Citation: 2010 TCC 521
Date: 20101015
Docket: 2009-1051(GST)I
BETWEEN:
STÉPHANE DESJARDINS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Favreau J.
[1]
This is an appeal under
the informal procedure of an assessment made pursuant to Part IX of the Excise
Tax Act, R.S.C. 1985, c. E‑15, as amended (the ETA) for which
the notice is dated December 17, 2007, and has no number, for the appellant's
monthly reporting period of September 2007.
[2]
According to the notice
of assessment, the Minister of Revenue of Québec as agent for the Minister of National
Revenue (collectively, the Minister) determined the appellant's net tax amount
for September 2007 to be $960,864.59 as follows:
|
Goods and
services tax ("GST") collected or collectable
|
= $964,722.65
|
|
Input tax
credits ("ITC") allowed (unchanged)
|
= $3,858.06
|
|
Net tax
|
$960,864.59
|
and imposed interest in the amount of $11,198.89 for a
total of $972,063.48.
[3]
When making the
assessment in question, the Minister added to the collected or collectable GST
reported the GST the appellant was deemed to have paid, as a recipient, and
collected, as supplier, in the amount of $962,076.84
($964,722.65 - $2,645.81) regarding the self-supply of the property,
calculated using the fair market value (FMV) of said property established by
the Minister, since the appellant did not self-assess during the self-supply of
the property in question.
[4]
The $962,076.84
adjustment to the appellant's net tax calculation mentioned in the previous
paragraph represents the GST calculated on the FMV of the property established
at $16,034,613.05 before GST, the Quebec sales tax (QST) payable and all
applicable GST and QST rebates for new rental housing.
[5]
Within the prescribed
time frame, the appellant filed his monthly net tax report in which his net tax
was calculated for a negative amount of ($1212.25) as follows:
|
GST collected
or collectable
|
$2,645.81
|
|
ITC claimed
|
$3,858.06
|
|
Net tax
|
($1,212.25)
|
[6]
The appellant did not
claim the GST rebate for the new rental housing for the property in question
and as a result, the Minister did not allow it to the extent that he would have
been eligible.
[7]
The issue results from
the fact that, during the month of September 2007 when the building at 25 Place
Casavant in Sainte-Thérèse (hereinafter the "property") was almost
completed, the appellant transferred the occupation of a residential unit by
lease to an individual who was the first to occupy such a residential unit. The
appellant did not pay, as recipient, and did not collect, as supplier, the GST
regarding the self‑supply of the property on the FMV of the property at
the time. GST was not included in the net tax calculation for the period in
question that was reported to the Minister, or for any other monthly period
prior to or after the period in question.
[8]
The only issue in
question is the determination of the FMV of the appellant's property in
September 2007 and, as a result, the amount of GST payable by the appellant for
the period in question, for the self-supply of the property in question.
[9]
The appellant claims
the FMV of the property is between $14,700,000 and $14,900,000 whereas the
Minister determined the FMV of the property was $16,034,614.05 according to the
replacement cost method.
[10]
The appellant mandated
a certified appraiser to assess the FMV of the property as of September 30,
2007. An opinion letter on the FMV of the property was submitted on March 7,
2008, and an appraisal report dated November 20, 2009, was prepared for the
purposes of the case.
[11]
Before proceeding with
the analysis of the appraisal report, clarifications are needed regarding
certain characteristics of the building in question. It is a 6-storey
(including ground floor), multi-residence building with a basement garage. The
building is made of concrete and has 180 units, namely 12 studio or 1½-room units, 60 3½-room
units, 95 4½-room units
and 13 5½-room units. The building has an indoor heated pool, a whirlpool
tub, a sauna, an exercise room and a common room, 243 parking spaces including
154 indoor spaces and 10 for visitors. The underground garage and main levels
are connected by two elevators. Each housing unit has its own electric meter
for lighting and heating; hot water is included in the rent and is provided by
the gas-powered central hot air heating system, which also heats the common
areas. The units are heated with electric baseboard heaters. The flooring in
the common areas is ceramic tile and carpet, while in the housing units ceramic
tile and laminate (floating floors) were used. According to the appraiser's
observations, the quality of the structure's construction is "B
class" and the interior and exterior finishing is a "low cost"
type.
[12]
Sylvie Lavoie,
certified appraiser, testified at the hearing and she provided explanations
about the appraisal method used and the factors involved in her appraisal. She
noted that she considered the three methods usually used to evaluate
real-estate property, namely the cost method for which the value index was
$17,700,000, the income method for which the value index was $14,900,000 and
the comparison method for which the value index was between $12,700,000 and
$16,700,000. In her opinion, the best method to use in the circumstances was
the income method since the property generated income and income was a better
reflection of the property's value than the cost of construction. In her
appraisal report (Exhibit A‑1), she made the following observation at
page 21:
[translation]
A potential and well-advised recipient
will focus much more on the income the property generates as well as the
percentage of expenditures and the property's monetary flow than on what it
cost to build.
The comparison method was not used because of the low
comparability rate of sales catalogued and analyzed.
[13]
The appraiser explained
that the income method is based on the fact that a property's value depends on
its ability to regularly generate a steady level of income on a long-term
basis. To carry out the income method, the effective gross income is estimated
and standardized, then the operating expenses are estimated and standardized to
establish a standardized net income which is converted to the market rate
investors seek.
Rental income
[14]
As of the appraisal
date, the rental summary according to the valid leases was:
|
Apartments
|
Number
of units
|
Average
monthly price
|
Actual
rent potential
|
Vacant
units
|
Vacancy
%
(#
of units)
|
Vacancy
%
(income
$)
|
|
1½ rooms
|
12
|
$628
|
$90,360
|
0
|
0.0%
|
0.0%
|
|
3½ rooms
|
60
|
$679
|
$488,880
|
0
|
0.0%
|
0.0%
|
|
4½ rooms
|
95
|
$859
|
$979,200
|
18
|
10.0%
|
11.2%
|
|
5½ rooms
|
13
|
$1,068
|
$166,680
|
2
|
1.1%
|
1.5%
|
|
Total
|
180
|
|
$1,725,120
|
20
|
11.1%
|
12.7%
|
[15]
The appraiser noted in
her appraisal report that the monthly rent in the building was higher than the
average rent noted by the Canadian Mortgage and Housing Corporation (CMHC) in
Zone 26, published in its October 2007 rental market report, but that the monthly
rent was comparable to that noted for large residential complexes (100 or more
units) in the Laval and Rive-Nord area. However, the appraiser applied a risk
premium to the overall discount rate (ODR) because the rental rate could be
hard to maintain over time due to the interior finishing of the apartments,
which is inferior to what might be expected for this type of construction. In
her opinion, the owner might have to offer incentives (free month of rent or
parking) to maintain the current rental rate.
Vacancies and uncollected rent—apartments
[16]
The building's overall
vacancy rate (11.1% to 12.7%) was higher than that observed by the CMHC (0.8%
to 4.4%). According to the appraiser, this gap was due to the building being in
the rental process at the time of the appraisal. For the purposes of the
appraisal, she standardized the vacancy rate at 4.0%, including vacancies and
uncollected rent.
Income from parking, vacancies and
uncollected rent
[17]
The property under
review has 79 indoor parking spots, 154 outdoor parking spots and 10 outdoor
parking spots reserved for visitors. The rental fee is $60/month for an indoor
spot and $15/month for an outdoor spot. On the date of the appraisal, the
situation was as follows:
|
Parking
|
Available
|
Rented
|
Vacant
|
|
Indoor
|
79
|
51
|
64.6%
|
28
|
35.4%
|
|
Outdoor
|
154
|
101
|
65.6%
|
53
|
34.4%
|
|
Sub‑total
|
233
|
152
|
65.2%
|
81
|
34.8%
|
|
Visitor
(outdoor)
|
10
|
|
|
|
|
|
Total
|
243
|
|
|
|
|
The appraiser noted that the number of parking spots
was greater than the renters' needs and for the purposes of the review, she applied
a vacancy and uncollected rent rate of 30% based on the vacancy rate used for
the apartments.
Operating expenses
[18]
Since the property is a
new construction, no history of operating expenses was available for analysis
and comparison with buildings in the same category. To estimate the usual
expenses, the appraiser consulted the expected operating expenses for 2008 and
conducted estimates using the monthly expenses of January 2008 and maintenance
contracts for 2007‑2008. In her opinion, the amounts for operating
expenses seemed normal. Expenses for which she had no information were
estimated using data from comparable buildings.
Management fees and structural reserve
[19]
For the purposes of the
appraisal, the appraiser used management fees of 4% of the effective gross
income ("EGI") and a structural reserve of 2% of the EGI.
Estimated value using the income method
[20]
Considering the
above-noted data, the auditor estimated the effective net income of the
property was $1,156,606 to which she applied an ODR of 7.75% whereas the
rates noted in the market were from 6.24% to 7.60%. The ODR of 7.75% includes a
risk premium of 0.50% or the equivalent of half a month's free rent or a 4%
deduction in rent. Additionally, considering the low quality of the construction
material, she estimated that there was a risk over time that the maintenance
and repair expenses would be higher than normal. Using the direct discounting
method, she estimated the value of the property at $14,900,000, or $82,778 per
housing unit (excluding applicable taxes and rebates).
[21]
The Minister had the
appraisal report analyzed by a certified appraiser, Jocelyn Martin. The
Court acknowledged him as an expert and he testified at the hearing. In his
opinion, in the context of self-supply, a simulation must be made of the price
an investor would have had to pay an independent builder to acquire property
including the land and the building. According to the appraiser Martin, the
cost method is the one to use to determine the FMV of the property as of September 30,
2007.
[22]
In his analysis of the
cost method, the appraiser considered the value of the lot, the replacement
cost of the building and the cost of preparing the lot were an accurate
reflection of the value of each component on the appraisal date. However, he
indicated that in the case of a residential building, the FMV should include
the various taxes and rebates that apply on the date of the appraisal. As a
result, the value of the property for appraisal purposes would be $15,533,129
(without the 36% rebate) or $16,264,795 (with the 36% rebate).
[23]
In his analysis of the
income method, the appraiser considered that the gross rental income, the
vacancy rate, operating expenses and income accurately represented the
property's rental potential. The only element in question was the ODR of 7.75%
including a risk premium of 0.50%. In his opinion, the risk premium is not at
all justified considering the quality of the interior finishing of the rental
units in the building was the same as that found in the majority of recent
constructions built for rental purposes. Moreover, he feels that the ODR should
be closer to the lower limit of comparable rates calculated, which vary from
6.24% to 7.60% for an average of 6.93%, because comparable properties
considered were the sales of rental properties constructed between 1961 and
1967. Significant capital expenses must be made to these buildings in order to
maintain the level and quality of rental income.
[24]
Appraiser Martin also
felt that the comparison method could not be used because of the low
comparability level of listed sales.
[25]
Regarding the appraiser
Lavoie's reconciliation exercise, appraiser Martin noted that the $14,900,000
excluded provincial and federal taxes, where applicable. However, since the
economic value is based on the analysis of exempt property transactions, the
indication obtained by this approach includes automatically the net taxes (GST
and QST minus the rebates). According to the appraiser Martin, the net
effective income of $1,156,606 divided by 17,700,000 indicates an ODR or 6.53%.
This rate is supported by the market (a rate lower than 7% is often used in
cases of new constructions) and shows that the owner is justified to build the
building.
[26]
During his testimony,
appraiser Martin noted that the actual cost of construction, $16,034,000 before
taxes, corresponded to a cost established by appraiser Lavoie, $17,700,000
based on reference books.
Analysis
[27]
The rule of self-supply
of a multiple-unit residential complex is stated at subsection 191(3) of
the ETA as follows:
(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
or use 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 or use 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 has entered into a lease, licence or similar arrangement in
respect of a residential unit in the complex with 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 or use 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.
[28]
The application of the
self-supply rule to the property in question is not challenged by the
appellant; only the FMV of the property as of September 30, 2007, is being
challenged.
[29]
The term "fair
market value" is defined at subsection 123(1) of the ETA as follows:
"fair market value" of a
property or a service supplied to a person means the fair market value of the
property or service without reference to any tax excluded by section 154 from
the consideration for the supply.
[30]
This Court has
considered the meaning of the expression "fair market value" and the
use of the cost method when applying subsection 191(3) of the ETA in many
decisions (Résidences Majeau Inc. v. R., [2009] G.S.T.C. 90 (TCC)
affirmed by [2010] G.S.T.C. 10 (FCA), Timber Lodge Ltd. v. R., [1994]
G.S.T.C. l73 (TCC), Charleswood Legion Non-Profit Housing Inc. v. R.,
[1998] G.S.T.C. 8, Métal Santigen Inc. v. R., 2007 D.T.C. 1037, Sira
Enterprises Ltd. v. R., [2000] G.S.T.C. 102 (TCC)).
[31]
At page 20 of her
appraisal report, Ms. Lavoie admitted that the cost method could lead to
conclusive results when the property is new or relatively new:
[translation]
According to the manual, Traité de l’évaluation foncière
[(DESJARDINS, Jean-Guy, Traité de l’évaluation foncière, 1992) [sic],
the use of the cost method to determine the market value may represent an
acceptable alternative when the income method cannot be used and when the rarity
of recent sales of comparable property means the comparison method cannot be
used. The cost method may still lead to conclusive results with new or
relatively new buildings. This is the case when the property reflects optimal
use and is situated in neighbouring units where vacant lots are sold regularly.
In this context, we can calculate the value of a lot with fairly high accuracy
and considering the building is new or relatively new, potential errors in the
calculation of depreciation are lower.
[32]
The appraisal did not
follow the cost method because the income method could apply in this case and
the property was not situated in an area with regularly sold vacant lots. It
was noted that in April 2006, the appellant had purchased the lot on which the
building was constructed from the City of Sainte-Thérèse for
$390,906.64 before taxes. This sale was considered representative of the
market price. For the purposes of the appraisal, Ms. Lavoie rounded off to
$3.00 per square foot, which represents a 2% increase in value at the time.
[33]
Based on the appraisal
report, we note that the value obtained using the cost method is higher than
the value obtained using the income method. The difference between the two
values is a significant economic depreciation. Unless there are specific
circumstances, I doubt that a building contractor or any business person with
the expertise and knowledge required to carry out a project of such scope would
agree to sell a new construction at a lower price than the actual cost in the
context of a strongly rising property market.
[34]
The evidence did not
show that there were excesses in the cost of construction or any specific
problems with soil contamination or with the connection infrastructure with
municipal services, or any errors of development or construction.
[35]
In the circumstances, I
feel that the cost method should be considered as the best method for
determining the FMV of the property, which was completely new and in the rental
period on the appraisal date.
[36]
The income method, as
applied by appraiser Lavoie, includes three weak elements, namely the history
of income and expenses, the ODR and the risk premium. Appraiser Lavoie used a
single year's history or income and expenses, which is insufficient for
determining a long-term trend. Appraiser Lavoie used an ODR of 7.25% based on
only three comparable properties, two of which were from 2004. The sample was
lacking, and the result is therefore of little probative value; a rate lower
than 7% should have been used. The application of a risk benefit of 0.50% is
not justified because the vast majority of rental properties are now built the
same way the property was built. The material of inferior quality could easily
be replaced at low cost.
[37]
As a result, the appeal
is dismissed.
Signed at Ottawa, Canada, this 15th day of October 2010.
"Réal
Favreau"
Translation
certified true
on this 30th day
of November 2010.
Elizabeth Tan,
Translator
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