[OFFICIAL ENGLISH TRANSLATION]
Date: 20020820
Docket: 2001-2207(GST)I
BETWEEN:
LES IMMEUBLES LE SÉJOUR INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Angers, J.T.C.C.
[1] This appeal is from an assessment
concerning the Goods and Services Tax ("the GST"),
interest, and penalties, made under the applicable provisions of
the Excise Tax Act ("the
Act"). The assessment dated March 16, 2001,
and covering the period from January 1 to December 31,
1998, deals primarily with the application of the GST following a
September 1, 1995, change in the use of a residential
complex.
[2] The appellant is a duly
incorporated company. On May 12, 1995, it completed
construction of a building located at 166, rue de
l'Hôtel-de-Ville, Rivière-du-Loup, Quebec. This
building was divided into 12 residential units, each with
five bedrooms, a living room, a kitchenette and two bathrooms.
According to Edgar Fraser, who became the main shareholder of the
appellant on the same date¾May 12, 1995¾the
use of the building was room rental: to students during the
academic year, that is, from September 1 to May 31; and
to tourists from June to August.
[3] When Mr. Fraser purchased the
shares, the appellant already had in its possession 58 room
rental leases signed by students for the period from
September 1, 1995, to May 31, 1996. During the tourist
season, the appellant hired reception and room service employees,
whose employment was terminated at the end of August.
[4] Mr. Fraser claimed that each
year his building is occupied by tourists in a proportion of
25 per cent and by students, for residential
accommodation, in a proportion of 75 per cent.
[5] Under cross-examination,
Mr. Fraser acknowledged that in 1995 and 1996 some students
took possession of their rooms as early as two weeks before the
September 1 date indicated in the lease. He added moreover
that these students often left before the date indicated in the
lease. He further explained that at the Rivière-du-Loup
CÉGEP the academic year starts on August 21 and ends
on May 15, whereas at the trade school the academic year
begins on September 2 or 3 and ends only in June.
[6] Mr. Fraser acknowledged that
during the summer some rooms might be rented as residential
accommodation for short periods such as one week, although some
rooms were rented for more than one month. The building is
located near the above-mentioned educational institutions and
certain tourist attractions.
[7] The respondent called as a witness
Jacques Cimon, an auditor and appraiser with the Canada Customs
and Revenue Agency, and Julie Bouchard, an accountant and
objections officer employed by the same Agency. These two
witnesses explained their work in the appellant's case. Early
in 2000, Mr. Cimon met with Jean Beaumont, a former
shareholder of the appellant, in order that the appellant's
business operations be explained to him. He learned from
Mr. Beaumont that the use of the appellant's building is
tourist accommodation during the summer and residential
accommodation during the other three seasons. Mr. Cimon
examined the appellant's financial statements going back to
the beginning of its operations; he also examined how the
appellant treated the GST when it purchased the building in 1995.
He found no reference to the GST when the building was purchased
in May 1995 but noted that, on the appellant's annual
GST return filed in December 1995, the appellant paid
50 per cent of the GST, claiming that half its
operations were GST-taxable and the other half were
GST-exempt.
[8] Mr. Cimon therefore analysed
the use of the appellant's building. He consulted his
Department's Policy Statement P-099 in order to
ascertain the meaning of the words "hotel",
"motel" and "inn"; he also consulted the
Act and its definitions, as well as the municipal by-laws
of the city of Rivière-du-Loup in effect at the time of
the construction of the building and at the time of his
investigation. As well, he examined the application for a
construction permit and the services offered by the appellant to
tourists and to tenants. The application was for a permit to
construct 12 residential units in a location where, at the time,
the zoning allowed for commercial use. According to
Mr. Cimon, this use would no longer be allowed today.
Mr. Cimon found it difficult to conclude that the
appellant's business was of the hotel or motel type since
that use was not exercised throughout the year. According to
Mr. Cimon, the building was a residential complex, although
strictly speaking the appellant's operations do not
correspond to this term as defined in the Act.
Mr. Cimon ultimately concluded that the appellant's
building should be considered a hotel or motel for part of the
year, that is, the summer.
[9] Concerning the application of the
GST, Mr. Cimon stated that he examined a pro forma
balance sheet as well as financial statements of the appellant,
in order to find a fair and reasonable method of determining the
proportion of the appellant's operations that is GST-taxable
and the proportion that is GST-exempt. The first method he used
was to compare the number of nights the rooms were rented to
tourists with the number of nights the rooms were rented to
tenants; the resulting proportions were 3 per cent for
tourists and 97 per cent for tenants. The second method was
to compare the income earned from each type of operation; the
resulting proportions were 15 per cent from tourists and
85 per cent from tenants.
[10] The third method, and the one
Mr. Cimon applied, was to compare the number of days the
appellant made rooms available to tourists, that is, from
June 20 to August 31 of each year, with the number of
days the appellant made rooms available to tenants, that is, from
September 1 to June 19; the resulting proportions were
approximately 19 per cent for tourist accommodation and 81 per
cent for residential accommodation. Therefore, under
subsection 206(5) of the Act, the respondent made an
assessment that the building was GST-exempt in a proportion of 81
per cent.
[11] The appellant sent the Minister an
objection to this reassessment. As grounds for the objection, it
stated, first, that the building's market value used as a basis
for computing the GST was too high and, second, that the
proportion of the use of the building as tourist accommodation
was incorrect. Instead, the appellant suggested proportions of
75 per cent and 25 per cent. As a last ground
of the objection, the appellant requested that the use of the
land be considered separately from the use of the building since
part of the land used for parking was not used in the winter.
Ms. Bouchard, an accountant and objections officer with the
Canada Customs and Revenue Agency, disallowed this last ground
because the building is attached to the land and the property
must be considered as a whole.
[12] Concerning the first ground of the
objection, Ms. Bouchard said that the appellant requested
that the $678,800 municipal appraisal by the city of
Rivière-du-Loup be used. The market value used by the
Minister was based on the $838,000 purchase price the appellant
paid for the building in May 1995. The appellant provided
the tax authorities with a September 1, 1995,
appraiser's report indicating a market value for the
appellant's building of $730,000, including taxes.
Ms. Bouchard found that value odd in light of the $838,000
purchase price paid a few months earlier. In order to settle the
matter, she decided to make the assessment on the basis of the
indicated market value of $730,000, including taxes.
[13] Ms. Bouchard testified that, like
the auditor, she wondered about the second ground of the
objection: that the proportion of the use of the building as
tourist accommodation was incorrect. She stated that she examined
the auditor's report, the advertising brochures distributed
by the appellant, and the residential leases, and took into
account the length of the tourist season. Her analysis of all
this material led her to conclude that the proportion determined
by the auditor was closer to reality than the proportion
suggested by the appellant.
[14] Like Mr. Cimon, the auditor,
Ms. Bouchard testified that she wondered how to apply the
GST following the change in use that took place
in September 1995. She stated that she examined
subsections 191(3), 206(5) and 206(4) of the
Act, as well as Policy Statement P-099. Unlike
the auditor, she concluded that on September 1, 1995, the use of
the building as tourist accommodation ceased entirely and no
longer existed at that time, with the result that there was no
longer any need to assign a proportion to that use of the
building. Under subsection 206(4) of the Act, the GST
was therefore payable on the entire building, that is, in a
proportion of 100 per cent. The March 16, 2001,
assessment (Exhibit I-5) was therefore made on the basis of
this conclusion.
[15] In her pleadings, the respondent also
argued that the primary use of the building throughout the year
meant that it was a residential complex and that renting the
residential units to tourists for a few weeks during the summer
was insufficient to change this use. The use of the building as
tourist accommodation was merely accessory to the use as
residential accommodation and was clearly insufficient to make
the building lose its nature as a residential complex. Instead,
this accessory use of the building would constitute self-supply
of a multiple unit residential complex and GST would be collected
under subsection 191(3) of the Act. According to the
respondent, the result would essentially be the same as if
subsection 206(4) of the Act were applied, as did
Ms. Bouchard.
[16] At the start of the hearing, the
appellant abandoned the part of its appeal regarding the market
value. The market value used in this case will therefore be
$730,000, including taxes. The Court cannot grant the
appellant's request that, in determining GST-taxable
activities, the use of the land be considered separately from the
use of the building since part of the land was not maintained in
the winter: the land and the building form a single unit.
[17] At issue therefore is the exact nature
of this building on September 1, 1995, for the purposes of
the Act. The Act sets out certain definitions that
are of assistance in making this determination. The term
"residential unit" is defined in
subsection 123(1) as follows:
"residential unit" means
(a) a detached house, semi-detached house,
rowhouse unit, condominium unit, mobile home, floating home or
apartment,
(b) a suite or room in a hotel, a motel, an inn,
a boarding house or a lodging house or in a residence for
students, seniors, individuals with a disability or other
individuals, or
(c) any other similar premises,
or that part thereof that
(d) is occupied by an individual as a place of
residence or lodging,
(e) is supplied by way of lease, licence or
similar arrangement for the occupancy thereof as a place of
residence or lodging for individuals,
(f) is vacant, but was last occupied or
supplied as a place of residence or lodging for individuals,
or
(g) has never been used or occupied for any
purpose, but is intended to be used as a place of residence or
lodging for individuals;
The term "residential complex" is also defined in
this subsection, 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,
...
but 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;
Lastly, the term "multiple unit residential complex"
is defined as follows:
"multiple unit residential complex" means a
residential complex that contains more than one residential unit,
but does not include a condominium complex;
[18] Clearly, then, what is involved here is
a multiple unit residential complex newly constructed by the
appellant, whose main intention was to rent these units for
residential purposes. The permit issued was indeed for the
construction of 12 residential units. As well, when the
appellant sold its shares, it already had in its possession
58 duly signed leases covering a period from
September 1 to May 31, that is a period of over
60 days in each case. Each of the rooms in the
12 residential units was therefore covered by a lease.
[19] Subsection 191(3) of the
Act provides for self-assessment by a builder of a
multiple unit residential complex when certain conditions are
met, as follows:
191(3) Self-supply of multiple unit residential complex
- For the purposes of this Part, where
(a) the construction or substantial renovation of a
multiple unit residential complex is substantially completed,
(b) the builder of the complex
(i) gives, to a particular
person who is not a purchaser under an agreement of purchase and
sale of the complex, possession of any residential unit in the
complex under a lease, licence or similar arrangement entered
into for the purpose of the occupancy of the unit by an
individual as a place of residence,
(i.1) gives possession of any residential unit in
the complex to a particular person under an agreement for
(A) the supply by way of sale of the
building or part thereof forming part of the complex, 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, or
(ii) where the builder is an
individual, occupies any residential unit in the complex as a
place of residence, and
(c) the builder, the particular person or an
individual who is a tenant or licensee of the particular person
is the first individual to occupy a residential unit in the
complex as a place of residence after substantial completion of
the construction or renovation,
the builder shall be deemed
(d) to have made and received, at the later of
the time the construction or substantial renovation is
substantially completed and the time possession of the unit is so
given to the particular person or the unit is so occupied by the
builder, 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.
[20] For this rule to be applicable, the
appellant must be the builder, as defined in
subsection 123(1) of the Act, as follows:
"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,
(c) in the case of a mobile home or floating
home, makes a supply of the home before the home has been used or
occupied by any individual as a place of residence,
(d) acquires an interest in the complex
(i) in the case of a condominium complex or residential
condominium unit, at a time when the complex is not registered as
a condominium, or
(ii) in any case, before it has been occupied by
an individual as a place of residence or lodging,
for the primary purpose of
(iii) making one or more supplies of the complex
or parts thereof or interests therein by way of sale, or
(iv) making one or more supplies of the complex or parts
thereof by way of lease, licence or similar arrangement to
persons other than to individuals who are acquiring the complex
or parts otherwise than in the course of a business or an
adventure or concern in the nature of trade, or
(e) in any case, is deemed under subsection
190(1) to be a builder of the complex,
but does not include
(f) an individual described in
paragraph (a), (b) or (d) who
(i) carries on the construction or
substantial renovation,
(ii) engages another person to carry on the
construction or substantial renovation for the individual, or
(iii) acquires the complex or interest in it,
otherwise than in the course of a business or an adventure or
concern in the nature of trade,
(g) an individual described in paragraph
(c) who makes a supply of the mobile home or floating home
otherwise than in the course of a business or an adventure or
concern in the nature of trade, or
(h) a person described in any of paragraphs
(a) to (c) whose only interest in the complex is a
right to purchase the complex or an interest in it from a builder
of the complex;
[21] In this case, notwithstanding the
transfer of shares, the appellant was the builder of its own
multiple unit residential complex. Construction was completed and
the first tenants took possession of their rooms on
September 1, 1995. Thus, the appellant had completed its
construction project as initially planned. At that point, all the
conditions required for subsection 191(3) of the Act
to apply were met, and the appellant is deemed to have made and
received the taxable supply of the building by way of sale on
September 1, 1995. It must be recalled that self-assessment
is provided for in order to avoid giving a person who is the
builder of that person's own construction project any
advantage over a person who purchases a residential complex from
a builder and is required to pay the GST on the purchase.
[22] The application of
subsection 191(3) of the Act in situations of
self-supply is not the same as the application of
section 206 of the Act. The only common element is
the deemed transfer of a taxable supply. The GST paid under
subsection 191(3) relates to a GST-exempt supply for which
the appellant may not claim an input tax credit since the input
tax credit is allowable only on inputs that are required for
commercial activities. In 398722 Alberta
Ltd. v. Canada,
[2000] G.T.C. 4091;
[2000] F.C.J. No. 644, the Federal Court of Appeal
stated that GST-exempt supplies must be considered separately
from supplies made for commercial activities, as follows:
22. Any business may consist of a number of components, each
of which is integral to the business as a whole. The definition
of "commercial activity" recognizes that possibility
but requires, for GST purposes, that any part of the business
that consists of making exempt supplies be notionally
severed.
[23] The rules set out in section 206
of the Act apply only to a building that is capital
property. Subsection 195.1(1) of the Act sets out
when a residential complex is deemed to be capital property, as
follows:
195.1 (1) Residential complex not capital property -
For the purposes of this Part, other than sections 148 and 249, a
residential complex shall be deemed not to be, at a particular
time, capital property of a builder of the complex unless
(a) at or before the particular time, the
construction or substantial renovation of the complex was
substantially completed; and
(b) at or after the time the construction or
substantial renovation of the complex was substantially completed
and at or before the particular time, the builder received an
exempt supply of the complex or was deemed under section 191 to
have received a taxable supply of the complex.
[24] In this case, if it is assumed that
construction was completed in May 1995 and that the building
was acquired as a GST-exempt supply, the building was capital
property once it was rented as tourist accommodation in
May 1995. The rules set out in section 206 would then
apply once the building ceased being used for commercial purposes
on September 1, 1995, and would apply again once the
rental as tourist accommodation resumed on
June 1, 1996.
[25] Unlike the situation contemplated in
section 197, this case involves a significant change in
use.
197. Insignificant changes in use -For the purposes of
subsections 206(2), (3) and (5), 207(2) and 208(2) and (3),
where in any period
(a) beginning on the later of
(i) the day a registrant last acquired or
imported property for use as capital property of the registrant,
and
(ii) the day subsection 206(3) or (5), 207(2) or 208(3) last
applied to the property, and
(b) ending at any time after that day,
the extent to which the registrant changed the use of the
property in commercial activities of the registrant is less than
10% of the total use of the property, the registrant shall be
deemed to have used the property throughout that period to the
same extent and in the same way as the registrant used the
property at the beginning of that period, unless the registrant
is an individual who began in that period to use the property
primarily for the personal use and enjoyment of the individual or
a related individual.
[26] Thus, the application of
section 206 makes it possible for the appellant to claim the
input tax credit on the purchase of the building in a proportion
corresponding to the use of the building for the appellant's
commercial activities.
[27] The assessment by the Minister reflects
the total GST payable by the appellant, and the GST should be
computed under section 191(3) of the Act. For these
reasons, the appeal is dismissed.
Signed at Edmundston, New Brunswick, this 20th day of August
2002.
J.T.C.C.
Translation certified true
on this 26th day of November 2003.
Sophie Debbané, Revisor
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