent" is also defined as:
Consideration paid,
usu. periodically for the use or occupancy of property (esp. real
property).
The provisions in the
head lease contemplate that the services remain with the land.
The tenant/purchaser of a dwelling may only remove the building.
The supply for land includes as part of the land, those services
that are with the lot and remain with the land after a dwelling
is removed. The definition of "land" includes items
permanently affixed or raw land and site services. A
lease/sublease is for property or land here which includes the
site services. The definition of "rent" is the
consideration paid for the use of occupancy of property
particularly real property pursuant to the lease. Since land here
includes the site services and a lease is defined as the right to
use and occupy the property or land here for rent, with rent
being the consideration for the land, it must, unless otherwise
specifically excluded, include the site services that become
permanently attached to it. In fact if a building becomes
attached by a basement or otherwise to a piece of land then the
land may ultimately be said to include the building affixed to
it. However the legal documentation here clearly severs the
building from the site services. The purchaser owns the building
and can remove it at the end of the lease. The site services stay
with the land.
[30] I conclude
that it was clearly the intention of the parties to the head
lease that the site services remain with the land at the
termination of the lease and that the residential unit was all
that the purchaser could own. The Appellant could not offer a
subtenant a better interest than the Appellant in fact obtained
under the head lease. The rent referred to in
paragraph 254.1(2)(h) are the payments made pursuant to the
sublease for land to which the University of Guelph and the
Appellant intended that these site services would remain with the
land at the end of the sublease and lease. The supply is for land
and in these particular circumstances the services clearly attach
to the land and form part of that supply.
[31] The next
issue is whether the Minister properly applied
subsection 153(2) to re-allocate the consideration paid in
respect to servicing costs from the residential unit to the land.
A re-allocation of consideration pursuant to this section is
permitted where it is determined that the consideration is
excessive for one supply. According to the testimony of the CCRA
appeals officer, David Thorpe, the Minister relied on
subsection 153(2) of the Act as authority to allow the
reallocation of the consideration. Subsection 153(2)
states:
(2)
For the purposes of this Part, where
(a)
consideration is paid for a supply and other consideration is
paid for one or more other supplies or matters, and
(b)
the consideration for one of the supplies or matters exceeds the
consideration that would be reasonable if the other supply were
not made or the other matter were not provided,
the consideration for each of the
supplies and matters shall be deemed to be that part of the total
of all amounts, each of which is consideration for one of those
supplies or matters, that may reasonably be attributed to each of
those supplies and matters.
[32] Subsection
153(2) was designed as an anti-avoidance rule. The applicability
of this section requires firstly that there are two or more
considerations and secondly that there has been unreasonable
allocation between the considerations. The Appellant's
position was that this section had no applicability because there
was only one consideration here, that is a single amount paid for
the dwelling pursuant to the purchase agreement and the bill of
sale. Respondent counsel argued that there were two
considerations. The purchase price of the dwelling was one
consideration and the rent for the leased land was the
"other" consideration as required by subsection 153(2).
I agree with the Respondent. There are two supplies in every case
here where a purchaser purchases a residential unit; one is a
dwelling for which a consideration is specified pursuant to the
purchase agreement and the bill of sale and the second one is the
land upon which the dwelling is built and sub-let to the
purchaser for a consideration specified in a sublease.
[33] In
accordance with my analysis, I have determined there are two
supplies of dwelling and serviced land and two considerations.
The next question to determine is whether the allocation of the
consideration was unreasonable. Appellant counsel, to support her
position made two arguments. Firstly, to support her contention
that the considerations had been reasonably allocated, she relied
on statements made in correspondence of Lynn Biscaro, the CCRA
technical advisor (contained at Tab 22 of the Book of Documents).
Ms. Biscaro's statement upon which counsel relied, read in
part as follows: "We had no issue with the amount of the
consideration ...". However when one looks at the entire
paragraph contained in Ms. Biscaro's correspondence of
June 4, 1999, it states:
In responding to your
comment "it is unreasonable to believe that purchasers
acting at arm's length would pay more than the FMV for a
building". We have no issue with the amount of consideration
paid by the purchaser. Our concern is twofold:
1.
Is the overall FMV of the complex reasonable? and
2.
Does the consideration amount used to calculate the rebate
include any amounts that should be excluded?
The response to both these issues has
already been addressed.
In this same correspondence, she
states:
The appraiser concluded that the overall
values were reasonable and met the requirement of subsection
191(1). However, the allocation between the land and building was
not.
These statements clearly support the
Respondent's position that the Minister did not take issue
with the total value of the considerations but took issue with
the allocation. The Respondent's position was that the
allocation of the servicing costs was unreasonable because the
rent did not reflect the value of the land. The Minister took the
position that the fair market value used by the Appellant for
self-assessment purposes was comparable to a better quality
home on a freehold lot in the same area. However, the dwellings
here were of average quality, according to departmental
appraisals, with construction costs far less than the purchase
price. The Minister therefore concluded that the development
costs were incorporated in the purchase price of the dwelling.
The Appellant cannot rely upon Ms. Biscaro's statement which
were taken out of context to infer that the allocations of the
considerations were reasonable.
[34] Secondly,
the Appellant argued that the amount of consideration for the
dwelling could not be unreasonable as so many purchasers, each
represented by a solicitor, would not pay an inflated price.
Therefore the purchase price stated in the bill of sale must be
reasonable. I do not believe this reasoning is logical.
Each purchaser here had a bottom line dollar amount they
were willing to spend in purchasing a dwelling inside this type
of community. As long as they were not out of pocket in excess of
this bottom line amount, it mattered little to them whether
consideration was allocated on paper to the purchase price for
the building or to rent for the land. The structuring of the
consideration mattered only to the builder, as an inflated
building price provided access to a larger rebate. The Minister
has based the rebate calculation on the construction costs of the
dwelling and profit margin less the amount attributed to
servicing costs. For these reasons I conclude that the Appellant
made an unreasonable allocation of considerations and that the
amounts have been properly and reasonably re-allocated pursuant
to subsection 153(2).
[35] Respondent
counsel in his argument referred to the example of a purchaser
buying one dwelling but subleasing two lots. The result of
the Appellant's allocation scheme would be a purchase price
for the building which would include the apportioned costs of
servicing two lots not just one. This would result in a price
that is greater than the purchase price for an identical building
situated on only one lot. This result is not economically
realistic. It is not reasonable based on common sense and good
judgment. Furthermore, the Appellant's allocations are
unreasonable as a purchaser of one building on two lots would
likely not be able to obtain additional insurance that would
reflect the purchase price paid.
[36] I conclude
that there are two supplies, dwelling and land with a
consideration paid for each. The provisions in both the head
lease and subleases support my finding that the services were
installed by the Appellant but, once installed, were to remain a
part of the land. The supply of land is therefore a supply of
serviced land. The purchasers paid rent and had the use and
enjoyment of these services with the Appellant maintaining them
throughout the lease but ultimately ownership of land with
services reverted to the University of Guelph. The purchase
agreement and bill of sale reflect prices that are excessive for
the dwelling alone and the Minister may utilize subsection 153(2)
to re-allocate that portion of the consideration paid for the
dwelling that related to servicing costs to the supply of
land.
[37] Although
this disposes of the matter, I want to provide my comments on
several additional arguments raised by Appellant counsel. Counsel
compared subsection 153(2) to section
68 of the Income Tax Act. Section 68 permits re-allocation
of an amount paid by a taxpayer for property and services on a
reasonable basis "irrespective of the form or legal effect
of the contract or agreement" (quotes added). Counsel
pointed out that the words in quotes do not appear in subsection
153(2), although she did not go on to elaborate why this might be
significant. It seems Appellant counsel is trying to draw the
conclusion that because subsection 153(2) does not contain these
same words that section 68 of the Income Tax Act
does, one is barred from looking to external sources of evidence,
other than the terms of the transaction documents themselves, in
the application of subsection 153(2) as is done in section 68. I
disagree. I do not believe that the omission of these words in
subsection 153(2) is a bar to looking behind the consideration
specified in the documents to determine whether subsection 153(2)
applies. The provision would have very little use if one could
not look behind the numbers in the Appellant's
documents.
[38] Appellant
counsel also referred me to GST memoranda 19.3.1 and 19.3.2 which
contain the CCRA's interpretation of sections 254 and 254.1
of the Act respectively. She referred to the fact that
memorandum 19.3.2 contains a direction that in determining
consideration under section 254.1, it would generally be similar
to the amounts paid or payable for the purchase of homes plus
land from a builder under section 254. The consideration
under section 254 typically includes an amount for land,
building, development, servicing and marketing costs of the
builder, which in the end would be allocated to the purchaser.
Counsel deducted that the reasonable view is that a purchaser of
a new home on leased land under section 254.1 should be
eligible for the same entitlement as a free hold purchaser under
section 254 and that the memoranda confirmed
this.
[39] The
memoranda are interpretation documents authored by the very
department whose job it is to administer and enforce them.
Associate Chief Judge Bowman in Canadian Occidental U.S.
Petroleum Corporation v. The Queen, [2001] DTC 295 at page
299 provided the following comments with respect to
interpretation material published by the Department:
[30] The
court is not bound by departmental practice although it is not
uncommon to look at it if it can be of any assistance in
resolving a doubt: Nowegijick v. The Queen et al., 83 DTC
5041 at 5044. I might add as a corollary to this that
departmental practice may be of assistance in resolving a doubt
in favour of a taxpayer. There can be no justification for using
it as a means of resolving a doubt in favour of the very
department that formulated the practice.
Since the Appellant has
relied somewhat on these, I feel it is necessary to provide my
comments.
[40] A rebate
calculated pursuant to section 254 assumes that there is
land plus a dwelling being purchased. The consideration used in
calculating the rebate includes those items listed in G.S.T.
memorandum 19.3.1 such as "landscaping",
"in-ground pool" and "land that forms part of a
qualifying unit". The rebate calculated pursuant to section
254.1 applies where the dwelling is purchased but the land is
leased. G.S.T. memorandum 19.3.2 does not list items to be
included in calculating the rebate as memorandum 19.3.1
does. Instead it simply refers to memorandum 19.3.1 as
follows:
Items to include or
exclude from total consideration are discussed in Section 19.3.1
Rebate for Builder-Built Unit (Land Purchased).
It goes on to state:
... no amount paid or
payable as rent for the land, nor any amount payable for an
option to purchase the land is to be included in calculating the
total consideration.
It is the interpretation of these words
that are at issue today. The Appellant's interpretation of
section 254.1, by reference to these Memoranda is that it is
essentially to be interpreted in the same fashion as
section 254. That would negate the requirement for these two
provisions. Parliament has purposively established two different
provisions for two different sets of circumstances.
[41] The
evidence indicated that the Appellant, prior to the sale of these
units, sought professional accounting advice in respect to the
method it would be utilizing for claiming new housing rebates for
this development. During an audit for the period March 1, 1991 to
February 28, 1993, the Appellant sought the advice of the auditor
on the appropriateness of its self-assessment methods and new
home rebate calculation used for this development. The auditor
advised the Appellant in writing that although the audit did not
cover the sales of homes in this development, their inquiry would
be addressed in the near future. No response followed for almost
four years. The Appellant argued that it took all reasonable
measures to ensure appropriate reporting. Although I do not
condone this type of behaviour on the part of the CCRA (as it
left the Appellant with the impression that it was conducting its
business properly), the Minister reassessed within the prescribed
period and to its credit, penalties and interest have been
deleted.
[42] For the
reasons given, the appeal is dismissed with costs.
Signed at
Ottawa, Canada, this 9th day of December 2002.
J.T.C.C.COURT FILE
NO.:
2001-1661(GST)G
STYLE OF
CAUSE:
Reid's Heritage Homes Ltd.
and Her Majesty the Queen
PLACE OF
HEARING:
London, Ontario
DATE OF
HEARING:
October 28, 2002
REASONS FOR
JUDGMENT BY: the Honourable Judge Diane
Campbell
DATE OF
JUDGMENT:
December 9, 2002
APPEARANCES:
Counsel for
the Appellant: Susan Fincher-Stoll
Counsel for
the
Respondent:
Gatien Fournier
COUNSEL OF
RECORD:
Counsel for
the Appellant:
Name:
Susan Fincher-Stoll
Firm:
Harrion Pensa
London, Ontario
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2001-1661(GST)G
BETWEEN:
REID'S
HERITAGE HOMES LTD.,
Appellant,
and
HER MAJESTY
THE QUEEN,
Respondent.
Appeal heard
on October 28, 2002, at London, Ontario, by
the
Honourable Judge Diane Campbell
Appearances
Counsel for
the
Appellant:
Susan Fincher-Stoll
Counsel for
the
Respondent:
Gatien Fournier
JUDGMENT
The appeal from the assessment made
under Part IX of the Excise Tax Act for
the period January 1, 1995 to October 31, 1998, notice of which is dated June 4,
1999 and bears number 08EP0100386 is dismissed, with costs, in
accordance with the attached Reasons for Judgment.
Signed at
Ottawa, Canada, this 9th day of December 2002.
J.T.C.C.
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