Citation: 2009 TCC 629
Date: 20091218
Docket:
2008-2460(GST)G
BETWEEN:
GISÈLE MASINO MILLET,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL
ENGLISH TRANSLATION]
REASONS FOR
JUDGMENT
Favreau J.
[1]
This
is an appeal of an unnumbered assessment dated July 23, 2007 made by the
Minister of Revenue of Quebec, acting on behalf of the Minister of National
Revenue (both hereinafter referred to as “the Minister”), pursuant to Part IX
of the Excise Tax Act, R.S.C., 1985, c. E-15 (ETA) for the period from
January 1, 2006, to December 31, 2006.
[2]
In
making the said assessment, the Minister, when calculating the appellant’s net
tax, disallowed a portion of the amount she had claimed as input tax credits
(ITC), namely the amount of $16,461.91 ($16,511.75 ‑ $49.75), being
the goods and services tax (GST) that the appellant paid when acquiring
supplies of goods and services for improvements to her principal residence consisting
in the construction of an annex to be rented to related parties and used as a
painter’s and a sculptor’s studios.
[3]
The
only issue in this appeal is whether the appellant is entitled to the ITCs she
claimed for 2006 for the improvements to her home.
[4]
The
relevant facts in this case are as follows:
(a) the appellant, a
registrant for the purposes of the ETA, owns a residence located on an
approximately 9,600-square-foot lot at 190 Bord‑de‑l’eau Est
in Longueuil;
(b) the appellant’s son,
Alexander Masino, and his spouse, Yechel Gagnon, a painter and sculptor
respectively, reside with the appellant;
(c) the appellant hired
architect Marc Deschamps to design a new building (the annex) to house two
500-square-foot workshops with 11-foot ceilings. An industrial-quality
ventilation system was also to be installed;
(d) the annex was designed
to be attached to the residence as the municipal zoning by-laws did not permit
the construction of a building separate and distinct from the residence;
(e) construction of the
annex began in June 2006 and was completed in October 2006. The construction
required demolition of a part of the residence. The construction costs for the
annex were $273,018.87, and GST of $16,461.96 was paid to the suppliers of the
goods and services used in the construction of the annex;
(f) following the
construction of the annex, the appellant, her son and her daughter-in-law
continued to live in the residence, but the annex was used exclusively for
commercial purposes by the appellant’s son and daughter-in-law. A first lease
was signed between the appellant and her son and daughter-in-law for the rental
of three rooms, a bathroom and half of the basement (for storage). This 8-month
lease was dated November 1, 2006, and expired June 30, 2007. A second lease, for
one year, was entered into on June 30, 2007, and this time the lease included two
workshops of approximately 600 square feet each with an adjoining room—with a
sink—for storage, the staircase connecting the residence and the annex, the
garage, a bathroom, and half the basement for storage;
(g) for municipal and land
registry purposes, there is just one structure on the lot located at
190 Bord‑de‑l’eau Est in Longueuil and there is no separate
civic address for the annex. The residence and the annex are connected to the
same electric meter and cannot be sold separately.
[5]
Counsel
in the present case disagree as to the statutory provisions—either subsection
169(1) or subsection 208(4) of the ETA—that apply, nor do they agree on the
percentage of the residence and the annex used for commercial purposes.
According to the appellant, the commercial-use area is 62% whereas the
respondent maintains that it is 47% (see the table attached to these reasons).
The dispute here concerns the percentage of commercial use of three areas: the
garage (100% according to the appellant versus 0% according to the respondent),
the area above the garage (80% according to the appellant versus 0% according
to the respondent), and the basement (75% according to the appellant versus 50%
according to the respondent). The calculation of the square footage of the
three areas is not contested.
Analysis
[6]
The
assessment at issue is based on the application of subsection 208(4) of the
ETA, which reads as follows:
(4)
Improvement to capital real property by individual—Where
an individual who is a registrant acquires, imports or brings into a
participating province an improvement to real property that is capital property
of the individual, the tax payable by the individual in respect of the
improvement shall not be included in determining an input tax credit of the
individual if, at the time that tax becomes payable or is paid without having
become payable, the property is primarily for the personal use and enjoyment of
the individual or a related individual.
[7]
Subsection
208(4) of the ETA expressly prohibits the granting of an ITC with respect to
improvements to real property where the property is primarily for the personal
use of the registrant. The words “improvement”, “real property” and “capital
property” used in subsection 208(4) are defined in subsection 123(1) of the
ETA:
“capital property”, in respect of a person,
means property that is, or would be if the person were a taxpayer under the Income
Tax Act, capital property of the person within the meaning of that Act, other
than property described in Class 12, 14 or 44 of Schedule II to the Income
Tax Regulations;
"improvement", in respect of property of a
person, means any property or service supplied to, or goods imported by, the
person for the purpose of improving the property, to the extent that the
consideration paid or payable by the person for the property or service or the
value of the goods is, or would be if the person were a taxpayer under the Income
Tax Act, included in determining the cost or, in the case of property that
is capital property of the person, the adjusted cost base to the person of the
property for the purposes of that Act;
“real property” includes
(a) in respect of property in the Province of Quebec, immovable property
and every lease thereof,
(b) in respect of property in any
other place in Canada, messuages, lands and
tenements of every nature and description and every estate or interest in real
property, whether legal or equitable, and
(c) a mobile home, a floating home and any
leasehold or proprietary interest therein.
[8]
Under
the above definition, the term “improvement” includes any property or service supplied
to a person for the purpose of improving property of the person, to the extent
that the consideration paid or payable by the person for the property or
service is included in determining, in the case of property that is capital
property of the person, the adjusted cost base to the person of the property
for the purposes of the Income Tax Act.
[9]
The
first meaning of the French verb “améliorer” (“to improve”) given in the Petit
Robert is: [TRANSLATION] “make improvements to (a place, a residence)—beautify,
repair, restore”. As regards the term “amélioration” (improvement), the first
meaning given in the Petit Robert is: [TRANSLATION] “work or expenditures
on property resulting in an increase in the property’s value.”
[10]
Counsel
for the appellant argued that, in the present case, the construction of the
annex was not an improvement to the residence, as the work did not increase the
value of the residence.
[11]
In
support of their argument, counsel for the appellant referred to the general
principles of statutory interpretation set out by the Supreme Court of Canada
in
Canada Trustco Mortgage Co. v. Canada, [2005] 2 S.C.R. 601, among which
is the following principle (page 610): “The interpretation of a
statutory provision must be made according to a textual, contextual and
purposive analysis to find a meaning that is harmonious with the Act as a
whole.”
[12]
Counsel
for the appellant also referred to the principles set out by the Supreme Court
of Canada in Hickman Motors Ltd. v. Canada, [1997] 2 S.C.R. 336,
regarding the onus of proof. It is appropriate to refer here to the following
principles stated on pages 378 and 379:
It is trite law that in
taxation the standard of proof is the civil balance of probabilities . . . and that within [the] balance of
probabilities, there can be varying degrees of proof required in order to
discharge the onus, depending on the subject matter. . . . The Minister, in making assessments,
proceeds on assumptions
. . . and the
initial onus is on the taxpayer to “demolish” the Minister’s assumptions in the
assessment . . . . The initial burden is only to “demolish” the exact
assumptions made by the Minister but no more . . . .
This initial onus of
"demolishing" the Minister's exact assumptions is met where the
appellant makes out at least a prima facie case . . . The law is settled that
unchallenged and uncontradicted evidence “demolishes” the Minister’s
assumptions . . . .
Where the Minister’s
assumptions have been “demolished” by the appellant, “the onus . . . shifts to
the Minister to rebut the prima facie case” made out by the appellant
and to prove the assumptions
. . . .
Where the burden has shifted
to the Minister, and the Minister adduces no evidence whatsoever, the taxpayer
is entitled to succeed . . . .
[13]
Counsel
for both parties referred to the definition of a prima facie case given
by the Federal Court of Appeal in Amiante Spec Inc. v. The Queen,
2009 FCA 139, at paragraph 23:
A prima facie case is
one “supported by evidence which raises such a degree of probability in its
favour that it must be accepted if believed by the Court unless it is rebutted
or the contrary is proved. It may
be contrasted with conclusive evidence which excludes the possibility of the
truth of any other conclusion than the one established by that evidence" . . . .
[14]
The
evidence presented at trial does not support counsel for the appellant’s
conclusion that the annex did not add value to the property. No evidence to
that effect was presented and no assessment was submitted. Counsel for the
appellant simply stated that it is a single residence located in an area zoned residential
and that its value is intrinsically related to its use. They also asserted that
if the property was sold the appellant would lose money.
[15]
Contrary
to the dictionary definition, the definition of the term “improvement” in the
ETA does not require that an improvement bring about an increase in the value of
real, or other, property that is improved. Since the term “improvement” is
defined in the Act, there is no need to rely on the dictionary definition.
[16]
Subsection
208(4) of the ETA deals with improvements to real property, which term, according
to the definition in subsection 123(1), includes, in respect of property in Quebec, immovable
property and every lease thereof. Pursuant to article 900 of the Civil Code
of Québec, land, and any constructions and works of a permanent nature
located thereon and anything forming an integral part thereof, are immovables.
[17]
In
this case, the annex is not an immovable separate and distinct from the
residence and is an integral part of the real property that includes both the
residence and the land. However, as the basis of the assessment was established
without considering the use of the land, it is not appropriate to use the square
footage of the lot in calculating the area of the property that was used for
personal purposes. Indeed, paragraph 31(n) of the Reply to the Notice of Appeal
makes no reference to the square footage of the lot. Paragraph 31(n) of the
Reply to the Notice of Appeal reads as follows:
[translation]
(n) the
total area of the residence and the annex is 4,744 square feet (2,597 + 2,147);
the residence portion represents 55% of the total area (2,597/4,744).
[18]
Another
condition for the application of subsection 208(4) of the ETA is that the
improvement must be made to real property that is capital property of an
individual. The definition of capital property in subsection 123(1) refers to
the meaning given that term in the Income Tax Act, which, in section 54,
defines “capital property” as follows:
"capital property"
of a taxpayer means
(a) any depreciable property of
the taxpayer, and
(b) any property (other than
depreciable property), any gain or loss from the disposition of which would, if
the property were disposed of, be a capital gain or a capital loss, as the case
may be, of the taxpayer.
[19]
Here,
it is not disputed that the real property in question is capital property of
the appellant.
[20]
Having
determined that the addition of the annex constituted an improvement to real
property that was capital property belonging to the appellant, it must now be
determined whether the real property (excluding the land) is primarily for the
personal use of the appellant or an individual related to her.
[21]
The
word “primarily” has often been defined by this Court as meaning more than 50
percent of the total use of the property in question (Navaho Inn v. Canada,
[1995] G.S.T.C. 21 and Mid‑West Feed Limited et al. v. M.N.R., 87
DTC 394).
[22]
As
a result of the revised calculations of the surface area of the basement
submitted by the parties’ counsel after the hearing of the appeal, the total
area (commercial and non-commercial) of the property is 4,419 square feet,
while the area of the garage and the room above the garage is the same, 261.32
square feet, and that of the basement is 732.13 square feet.
[23]
According
to Alexandro Masino’s testimony, the garage is used by his spouse for sawing
wood; the room above the garage is a former living room converted into an
office where his wife and he each have a computer, while the bathroom in the
basement is used by his spouse and him to wash after a day of work.
[24]
In
the lease dated November 1, 2006, the garage is not specifically mentioned as
being included in the rooms rented, but in the lease dated June 30, 2007, the
garage is included. At the hearing, counsel for the respondent acknowledged
that the three rooms referred to in the lease dated November 1, 2006, included
both workshops and the garage. As a result, the garage must be considered as having
been used exclusively for commercial purposes.
[25]
With
respect to the former living room above the garage, it is not mentioned in
either lease, even though the second lease is very specific with respect to the
rooms rented. Consequently, the room above the garage must be considered as
being used exclusively for personal purposes even if, in fact, this room may
very well be used by the appellant’s son and daughter-in-law for their
commercial activities. Under the rules of evidence, a valid written document
cannot be contradicted by testimonial evidence (i.e. the appellant’s son’s
testimony).
[26]
Half
the basement is, according to the two leases, included in the rented rooms. The
same is true for the bathroom located in the basement. Counsel for the
appellant contended at the hearing that more than 50% of the basement was used
for storage of works and that, as a result, claiming 75% of the basement as
being for commercial use was appropriate, particularly since the bathroom with shower
was also included among the rented rooms.
[27]
Just
as for the room above the garage, I do not think that the percentage of the
commercial use of the basement can exceed 50% because that is what is expressly
provided in the November 1, 2006 and the June 30, 2007 leases, i.e. that only
half the basement was rented.
[28]
The
area of the basement bathroom was not considered in the calculation of the
percentage of the commercial use of the property. The evidence did not show whether
this bathroom was part of the half of the basement that was rented or whether,
on the contrary, it was part of the unrented half of the basement. In addition,
neither party submitted evidence as to the dimensions of this bathroom. The
respondent simply did not consider the bathroom, while the appellant attempted
to increase the percentage of commercial use of the entire basement from 50% to
75%. Both parties had the opportunity to modify their calculations when filing,
after the hearing of the case, a new table showing the percentages of
commercial and non-commercial use of the rooms on the property. As a result, I
cannot take the area of the basement bathroom into account in the calculation
of the percentage of commercial use of the property’s rooms.
[29]
The
addition of the area of the garage to the commercial square footage increases
the total commercial square footage to around 53% of the total, and the
non-commercial area is then 47%. Consequently, subsection 208(4) of the ETA is
not applicable in this case and we must turn to the general rule laid down in
subsection 169(1) of the ETA to determine the ITC amount to which the appellant
is entitled with respect to the property and services she acquired in relation
to the addition of the annex.
[30]
Subsection 169(1)
of the ETA provides as follows:
(1) General rule for
credits—Subject to this Part, where a person acquires or imports property
or a service or brings it into a participating province and, during a reporting
period of the person during which the person is a registrant, tax in respect of
the supply, importation or bringing in becomes payable by the person or is paid
by the person without having become payable, the amount determined by the
following formula is an input tax credit of the person in respect of the
property or service for the period:
A × B
where
A is the tax in respect of the
supply, importation or bringing in, as the case may be, that becomes payable by
the person during the reporting period or that is paid by the person during the
period without having become payable; and
B is
(a) where the tax is
deemed under subsection 202(4) to have been paid in respect of the property on
the last day of a taxation year of the person, the extent (expressed as a
percentage of the total use of the property in the course of commercial
activities and businesses of the person during that taxation year) to which the
person used the property in the course of commercial activities of the person
during that taxation year,
(b) where the property or service is
acquired, imported or brought into the province, as the case may be, by the
person for use in improving capital property of the person, the extent
(expressed as a percentage) to which the person was using the capital property
in the course of commercial activities of the person immediately after the
capital property or a portion thereof was last acquired or imported by the
person, and
(c) in any other case,
the extent (expressed as a percentage) to which the person acquired or imported
the property or service or brought it into the participating province, as the
case may be, for consumption, use or supply in the course of commercial
activities of the person.
[31]
Pursuant
to subsection 169(1) of the ETA, any registrant who acquires property or a
service may claim, in the calculation of the registrant’s net tax, an ITC
corresponding to the GST paid or payable by the registrant for the said
property or service that is consumed, used or supplied, to the extent that the
registrant intends to use it in the course of the registrant’s commercial
activities.
[32]
Paragraph
169(1)(b) of the ETA specifies that where improvements are made to
capital property of the person who is a registrant, one must use the percentage
representing the extent to which the person was using the capital property in
the course of commercial activities of the person immediately after the capital
property of a portion thereof was last acquired by the person. In the present
case, this means that the appellant is entitled to ITCs equivalent to 53% of
the GST payable or paid by her with respect to the improvements made to her
capital property.
[33]
For
these reasons, the appeal is allowed in part and the assessment is referred back
to the Minister for reconsideration and reassessment on the basis that the
appellant should be allowed ITCs of $8,724.78, that is, 53% of $16,461.86. The
appellant shall have her costs.
Signed
at London,
Ontario, on this
18th day of December 2009.
"Réal Favreau"
Translation
certified true
on this 28th day
of April 2010.
Erich Klein,
Revisor
APPENDIX 1
|
Calculation of area of
existing building (prior to addition)
Non-commercial
|
|
Description
|
Width
|
Depth
|
Floors
|
Use
|
Revenu Québec
(corrected)
|
Appellant’s
position
|
|
Main
rectangle
|
28.41’
|
31.49’
|
2
|
|
1789.09
|
1789.09
|
|
Exit stairs (minus)
|
11.93’
|
13.62’
|
2
|
|
-324.84
|
-324.84
|
|
Basement (home)(Revenu QC)
|
28.41’
|
31.49’
|
1
|
(894.55-162.42) x 50%
|
366.06
|
n/a
|
|
Basement
(home)(appellant)
|
28.41’
|
31.49’
|
1
|
(894.55-162.42) x 25%
|
n/a
|
183.03
|
|
Garage
|
12.22’
|
21.39’
|
1
|
|
261.32
|
0
|
|
Above garage
|
12.22’
|
21.39
|
1
|
|
261.32
|
52.26 (20%)
|
Total
|
|
|
|
|
2,353
|
1,700
|
|
Calculation of area of
addition
Commercial
|
|
Description
|
Width
|
Depth
|
Floors
|
Use
|
Revenu
Québec (corrected)
|
Appellant’s
position
|
|
Main
rectangle
|
20.00’
|
35.00’
|
2
|
|
1400.00
|
1400.00
|
|
Basement (addition)
|
n/a
|
n/a
|
0
|
|
0.00
|
0.00
|
|
Staircase
|
10.00’
|
5.00’
|
2
|
|
100.00
|
100.00
|
|
Hallway
|
10.00’
|
10.00’
|
2
|
|
200.00
|
200.00
|
|
Basement (home)(Revenu QC)
|
28.41’
|
31.49’
|
1
|
(894.55-162.42) x 50%
|
366.06
|
n/a
|
|
Basement
(home)(appellant)
|
28.41’
|
31.49’
|
1
|
(894.55-162.42) x 75%
|
n/a
|
549.10
|
|
Additions as per the
appellant’s position
Commercial
|
|
Garage
|
|
|
|
|
|
261.32 (100%)
|
|
Above
garage
|
|
|
|
|
|
209.06 (80%)
|
|
Total
|
|
|
|
|
2006
|
2719
|
|
TOTAL (total area: commercial and non-commercial)
|
|
|
|
|
4419
|
4419
|
|
PERCENTAGE (non-commercial area
|
|
|
|
|
53%
|
38%
|
|
PERCENTAGE (commercial area)
|
|
|
|
|
47%
|
62%
|
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