Citation: 2009 TCC 292
Date: 20090529
Docket: 2006-1882(GST)I
BETWEEN:
1096288 ONTARIO LIMITED,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Paris, J.
[1]
The Appellant is a
developer, and in the course of its business moved houses onto new lots and
sold them. The question raised in this appeal is whether the Appellant was
required to collect GST on the sale of those houses.
[2]
The Minister of
National Revenue (Minister) assessed the Appellant for GST on 11 relocated
houses it sold between September 1, 2000 and November 30, 2004. At the hearing,
the Respondent conceded that three of those sales were sales on
which the Appellant was not required to collect GST because the purchasers were
GST registrants.
[3]
The Appellant takes the
position that the eight remaining sales
were exempt from GST by virtue of section 2 of Part 1 of Schedule V of the
Excise Tax Act. (the Act). Section 2 provides that a sale of
a “residential complex” by a person who is not a “builder” and who has not
claimed input tax credits (ITCs) on the acquisition of the complex or on
improvements in respect of the complex is exempt from GST.
[4]
There is no dispute
that the houses sold by the Appellant were residential complexes. However, the
parties disagree as to whether the Appellant was the builder of those
residential complexes. This turns on whether the Appellant can be said to have
constructed them.
[5]
The Respondent also
says that even if the Appellant was not the builder of the residential
complexes, the sales by the Appellant were still not exempt because it claimed
ITCs on improvements to the complexes. The Appellant admits having claimed ITCs
but says that the claims were made in error and should not result in the sales
being taxable supplies.
[6]
Finally, in the event
that the sales are found not to be exempt supplies, the Appellant says that
section 192 of the Act would apply. In general terms, section 192
provides that in the case of a non-substantial renovation to real property, the
GST on the sale of that property is calculated only on part of the cost of the
renovations rather than on the entire sale price of the property.
Facts
[7]
The Appellant moved
houses from land it was developing onto new lots it owned. The Appellant prepared
each of the new locations by putting in a foundation and driveway and by
installing water, electric and gas lines. If municipal services were not
available, the Appellant would dig a well and install a septic system. The
houses were taken off their foundations at the old locations and placed on
trucks and taken to the new locations and attached to the new foundation. The
new service lines were hooked up, minor work was carried out to repair damage
such as plaster cracks caused by the move, and some rooms were repainted. In
some cases, the Appellant would build a new garage. The Appellant’s sole
shareholder, Mr. Gary Langen, testified that the Appellant would try to reuse
as much of the existing house as possible.
[8]
According to the
Appellant’s accountant, Mr. Gary Gehiere, the Appellant had treated the sales
of relocated houses as exempt supplies prior to December 21, 2001. It did not
collect GST on the sale of the houses or claim ITCs in respect of them. Mr. Gehiere
said that on two occasions he sought to confirm with the Canada Revenue Agency
(CRA) that the sales of the relocated houses were exempt supplies. On the first
occasion, during an audit in 1997, he was told to continue treating sales as
exempt supplies. During another audit in 1998, he raised the matter again with
the auditor but never received a response.
[9]
On December 21, 2001,
after yet another audit, the Appellant was assessed by the Minister on the
basis that the sales of the relocated houses were not exempt supplies. The
auditor also told the accountant that the Appellant could claim ITCs in respect
of inputs to the properties. The Appellant did not dispute the assessment, and Mr.
Gehiere said that the Appellant began collecting GST on the sales and claiming
ITCs.
[10]
The Appellant has now
decided to challenge the treatment of the sales as taxable supplies by
appealing the assessments relating to the eight sales in issue.
Legislation
[11]
The relevant portions
of section 2 of Part 1 of Schedule V of the Act read as follows:
Exempt Supplies
Real Property
2. A particular supply by way of sale of a
residential complex or an interest in a residential complex made by a
particular person who is not a builder of the complex or, if the complex is a
multiple unit residential complex, an addition to the complex, unless
(a) the particular
person claimed an input tax credit in respect of the last acquisition by the
person of the complex or in respect of an improvement to the complex acquired,
imported or brought into a participating province by the person after the
complex was last acquired by the person; or
…
[12]
The terms
"builder" and "residential complex" are defined in
subsection 123(1) of the Act, and the relevant parts of those
definitions read 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,
"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,
[13]
Section 192 of the Act
reads:
Non-substantial
renovation
192. For
the purposes of this Part, where in the course of a business of making supplies
of real property a person renovates or alters a residential complex of the
person and the renovation or alteration is not a substantial renovation, the
person shall be deemed
(a) to have made and
received a taxable supply, in the province in which the complex is situated and
at the earlier of the time the renovation is substantially completed and the
time ownership of the complex is transferred, for consideration equal to the
total of all amounts each of which is an amount in respect of the renovation or
alteration (other than an amount of consideration paid or payable by the person
for a financial service or for any property or service in respect of which the
person is required to pay tax) that would be included in determining the
adjusted cost base to the person of the complex for the purposes of the Income
Tax Act if the complex were capital property of the person and the person
were a taxpayer under that Act; and
(b) to have paid as a
recipient and to have collected as a supplier, at that time, tax in respect of
the supply, calculated on the total determined under paragraph (a).
Appellant’s position
[14]
The Appellant’s counsel
submitted that the Appellant was not the builder of the residential complexes
in issue because it did not construct them. He said that the houses were
already constructed prior to being moved onto the new lots, and that only minor
work was done to prepare the new lots and reattach the relocated houses. That
work did not amount to construction within the meaning of that term in the
definition of “builder” in subsection 123(1) of the Act.
[15]
Counsel argued that the
phrase “construction of a residential complex” in the definition of “builder”
must be read in context, and since “builder” is defined in the Act as a
person who engages in either the construction or substantial renovation
of a residential complex, construction must be taken to involve more significant
building activity than substantial renovation. According to the Act,
substantial renovation requires that a residential unit be more or less gutted, which is already
more than what the Appellant did here.
[16]
The Appellant’s counsel
referred to a number of cases involving claims for a new housing rebate under
subsection 256(2) of the Act. (Warnock v. The Queen, [1996] T.C.J.
No. 1527 (QL), McLean v. The Queen, [1998] T.C.J. No. 435 (QL),
Erickson v. The Queen, [2001] T.C.J. No. 40 (QL), and Lair v. The Queen
[2003] T.C.J. No. 739 (QL)). The language in paragraph 256(2)(a) echoes
that used in the definition of “builder” in requiring that the applicant be a
person who "constructs or substantially renovates, or engages another
person to construct or substantially renovate... a residential complex”.
[17]
In Warnock and McLean,
the Appellants undertook major renovations to their houses, but their claims were
rejected because the work was found not to qualify as substantial renovation. In
Erickson, the Appellant built a large addition to his house that doubled
its living area. He was found not to have constructed a new residential
complex. In Lair, the Appellant rebuilt a house that the judge described
as “ready to collapse”. The Court allowed the claim for the rebate, finding
that new premises had been constructed or that there had at least been a
substantial renovation of the premises. Counsel reasoned that since the work
done by the Appellant to the relocated houses was far less than the work done in
each of the cited cases, the Appellant should not be found to have constructed any
residential complexes.
[18]
The Appellant's counsel
said that the houses that were relocated in the case at bar were not changed in
any material respect and that the only new supporting systems were added. He
said that the relocated houses were used houses prior to being moved and were
still used houses after being moved.
[19]
With respect to the
ITCs, the Appellant argued that it only claimed the credits because it felt
obliged to treat the sales of the relocated homes as taxable supplies as a
result of the 2001 audit and reassessment. The Appellant's position is that it
claimed the ITCs under a mistake of law and that an invalid claim for an ITC
should not be taken into account for the purposes of section 2 of Part 1 of Schedule V
of the Act.
[20]
The Appellant maintains
that even if it constructed the residential complexes in issue, the work it did
was still only a non-substantial renovation of the complexes and section 192 of
the Act would apply.
Respondent’s position
[21]
The Respondent argued
that the houses sold by the Appellant were new residential complexes that were
constructed by the Appellant on the new lots using the structures moved from
the old locations. Counsel said that the definition of “residential complex”
provides that a residential complex has two components – the house and the land
on which the house is located. Therefore, in this case, when the relocated
houses were removed from their original lots they ceased to be part of the
previous residential complexes. By preparing the foundations on the new lots
and installing services and attaching the relocated houses, the Appellant
constructed new residential complexes. The creation of the new complexes
constituted construction of those complexes.
[22]
The Respondent did not
take the position that there was a substantial renovation to the relocated
houses because a substantial renovation requires “the renovation or alteration
of building to such an extent that all or substantially all of the building
that existed immediately before the renovation or alteration was begun, other
than the foundation, external walls, interior supporting walls, floors, roof
and staircases, has been removed or replaced. . .” In this case, the building
itself was not changed in a substantial fashion.
[23]
With respect to the
matter of the ITCs, counsel said that if the ITCs are found to have been
claimed in error, the matter should be referred back to the Minister to reverse
the ITCs that were claimed.
[24]
The Respondent’s
counsel said that section 192 of the Act did not apply to the Appellant
because the Appellant did not renovate a pre-existing residential complex. It
created a new complex that did not exist before.
Analysis
[25]
The first issue is
whether the Appellant can be said to have constructed residential complexes by
moving pre-existing houses onto new lots.
[26]
“Construction” is not a
defined term in the Act. According to The Oxford English Dictionary
(2nd ed.), “construction” means:
the action of framing, devising or forming by the putting together
of parts; erection, building;
and “construct” means:
to make or form by fitting the parts together; to frame, build,
erect
[27]
In the French version
of the definition of “builder” in subsection 123(1) the phrase “construction or
substantial renovation” is translated as “construction ou renovations majeures”.
According to Le Petit Robert (1989), “construction” means:
Action de construire – assemblage, edification, erection.
and “construire” means :
Bâtir, suivant un plan déterminé,
avec des matériaux divers.
[28]
On the basis of these
definitions, I take the ordinary meaning of construction to be the action of
making something by means of combining or assembling parts or elements. Therefore,
the construction of a residential complex is the creation of a residential
complex by means of combining or assembling parts or elements.
[29]
The Appellant suggests
that I should infer that Parliament intended the term “construction” to cover
work in respect of a residential complex that is more extensive than the substantial
renovation of the residential complex, and since the extent of the work done by
the Appellant on the relocated houses in this case was less than what
constitutes a substantial renovation, it argues that the work done was not
construction.
[30]
On a textual,
contextual and purposive reading of the definition of “builder”, it is not
apparent to me that Parliament intended that the construction of a residential
complex must involve more extensive building work than a substantial
renovation.
[31]
The ordinary meaning of
“construction” set out above refers to a type of activity, rather than an
amount. It is distinguishable from “renovation” in that it involves the
creation of something new rather than the renewal of something that was
pre-existing.
[32]
It is true that the
definition of “substantial renovation” refers to very extensive building
activity, but it does not follow that a similar meaning should be given to the
phrase “construction … of a residential complex”. Firstly, Parliament has not
chosen to modify the word “construction” with any qualifier such as
“substantial”, and secondly, in choosing not to define construction, it may be
presumed that Parliament intended the ordinary definition of the word to
apply.
[33]
Finally, the definition
of “builder” is part of the scheme of the Act relating to the taxation
of residential property. According to that scheme, each newly‑constructed
residential complex is taxed only once, when it is sold by the builder. In order to
carry out this scheme, it is not necessary for the construction of new
residential complex to involve more building activity than that involved in the
substantial renovation of an existing residential complex. It is only necessary
that a new residential complex be created by the activity. On the other hand,
where a pre‑existing unit is renovated, it makes sense to require that
those renovations be substantial if the intention is to target situations where
the renovations in effect result in a new residential complex.
[34]
The Appellant has not
shown that any ambiguity arises from the use of the word “construction” in the
definition of “builder”, and the context and purpose of the provision do not
suggest that in all cases construction must involve greater work than
substantial renovation. In most cases it will, but there may be exceptions. A
residential complex could also be constructed with prefabricated segments,
which would be similar to using the relocated structures to construct the new
residential complexes in this case. Each case will turn on its own facts.
[35]
In my view, the decision
in Erickson, cited by the Appellant, does not support its position. In Erickson,
it was never in dispute that construction of a residential complex requires the
creation of a new residential complex. In that case, the claimant built a large
addition to his home and applied for a new housing rebate in relation to the
work. The claimant conceded that he did not substantially renovate his pre-existing
residence because the original structure was not substantially altered, but
argued that he had constructed a new residential complex. The Court found that
the work did not qualify as construction of a residential complex, and said
that an addition to a pre-existing residence would only constitute construction
of a new residential complex where the pre-existing residence could be found to
have been incorporated into a new residence. At paragraph 16, the Court said
that:
… there
might be cases where an addition is of such proportion in relation to the
existing premises that it can fairly be said that the existing premises has
been incorporated into the addition in a manner that makes it appropriate to
regard the original premises as effectively having ceased to exist as a
residential unit. In such case a new premises has been constructed and the
rebate provision will apply.
[36]
The facts in Erickson
are distinguishable from the facts before me in this case. In Erickson,
work was done to a pre-existing residential complex whereas here there were no
pre-existing residential complexes at the new locations. The Appellant created
new residential complexes where there were none before.
[37]
The Appellant’s counsel
suggested that the house structures that were relocated were pre-existing
residential complexes, and therefore, that the work done by the Appellant consisted
of work on pre-existing residential complexes rather than the creation of new
ones. This argument cannot succeed. The structures that were moved by the
Appellant from the old locations to the new locations were not residential
complexes within the meaning of the Act. A “residential complex” (other
than a mobile home or floating home) is defined in subsection 123(1) of the Act
as including any land subjacent to the structure and any contiguous land
necessary to the use and enjoyment of the building portion of the complex as a
place of residence. Therefore, the structure of a house is only a part of a
residential complex. Without land the structure could not be used as a place of
residence. In this case, when the existing houses were taken off their
foundations and moved off the original lots they ceased to be part of the
original residential complexes because they were severed from the land that was
necessary for their use and enjoyment as a place of residence. Once they were attached
once again to land that was necessary for their use and enjoyment as a
residence, they became part of a new residential complex. During the move,
though, the structures did not retain their character as residential complexes.
[38]
The decisions in Warnock
and McLean are also of no assistance to the Appellant. Those cases dealt
with whether the Appellants had substantially renovated their homes and not
with the issue of construction of a residential complex.
[39]
Finally, in Lair,
the Court did not offer a definition of “construction” but said that the
determination was one to be made based on the facts of each case. As well, as
in Erickson, the work in Lair was done to a pre-existing
residential complex.
[40]
I conclude that the
houses sold by the Appellant were new residential complexes that were
constructed by it. While the relocated houses themselves (that is, the
structures) were not constructed by the Appellant, those structures were only a
part of each of the residential complexes that were sold. They were one of the
pieces or parts that went into the construction of the new complexes. In order
to function as dwelling places, the structures required new foundations, new
services and driveways. These items were assembled or combined with the
relocated house to produce finished residential complexes. This process
amounted to the “construction” of new residential complexes within the meaning
of that term as used in the definition of “builder” in subsection 123(1) of the
Act.
[41]
Given my conclusion on
the first issue, it is not necessary for me to decide whether the Appellant
would have been disentitled to the exemption from GST because it had claimed
ITCs on supplies used in constructing the new residential complexes. However, I
would presume that the phrase “claimed an input tax credit” in the definition
of “builder” in subsection 123(1) refers to an ITC that was claimed in
accordance with the law. If the Appellant was not legally entitled to claim the
ITCs, the fact that it did so would not prevent the sale of the houses from
being exempt under section 2 of Part 1 of Schedule V.
[42]
The Appellant maintains
that even if it constructed the residential complexes in issue, the work it did
was only a non-substantial renovation of the complexes and section 192 of the Act
would apply. Section 192 is a self-supply rule that applies where
non-substantial renovations or alterations are done by a person to a
residential complex in the course of a business making supplies of real
property. According to that section, the amount of GST to be remitted would be
calculated only on a part of the value added to the property by the Appellant,
rather than on the entire sale price of the property as assessed by the
Minister.
[43]
I agree with the
Respondent that section 192 is only applicable to renovations or alterations to
pre-existing residential complexes. For the reasons I have already given, the
relocated house structures were not residential complexes while being moved and
the Appellant’s activities constituted the construction of new residential
complexes. This interpretation accords with the scheme of the Act which
is to impose tax on the sale of newly constructed residential complexes on the
entire consideration paid.
[44]
On a final note, I
believe it is also necessary to refer to a matter that was not raised by the
parties but which arises from evidence given by Mr. Gehiere that suggested that
the Appellant collected and remitted the GST on the sales of the relocated
houses. If GST had in fact been collected
and remitted on the sales, the Appellant would have been liable to remit the
GST to the Minister even if the sales were exempt supplies and the GST was
collected in error. (This would even include those sales on which the
Respondent has now conceded that the Appellant was not required to collect or
remit GST.) Where GST is collected in error, it forms part of its net tax under
subsection 225(1) of the Act and must be remitted (see ITA International
Travel Agency Ltd. v. Canada, 2002 FCA 200. However, a rebate
of the tax is available under section 261 of the Act to the person who
paid the GST in error.
[45]
Mr. Gehiere’s evidence regarding
the collection of GST on the sales was somewhat sketchy, and the documentary
evidence tended to contradict his testimony. None of the statements of adjustments,
for example, showed any GST collected from the purchasers. On all of the
evidence, I am not convinced that the GST was collected or remitted by the
Appellant for the sales in issue. I presume that if the Minister had determined
that the GST had been collected and remitted on all of the sales, that the
issue would have been raised in the Reply to the Notice of Appeal.
[46]
The appeal will be
allowed in part, without costs, in accordance with the concession by the
Respondent that the Appellant was not required to collect GST on three of the
sales for which it was assessed.
Signed at Ottawa, Canada, this 29th day of May 2009.
“B.Paris”
Email this Content