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Citation: 2009 TCC 425
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Date: 20091023
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Dockets: 2007-3779(IT)G
2007-4174(GST)I
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BETWEEN:
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STAN WIRE APPLICATION LTD.,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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AMENDED REASONS FOR JUDGMENT
Campbell J.
[1] The
appeals were heard together on common evidence and involve issues under both
the Income Tax Act (the “Act”) and the Excise Tax Act (the
“ETA”). The Appellant was involved in the construction of homes for sale
with some of these transactions involving transfers to the sole shareholders
and directing minds of the Appellant corporation, Agata and Boguslaw Nowak. The
Minister of National Revenue (the “Minister”) assessed under the Act on
the basis that these transfers between the Appellant and the Nowaks did not
occur at fair market value (“FMV”). The issues under the ETA arise
largely as a result of the income tax matters and involve an analysis of
whether the Appellant properly reported net GST with respect to several
transfers, whether input tax credits (“ITCs”) were over-claimed and whether the
Appellant can deduct the New Housing Rebate (“NHR”) with respect to several of these
transfers together with the amount of these deductions.
The Facts:
[2] I
heard evidence from both Mr. and Mrs. Nowak as well as David Jang, the
Respondent’s property appraiser for one of the properties.
[3] The
Appellant was incorporated in 1998 with its main operation being the
installation of stucco wiring. Several years later, the Appellant became
involved in the construction of houses for resale. The assessments involve
taxation years ending February 2002, February 2003 and February 2004. These appeals
focus on four properties: 1169 Strathcona Drive (“1169”), 3139 Signal Hill
Drive (“3139”), 3135 Signal Hill Drive (“3135”) and 160 Strathlea Place
(“160”).
[4] In
2001, the Nowaks personally purchased the lot at 1169 Strathcona Drive (“1169”). The Offer to Purchase (Exhibit A-34)
stipulates that Mrs. Nowak was the purchaser of this lot. A home was built and
the Nowaks resided there from December 2001 to May 2002. Mrs. Nowak
testified that she and her husband built the residence personally with their
own funds using contractors at market price (Transcript, page 18) and then sold
it in May 2002. The Respondent argued that some of the 1169 construction costs
were incurred by the Appellant and were debited to the Nowaks’ shareholder
account; that the Appellant was listed as the person responsible for building
the house on inspection; and that it was the Appellant that gave a one-year
builder’s warranty on 1169 at the May 2002 sale to a third party. The
Respondent also asserted that the Appellant claimed ITCs with respect to the
1169 construction. Further the Respondent produced cheques (Exhibit R-2) to
demonstrate that the Nowaks used the Appellant corporation as a conduit with
respect to certain supplies for the 1169 construction.
[5] The
Appellant argued that it did not claim any ITCs for 1169 because these ITCs
were in fact in connection with another construction which occurred
concurrently with the construction of 1169 (Transcript, page 19). The apparent
practice of the Appellant was to isolate funds respecting each of its
constructions and maintain a separate GST number for each (Transcript, page
43).
[6] The
Nowaks maintained that 1169 was constructed with the intention that it would be
their residence but that unforeseen circumstances, which included the construction
of additional new homes in the area, the installation of a bus stop in front of
the property causing noise problems and increased traffic in the area, forced
them to move from 1169.
[7] In
March 2002, the Nowaks purchased the lot at 3139. The Nowaks funded the
construction and the Appellant erected the house on this lot. They were charged
via journal entries in the Appellant’s books. The Appellant reported
$234,453.00 as the consideration of the supply of 3139 to Mrs. Nowak. In September/October
2002, the Nowaks moved into 3139 although they testified that it was not fully
completed.
[8] According
to the evidence, their intention respecting the purchase of 3139 was
personal. Mr. Nowak, in his search for business lots, located two lots –
3139 and 3135 – and decided that 3139 was an ideal location for a
personal residence. However, the land developer would not deal directly with
individuals but only with corporations, necessitating the involvement of the
Appellant corporation acting on behalf of the Nowaks in the purchase of 3139.
[9] The
transfer of title to 3139 occurred directly from the land developer to the
Nowaks personally. This was a so-called “skip transfer”, a common practice in Alberta, where the transfer of title “skips” the builder.
Payment for the 3139 lot occurred in July 2002 via the shareholder
loan account of the Appellant. The Appellant reported $234,453.00 as income
from the transfer of 3139 to Agata Nowak. The Appellant did not remit GST.
Instead, according to common practice in the industry, the Appellant swapped
GST numbers with the land developer which was presumably done under subsections
221(2) and 228(4) of the ETA in respect of self-assessment on
acquisition of real property. The Appellant would therefore be required to
remit GST payable, if any, directly as opposed to paying it to the developer.
[10] It should be noted that the Respondent submits that, as of
June 7, 2002 prior to the Nowaks moving into 3139, the Appellant was
already using 160 as its mailing address prior to the construction of the house
on that lot.
[11] 3139 was sold in May 2003 to a third party for $366,000.00 ($23,943.93
of tax included) after being listed in January 2003.
[12] Accordingly, the Minister assessed the Appellant in respect to 3139 on
the basis that the FMV at the time of transfer to the Nowaks was $342,056.00
($366,000.00 - $23,944.00 GST). An amount of $107,603.00 ($342,056.00 -
$234,453.00) was included in the income of the Appellant for the 2003 taxation
year.
[13] In calculating its net tax, the Appellant claimed a deduction of
$5,956.31 as a NHR in respect to 3139. The Minister disallowed this rebate
because it viewed the underlying intention of the Nowaks’ acquisition of 3139
as one to resell at a profit.
[14] In March 2002 the Appellant had also purchased the lot at 3135, which
was adjacent to 3139. The Appellant entered into an agreement of purchase and
sale with respect to 3135 with Derek Selwent to build a house on a cost plus
basis. Mr. Selwent became the Nowaks’ neighbour but according to their
evidence, together with the police reports (Exhibit A-4), he became a
threatening, violent and malicious presence in their lives with incidents of
vandalism against them. To preserve their safety and quality of life, the
Nowaks maintain that they had good reason to leave 3139 after a short duration
of residing in that property.
[15] With respect to Mr. Selwent’s property, 3135, the Appellant was
to supervise all aspects of construction and provide a one-year warranty. The
supplier/developer of the vacant lot transferred 3135 directly to
Mr. Selwent, the homeowner, despite the involvement of the Appellant
corporation (Exhibit A-7). This document stipulated that a “skip transfer”
occurred respecting 3135.
[16] Construction of 3135 was substantially completed in November 2002 and the
purchaser assigned the corresponding NHR (Exhibit A-16) to the Appellant, which
then credited the rebate amount to Mr. Selwent by reducing his final
amount payable. To date the Appellant has not received complete payment from
Mr. Selwent (Transcript, page 156). In calculating its net tax, the
Appellant claimed a deduction of $5,743.54 as the NHR for 3135. The Minister is
denying this NHR on the basis that the purchase was not made from a builder
under the ETA. The Respondent contends that the Appellant did not supply
a residential complex to Mr. Selwent but provided only construction services.
[17] In January 2002, the Appellant purchased 160 via a shareholder loan
(Transcript, page 59). Construction commenced in September 2002. Mrs. Nowak
testified that the intention for 160 was to build a “spec” home for resale.
This did not materialize due to the problems which they were having with their
neighbour, Mr. Selwent, while they resided at 3139. The Nowaks claim that
they had no alternative but to relocate from 3139 to 160 in May 2003. According
to the Nowaks, they moved into 160 prior to its completion because they had
nowhere else to go and they desperately wanted to escape their neighbour,
Mr. Selwent.
[18] The property, 160, was transferred from the Appellant to
Mrs. Nowak on April 29, 2003 for a stated purchase price of
$266,276.00 excluding GST. The Nowaks paid $11,929.18 of GST to the Appellant,
being an amount equal to the difference between the full GST and the NHR of
$6,710.17 (Transcript, page 59).
[19] The Nowaks had the property appraised in July 2006 to determine its
value as of May 2003. The value was established at $375,000.00, including GST
(Exhibit A-31). The Appellant failed to produce the author of this
appraisal as a witness. The Respondent contends that the FMV of 160 at
June 6, 2003 was $399,000.00, excluding GST, as determined by Mr. Jang’s appraisal.
[20] Therefore, the Respondent submits that the Minister correctly included
$132,724.00 ($399,000.00 - $266,276.00) in the income of the Appellant for the
2004 taxation year to reflect a FMV transfer between the Appellant and the
Nowaks in respect to 160.
[21] In calculating its net tax, the Appellant claimed a deduction of
$6,710.17 with respect to 160 for a NHR.
The Income Tax Issues:
[22] The issue is whether the Minister correctly reassessed the Appellant
corporation to include in income the amounts of $107,603.00 in respect to
property 3139 and $132,724.00 in respect of 160 in the taxation years ending in
2003 and 2004, respectively.
[23] The Minister’s income inclusions arise as a result of the Appellant’s
transfer of 3139 and 160 to its shareholder, Agata Nowak, where the Minister
asserts that these transfers occurred at less than FMV.
[24] The 2003 income tax assessment also includes an amount of $761.36
which the Respondent claims the Appellant failed to report in the amount it
received ($173,775.04) for the contractor services it provided to
Mr. Selwent in building the house at 3135.
The GST Issues:
[25] The GST issues involve a determination of
whether the Minister properly assessed the Appellant net GST owing after
considering the following:
(1)
the appropriate FMV
to be assigned to 3139 and 160;
(2)
the disallowance of
the NHR regarding 3139 and 3135;
(3)
the failure to report
GST stemming from over-claiming ITCs with respect to 1169; and
(4)
the over-claiming of
the NHR in respect to 160 considering the difference in FMV and transfer value
of this property.
[26] In addition to the above issues, penalties pursuant to section 280 of
the ETA in the amount of 6% and interest at the prescribed rate were
imposed.
Analysis:
[27] I will deal first with the income tax issues and specifically with
properties 3139 and 160 because a resolution of the GST issues is dependent to
a large extent on a determination of the income tax matters.
[28] Based on the Respondent’s submissions (Transcript, page 319), the
argument is that the Appellant received virtually no profit as a result of its
transfer to the Nowaks of the houses it built. According to the evidence, the
Appellant decided that approximately $25,000.00 would be a sufficient profit on
the construction of each house. The Respondent’s position suggests that the
Minister sees the true profit source in the hands of the Appellant’s
shareholders, the Nowaks, when they resold these properties within short
periods of time of moving into each. Given this view, it seems odd that the
Minister chose not to pursue this arrangement directly to the Nowaks conduct of
trading houses or, alternatively, via shareholder benefits. However, that avenue
was not pursued and the Minister instead has chosen to pursue the Appellant
corporation as having had its property appropriated by its shareholders for
consideration which is less than the FMV.
[29] Most of the Respondent’s submissions were based on the decision of Happy
Valley Farms Ltd. v. The Queen, 86 DTC 6421, and the tests enunciated there
to distinguish between an activity carried on as a business and one that is an
investment. I remain as unconvinced today, concerning the relevancy of the
tests in this decision to these appeals, as I was when I heard these
submissions. First, I have no doubt, according to the evidence adduced, that
the Appellant corporation was in the business of both building and
selling homes. The tests enunciated in Happy Valley Farms may have been useful if the proceeds from the
resale of the homes by the Nowaks had been assessed as business income of the
Nowaks. The Nowaks however were not assessed personally and it is only the
corporation that is an appellant with the income assessed in its coffers only.
[30] As I understand the Respondent’s submissions, with respect to the
income tax issues in connection to properties 3139 and 160, reliance is placed
on section 69 of the Act to include in the Appellant’s income the
proceeds of disposition of both these properties at FMV as established on
resale by the Nowaks. I am assuming that the Respondent is arguing that the
alleged unreported income is to be included in the Appellant’s income pursuant
to subsection 69(4) of the Act in regard to shareholder appropriation or
by way of subparagraph 69(1)(b)(i) of the Act in regard to inadequate
consideration for both 3139 and 160. I am making this assumption pursuant to
the Respondent’s remarks at pages 309-310 of the transcript:
… And in this case, the minister
relies on that provision to submit that the appellant transferred the houses to
non-arm’s length persons when it transferred it to the shareholders. In so
doing -- and it is in the business of building houses, the minister takes the
position that the appellant should have transferred and is deemed to have
transferred the properties at 3139 and 160 at fair market value. And for
clarity, of course, the minister takes the position that fair market value for
3139 is the $366,000, that was the amount of 3139 sold to third-party persons,
non-arm’s length within six months of the shareholders taking possession of the
property. So that sale took place in April of 2003. So the minister relies on
that figure as the fair market value, the properly reflective value of that
house.
With respect to the
house at 160, the minister, of course, relies on the evaluation provided
through the evaluation expert of the Canada Revenue Agency, Mr. David Jang, and
just to note, Madam Justice, that, of course, that amount is different than
what is in our pleadings because in our pleadings, the evaluation we relied on
was Tom Liu’s which was 400,000. Mr. Jang’s evaluation report brings the value
of that house in $399,000, so we would, of course, rely on Mr. Jang’s and the
current evaluation report that is before this Court for the value of that
house.
[31] While section 69 was named generally in the Respondent’s Reply
regarding the income tax issues, it was not explicitly referred to during the
hearing. I am however making my inference that the Respondent is utilizing
subsection 69(4) and subparagraph 69(1)(b)(i) as the basis of her argument
respecting the income tax issues relating to 3139 and 160.
[32] Alternatively, it may be that the Respondent is attempting to argue
that the proceeds from the disposition of the homes recognized at the
shareholder level, that is, the Nowaks’ resale of the homes, should be imputed
to the corporate entity. Therefore, what may be potentially business income in
the hands of the shareholders should constitute business income in the hands of
the Appellant corporation which is owned and directed by these same
shareholders. If I am correct in this inference respecting the Respondent’s
position, I must reject it because clearly the Appellant and the shareholders
are separate legal entities. It may be a different situation where a sham or
fraud are alleged but that is not the case in these appeals. At page 316 of the
transcript, the Respondent submitted the following:
… What we’re asking the Court to
consider is whether the appellant’s claim that these were primarily built for
personal residence is to be accepted over what the minister believes is the
true intention which is to reside in the houses for a very short period of time
and then sell them for a profit.
The Respondent’s position is not clear but if the Minister wished to
attack a possible house swapping by the Nowaks, then an assessment of the
proceeds from the resale of these homes as business income in their hands
personally should have been pursued.
[33] The above inferences and remarks have been made because the
Respondent’s submissions respecting the income tax issues were primarily
confined to the application of the Happy Valley Farms’ test to the facts
of this appeal to render the Appellant in the business of building and selling
houses. According to the pleadings and the evidence adduced, I do not believe
that the Respondent’s approach to the issues in these appeals is the
appropriate one.
Property 160:
[34] The Respondent argued that the difference between the FMV and the
transfer value of 3139 and 160 should be included in the business income of the
Appellant because the Appellant transferred these properties to the Nowaks for
a price that was less than the FMV at the time of the transfers. It is
subsection 69(4) and subparagraph 69(1)(b)(i) that would come into play in
accordance with this argument. Those provisions state:
69(1)(b) where a taxpayer has disposed of anything
(i) to a person with whom the taxpayer was
not dealing at arm's length for no proceeds or for proceeds less than the fair
market value thereof at the time the taxpayer so disposed of it,
…
69(4) Where at any time property of a
corporation has been appropriated in any manner whatever to or for the benefit
of a shareholder of the corporation for no consideration or for consideration
that is less than the property's fair market value and a sale of the property
at its fair market value would have increased the corporation's income or
reduced a loss of the corporation, the corporation shall be deemed to have
disposed of the property, and to have received proceeds of disposition therefor
equal to its fair market value, at that time.
[35] Both of these provisions are deeming provisions that require that the
properties, 3139 and 160, form part of the assets of the Appellant corporation.
Subparagraph 69(1)(b)(i) refers to “disposing” of something, which necessitates
that the transferor have certain ownership rights over the item at the time of
transfer.
[36] In Boardman et al. v. The Queen, 85 DTC 5628, a court ordered,
during divorce proceedings, the vesting in the wife’s name of two homes owned
by a company of which the husband was the main shareholder. The company was reassessed
to add a taxable capital gain to its income in respect of the conveyance, based
on the difference between the FMV and the adjusted cost base (“ACB”) of the
houses. The Court held that subsection 69(4) is applicable to deem the company
to have sold the property at FMV and to have received the proceeds. At page 5633
the Court made the following comments:
While I think it may be more
fairly debatable whether subparagraph 69(1)(b)(i) is applicable to this
situation, I need not decide that as I conclude that subsection 69(4) is
applicable. This latter subsection gives rise to two issues argued by counsel
and not otherwise dealt with in my reasons above. It was contended by counsel
for the taxpayer corporation that the property was not "appropriated"
and even if it were the transaction was not an income transaction, the company
not being in the business of buying and selling houses, and therefore could not
be said to have increased the corporation's "income". With respect to
the first point, counsel contended that the word "appropriate"
implies action by the owner of the property or by the person acquiring it, and
that in the present case the effective action transferring the property was
that of a third party, namely the Court of Queen's Bench. While these are valid
meanings of the terms "appropriate" when used as an active verb,
there are other meanings provided in the Oxford English Dictionary cited by
counsel, such as "to assign or attribute specially or exclusively to . .
." or "to make, or select as, appropriate to . . .". These would
embrace the action of a third party as well. Apart from that, it must be noted
that the verb is used in subsection 69(4) in the passive voice as it refers to
property that "has been appropriated". It does not say that the
property must have been appropriated by the company to the shareholder or for
the benefit of the shareholder but only that the property must have been
"appropriated in any manner whatever to, or for the benefit of, a
shareholder. . .". I therefore think that the action of the Court of
Queen's Bench in choosing this particular property to be used for satisfying
Dr. Boardman's personal obligations to his wife can be regarded as an
appropriation within the meaning of subsection 69(4).
I am also satisfied that this
appropriation, if sold at fair market value, "would have increased the
corporation's income" for this taxation year. I must assume that the word
"income" is used in the meaning attributed to it by the Income Tax
Act. It is clear in section 3 of the Act, for example, that taxable capital
gains are to be calculated as part of income for the purposes of the Act. It
appears to me that any sensible reading of subsection 69(4) would indicate that
it covers capital transactions if, had there been a real sale and fair market
value received, the effect would have been to increase the corporation's income
as calculated under the Act. That surely would have been the case here.
[37] According to the decision in Park Haven Designs Inc. et al. v. The
Queen, 2007 DTC 350, there can be no disposition, deemed or otherwise,
unless the so‑called transferor “had” the property to dispose of it. This
case involved a “skip transfer” in Alberta which provided
for a transfer directly from the land developer to the owner avoiding the cost
associated with an intervening title deed involving the builder. The Appellant
in the present appeals claims to have implemented this technique in dealing
with its customers.
[38] The circumstances in Park Haven Designs are similar to the facts
respecting property 160. At paragraph 31 of Park Haven Designs, Miller
J. stated:
… Patrick House was built as a spec house. It was not
built as a custom house for the Jaques, though ultimately they did reside in
it. The Jaques did not transfer funds in trust on a progressive basis to Park
Haven to have Patrick House built: they instead lent money on two occasions so
that Park Haven could afford to build that House. The evidence supports the
position that Park Haven intended to build a spec home, which Park Haven would
eventually sell to a customer. Its income was not to be derived from a
management fee, but from the ultimate disposition of the property. Under these
circumstances, I find the monies used by Park Haven to buy the land were not trust
monies from the Jaques - they were borrowed monies. It was intended that Park
Haven acquire the property. Unlike the transfer of land of the Slopes House,
which indicated consideration was received from Mr. Jaques, in the transfer of
land for Slopes House, from the developer, Patterson Hills Development Corp. to
Mr. Jaques, it stated:
In
consideration of the sum of $76,000.00 paid to it by Park Haven Designs,
receipt of which is hereby acknowledged, transfer to David Jaques.
This is
evidence of a Skip Transfer and supports the finding that Park Haven did have
the property to dispose of. That being the case, subsection 69(4) does come
into play.
According to this
decision, even in the context of a skip transfer, the builder still “has” the
property to dispose of it, despite the fact that title “skips over it” direct
to the purchaser’s hands.
[39] Lot 160 was
purchased in January 2002 by the Appellant from the developer via a
shareholder’s loan. Construction of the house commenced in September 2002. According
to the evidence of the Nowaks, the initial intention was to build a spec home
and put it on the market for sale but this changed when the Nowaks, who were
residing at 3139, had problems with their neighbour, Mr. Selwent, and had
no other place to go. They moved into 160 in May 2003 despite only basic
amenities being completed in order to escape this neighbour. The executed Offer
to Purchase Residential Lot 160 (Exhibit R-11) listed the Appellant as
“Purchaser” of this lot. At clause 6, it stipulates that the developer
shall convey the lot to the Appellant, subject to permitted encumbrances. At
Exhibit A-33, a lawyer’s correspondence dated April 11, 2003 references the
transfer of 160 as a sale to the Appellant with a resale to the Nowaks. In
addition, it references a deed of conveyance from the developer, United Inc./Hidden
Valley Holdings Ltd. This deed dated April 11, 2003 is contained at Exhibit
R-13, the CRA Appraisal Report, and refers to the developer receiving the
consideration for the lot from the Appellant but that the transfer is to the
Nowaks “as joint tenants at the request of Stan Wire Application Ltd.”.
[40] Whether this may
properly be called a skip transfer or not, the end result is the same. Although
I believe this is a skip transfer, the significant factor is that the Appellant
made a request to have the land transferred to the Nowaks. As a pre-condition
to the Appellant making such a request, it had to have some type of ownership
interest or authority or power in conjunction with this property in order to be
able to direct title to the Nowaks. It is reasonable to conclude that the
Appellant disposed of 160 to the Nowaks. In addition, this lot was purchased
with the Appellant’s funds, obtained from a shareholder loan account. My
conclusion is further supported by the evidence that 160 was initially
purchased by the Appellant in order that a spec house could be built. This was
not pursued because 160 was transferred instead to the Nowaks. All of this
supports that the Appellant did have 160 to dispose of or which could be
appropriated and therefore subparagraph 69(1)(b)(i) and subsection 69(4) can
apply. It is a question of valuation whether these deeming provisions should
apply in these appeals. Therefore, if there is to be any deemed income inclusion
pursuant to section 69, the FMV of 160 at the moment of its transfer from
the Appellant to the Nowaks must be established.
[41] The value assigned
to 160 by the Appellant at the time of the transfer in April 2003 to the Nowaks
was $266,276.00 excluding GST. The Respondent relied on the appraisal dated
November 9, 2007 completed by David Jang (Exhibit R-13) to argue that the
FMV of 160 was $399,000.00 excluding GST, as of June 6, 2003. This
appraisal was based on the value of comparable properties (Transcript, page
224) but was based on an exterior inspection only as the property had been
resold at the date of the appraisal.
[42] For the purposes of
section 69, property 160 is to be valued at the time of transfer to the Nowaks.
If the house was incomplete as the Nowaks contend, then this must be factored
into the valuation. Comments made by Miller J. in Park Haven Designs (paragraph
34 of the decision) also confirm this view. Miller J. found that the FMV
of the property can be “… reached by adding an amount of 10% of construction
costs … The management fee represents what a third party purchaser would have
had to pay.” This is essentially the business practice employed by the
Appellant.
[43] Mrs. Nowak had the
following comments in respect to the degree of completion of 160 (Transcript,
page 62):
…the house was not completed at that
time, especially the things on the outside were not done because it was
wintertime when the construction was going on, so things like stucco outside
was not done, driveways -- driveways was not done, sidewalk, landscaping, deck
and on the inside there was carpet, tile, shelving, they were not -- they were
not done at that time. Landscaping was not done until 2005, and after moving
into the house, lots of things were completed after that, and they were
completed by Nowaks, not by Stan Wire.
[44] I accept Mrs. Nowak’s evidence in respect to the condition of 160 at
the time it was transferred from the Appellant to them. Substantial portions of
the residence had not been completed and it was the Nowaks that completed the
house subsequent to the transfer. The Appraisal Report (Exhibit R-13) does not
account for this important factor. I am therefore rejecting the Report’s
suggested valuation of $399,000.00. Because the house was substantially
incomplete, I believe the Appellant’s valuation of $266,276.00 to be the more
reasonable. In addition, the cost plus value consists of a profit margin that
is in line with what the Appellant charged to third party clients (for example
Mr. Selwent) which was approximately $25,000.00. Since this clearly was the
Appellant corporation’s usual business practice, it seems to me to be
unreasonable to permit the Minister to substitute its business judgment for
that of the taxpayer.
[45] In summary, neither subparagraph 69(1)(b)(i) nor subsection 69(4) of
the Act are applicable in respect of the transfer of 160 on the basis
that the property was in fact transferred by the Appellant to the Nowaks at the
appropriate FMV. As such the transfer of 160 by the Appellant to the Nowaks was
not at a value that was less than FMV.
[46] A number of GST consequences flow from my conclusion concerning FMV.
Since the NHR is calculated on FMV of the property (section 155 and paragraph
254(2)(b) of the ETA), the rebate claimed by the Appellant is
accordingly accurate because 160 was in fact transferred at its FMV. Therefore,
the Appellant is entitled to claim a NHR calculated on the amount the Nowaks
paid the Appellant and not based on the Minister’s suggested FMV in respect to property
160. In addition, I conclude that the Appellant did not under-report GST
because the underlying value it used in its calculation was accurate in
relation to my conclusion respecting FMV.
Property 3139:
[47] The same income tax issue is involved with
property 3139, as it was for property 160, that is, whether section 69 of the Act
applies to the transfer of 3139 from the Appellant to the Nowaks. Property
3139, unlike 160 which was initially purchased as part of the business of the
Appellant, was from the outset purchased with the intent that it would become
the personal residence for the Nowaks. When Mr. Nowak saw this lot he testified
that he fell in love with the location but eventually, according to the Nowaks,
problems with their neighbour rendered it impossible for them to continue to
reside in this property. The Nowaks’ evidence was that the Appellant’s
involvement in this purchase was solely in the capacity of acting for them
personally in order to facilitate the purchase.
[48] The Nowaks testified that the developer’s practice was to deal only
with incorporated entities and therefore he refused to deal with the Nowaks
personally. As a result, they used the Appellant corporation to complete the
purchase in conjunction also with the Appellant’s purchase of the adjacent lot 3135.
The evidence supports that the Appellant was merely the conduit through which
the Nowaks could complete the purchase and obtain the transfer of 3139 from the
developer. The Nowaks were acting in their personal capacity in this purchase
and not as shareholders on behalf of the Appellant. Essentially the Appellant
acted on behalf of the Nowaks personally and pursuant to their instructions in
what amounts to an agency relationship in light of the common intention of all
parties. Despite the lack of documentation to substantiate that 3139 was
transferred from the developer to the Nowaks personally, using the Appellant
corporation as the conduit, I am not persuaded that ownership was to have
vested in the Appellant corporation for business purposes. As noted in Dixon v. M.N.R., 92 DTC 1456, when considering oral testimony:
… When the Court looks at non-arm's length
transactions, it must balance the oral testimony carefully against the written
documentation. It is incumbent upon a taxpayer to have the written
documentation to a non-arm's length transaction in clear unequivocal form to
back up the oral statements. …
[49] However, while I have no documentary evidence to support the
Appellant’s claim that 3139 transferred direct to the Nowaks personally, and
this admittedly casts doubt on the entire arrangement, when I look at the
evidence of the Nowaks as a whole I have no reason to disbelieve their
testimony on this point. They were self‑represented litigants who came to
the hearing well prepared and I found their testimony to be straightforward and
convincing. I have no reason to accept generally their evidence while rejecting
what they told me respecting property 3139.
[50] Therefore, since the Appellant never acquired 3139, it could not later
dispose of it at less than FMV nor could the property be appropriated by the
shareholders. In these circumstances section 69 cannot come into play.
Consequently, the FMV issue for income tax purposes is moot.
[51] Even if I had to determine the FMV of 3139, I would have concluded
that the Minister’s assumptions in this regard had been demolished so that a
figure closer to that which the Appellant suggested would appear more
reasonable in accordance with the evidence adduced. The Respondent’s assessed
value of $366,000.00 as of September/October 2002 was based not on an appraisal
but on the sale price in April 2003. Again this is similar to the fact
situation in Park Haven Designs. Here, as in Park Haven Designs,
I must weigh the unsubstantiated evidence produced by the Respondent against
the testimony of both Mr. and Mrs. Nowak respecting the degree of completion of
3139. While the Nowaks’ valuation evidence is admittedly weak, it nevertheless
remains stronger than the evidence produced by the Respondent.
[52] I turn next to the GST issues respecting 3139. According to the
Respondent’s Reply in the GST matter, the Nowaks acquired 3139 primarily for
the purpose of selling it at a profit, and not as their primary residence,
which accordingly should disentitle them to the NHR which, pursuant to section
234 of the ETA, had been assigned to the Appellant. This issue is
dependent upon whether the Nowaks purchased 3139 as their primary place of
residence or primarily to resell at a profit. “Primary place of residence” is
not defined in the ETA but a person can have only one primary place of
residence, which is unlike the concept of “principal place of residence” for
income tax purposes. Subsection 254(2) of the ETA states:
New
housing rebate
(2) Where
…
(b) at the time the particular individual
becomes liable or assumes liability under an agreement of purchase and sale of
the complex or unit entered into between the builder and the particular
individual, the particular individual is acquiring the complex or unit for use
as the primary place of residence of the particular individual or a relation of
the particular individual,
…
[53] In Seni v. The Queen, [2005] G.S.T.C. 15, the meaning of “used
primarily as a place of residence of the individual” as referenced in
subsection 254(2) was discussed at paragraph 17:
17 I have no difficulty in
concluding that Glengarry was not exempt from tax under Schedule V - Exempt
Supplies, Part I - Real Property. As stated the Appellant stayed there on a temporary
basis when he and his wife had marital difficulties. The expression "used
primarily as a place of residence of the individual" was analyzed by Heald
D.J. of the Federal Court of Appeal in Lacina v.Canada. He stated that the
test set out by O'Connor J., the trial judge in the Tax Court of Canada, was
valid and added:
There remains for consideration the
question as to whether criteria (b) and (c) have been met in the circumstances
of this case. It is the submission of the applicant that the word "primarily"
as used in ss. 191(5) refers to the amount of space dedicated to a
residence and not the enduring quality of the residence therein. On the other
hand, the respondent submits that, used in this context, the word
"primarily" refers to a personal intention to live there permanently
and not to use the property as stock-in-trade or, in other words, as a
disposable asset.
I agree with the interpretation suggested
by counsel for the respondent. The self-supply rules are designed to prevent a
builder from gaining any advantage from occupying a residential complex, which
is a part of his inventory, for a short time before selling it.
Based on this interpretation of ss.
191(5), I conclude that the Learned Tax Court Judge correctly decided, on this
record, that the applicant did not occupy Houses No. 1 or No. 3 primarily as
places of residence. The occupants remained in House No. 1 for a period of
approximately 2 to 4 months, and in House No. 3 for a period of approximately 4
to 7 months. The applicant's activities established an unmistakable pattern of
operation. Clearly, the applicant built and sold the houses over a short period
of time as an adventure in the nature of trade. His residence in these two
houses did not possess the enduring quality required to support a finding that
he occupied either of them "primarily as a place of residence".
[54] Although these comments were made in respect to exempt supplies of
residential properties, section 3, Part I of Schedule V, the principles of
statutory interpretation require that where the same words are used throughout
a statute they be given the same meaning.
[55] The determination of whether an individual acquired the complex for
use as the primary place of residence involves an evaluation of the intention
of a purchaser at the time the agreement of purchase and sale is concluded. In Coburn Realty
Ltd. v. The Queen, [2006] G.S.T.C. 54, Chief Justice Bowman made the
following comments regarding the difficult task involved in determining a
taxpayer’s purpose and intent at a specific moment in time:
10 Statements by a taxpayer of his
or her subjective purpose and intent are not necessarily and in every case the
most reliable basis upon which such a question can be determined. The actual
use is frequently the best evidence of the purpose of the acquisition. In 510628 Ontario Limited v. The Queen, [2000] T.C.J. No. 451, 2000
G.S.T.C. 58, the following was said:
[11] It should be noted that the
expression "for use primarily ..." (en vue d'etre utilisé) requires
the determination of the purpose of the acquisition, not the actual use.
Nonetheless, I should think that as a practical matter if property is in fact
used primarily for commercial purposes it is a reasonable inference that it was
acquired for that purpose.
11 I shall
turn then to the actual use that was made of the boat. Mr. Coburn testified
that the boat was used for entertaining clients and for rewarding his sales
staff. He stated that the appellant was seeking to expand its business to
cottage country. I accept that he wished to expand the appellant's business but
I am not persuaded that the boat was used or was intended to be used primarily
for business purposes. Although I think there was probably an element of
business in some of its use, the evidence of its actual use does not support
the conclusion that the primary purpose of its acquisition was for use in the
appellant's business.
[56] In Coburn Realty, subsequent conduct was a consideration in
determining intention at a relevant point in time. In applying this to the
present appeals, the Appellant tendered into evidence a homeowner’s insurance
policy for 3139 (Exhibit A-3), which stipulated that the dwelling was not
vacant or unoccupied and that it was classified as a “principal” dwelling type
for the purposes of the policy. This policy was effective from October 31, 2002
to October 31, 2003. CRA Policy Statement P-228, issued March 30, 1999 and
subsequently referred to in Bérubé v. The Queen, [2001] G.S.T.C. 129,
referenced criteria which would be indicative of a primary place of residence
and that list included the purchase of homeowner’s insurance.
[57] In addition, the police reports (Exhibit A-4) support the testimony of
the Nowaks that they moved from 3139 because of the unforeseeable circumstances
with their neighbour at 3135 and not for reasons pertaining to resale of 3139
for a profit.
[58] However, I must weigh this evidence against the contradictory evidence
that was suggestive of the motive for the acquisition being resale for profit. Within
seven months of moving into 3139, the Nowaks sold to a third party for
$131,000.00 more than the amount that had been paid for the initial transfer in
the fall of 2002 ($366,000.00 – $235,000.00). There appeared to be an apparent
pattern where the Nowaks would acquire houses and subsequently resell for a
profit and therefore the Nowaks stated intention of purchasing 3139 as a
primary place of residence becomes suspect. At the very least it hints that the
possible motive could have been resale for a profit. Some of the statements
respecting a mailing address made by Mrs. Nowak in cross‑examination
added to this suspicion. Mrs. Nowak testified that she chose to make property
160 their mailing address before even moving into 3139. This leads to the very valid
question: did the Nowaks have the intention of moving into 160 prior to their
move into 3139, leaving the impression that 3139 was not a true personal
residence? There is no easy answer without a crystal ball to retroactively look
into the thought processes of the Nowaks at that point in time. Without that
crystal ball I must simply assess the evidence overall and apply to all of it
the most reasonable interpretation. After some reflection, I am accepting the
Nowaks’ explanation that 3139 had no mailing address while 160 did and that,
for a period of time, this was the reason that they used 160 as their mailing
address.
[59] Finally the Respondent also raised the doctrine of “secondary
intention”. In Nowoczin v. The Queen, 2007 DTC 949, the Court at paragraph
30 made the following comments respecting secondary intention:
[30] An important issue to be examined is
whether the circumstances disclosed by the evidence give rise to application of
the doctrine of secondary intention. In order [for] to that to be present, the
prospect of a resale at a profit must have been an operating motive for the
purchase that existed at the point of acquisition. Whether such motive existed
is a question of fact in each case to be determined from a reasonable, objective
analysis of all the evidence…
[60] Upon review of all of the evidence, I remain unconvinced that an
operating motivation for the construction and transfer of 3139 was in all
probability a resale for profit. While the profit motive may have been in the
back of their minds during the process, that is probably a common thought
pattern with many people engaged in a real estate transaction.
[61] In summary, the Nowaks will be entitled to the NHR of $5,956.31, with
the result that the assignment to the Appellant is validly made. Curiously, the
Respondent did not rely on the alternative ground that it relied on in respect
to property 3135; that is, that the Appellant was not a builder.
Property 3135:
[62] The issue respecting 3135 is whether the Appellant qualified as a
“builder” as defined in the ETA which would entitle Mr. Selwent and by
extension the Appellant to claim the NHR.
[63] To qualify for the rebate, the residential complex must be supplied by
a “builder”, in accordance with paragraph 254(2)(a) of the ETA which
states:
New
housing rebate
(2) Where
(a) a builder of a single unit residential
complex or a residential condominium unit makes a taxable supply by way of sale
of the complex or unit to a particular individual,
…
[64] The relevant portions of subsection 123(1) of the ETA defines
“builder” as:
“builder”
"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
…
(iii) in any other case, the construction
or substantial renovation of the complex,
…
(Emphasis added)
This definition of “builder” is clearly different from its ordinary
meaning because pursuant to this provision, a builder must have an interest in
the property.
[65] The Respondent’s position is that the Appellant is not a builder
pursuant to subparagraph 123(1)(a)(iii) because the Appellant did not own the
lot upon which the house was built. Because Mr. Selwent owned the lot and paid
for it, the Appellant is not an owner of 3135 and it is not a builder
(Transcript, page 324). This proposition is based on the fact that the
Appellant arranged the transaction for 3135 so that transfer of ownership
occurred directly from the developer to Mr. Selwent, the ultimate
purchaser of 3135. This arrangement was outlined in the Preliminary Service
Agreement (Exhibit A-6) between the Appellant and Mr. Selwent. Clause 1 of
that Agreement, titled “Land Purchase”, states:
The contractor [the Appellant
corporation in these appeals] agrees to purchase a lot on behalf of the
purchaser [Mr. Selwent].
Legally Described As …
The purchaser agrees to pay for the
above land the price set up by the Developer and fulfil the requirements set up
in the Developer’s purchase agreement. Land title will be transferred directly
to the purchaser upon Developer receiving full payment.
[66] In addition, clause 2, titled “Construction”,
provides:
(a) The
contractor agrees to construct a residential dwelling according to the Alberta
Uniform Building Code, City of Calgary by-laws …
[67] This Service Agreement is clearly not an agreement of purchase and
sale. It is, as the name suggests, a contract to provide services including
contracting, construction and related services to Mr. Selwent. Subparagraph
123(1)(a)(iii) merely requires that a builder acquire an interest in the
property during the relevant period, as opposed to ownership per se. The
term “acquisition of an interest” is by its very nature broader in scope than
ownership. The provision, in referencing interest, does not specify that it
must be an “ownership interest”. The question therefore that must be addressed
is whether the Appellant acquired an interest during the construction period in
the lot at 3135 upon which it was constructing a dwelling for Mr. Selwent.
[68] Pursuant to the Alberta Builders Lien Act, subsection 6(1)
allows for the creation of a lien in respect of work performed to the extent a
person, which under that Act includes a corporation, remains unpaid for
that work. The Appellant was not fully paid for its work performed on 3135 and
so a lien created by this Act in its favour could have been potentially
established pursuant to subsection 6(1) of this Act. Therefore, could
the creation of a lien pursuant to this Act constitute an “interest in
the property” as required by the definition of builder? According to former
Chief Justice Bowman in Superior Modular Homes Inc. v. The Queen, [1997]
G.S.T.C. 107, a mechanics lien is an interest in property. At paragraphs 6 and
7 he made the following comment:
6 I think
a mechanics' lien, which under the provincial legislation arises when the work
is begun or the material furnished, is an interest in land. It permits the
lienholder to enforce his claim out of the land. I have no difficulty in
concluding that a lienholder has an interest in the land to which the lien
attaches until the claim is satisfied.
7 …
In this jurisdiction the statute has
included in the term "land" an equitable interest thereon. A mortgage
and a mechanics' lien are each included in the term encumbrance. If a
mechanics' lien does not constitute an equitable interest in land then a
mortgage and encumbrance are in the same position, yet all of these have
attached to them statutory rights and remedies in an against land which the
Courts can pursue and make available for the payment of debt. …
[69] The evidence was unclear whether the Appellant ever registered a lien.
A lengthy court case ensued with Mr. Selwent but it was never fully established
that that was the result of the registration of a lien. In Brial Holdings
Ltd. v. M.N.R., [1993] G.S.T.C. 33 (CITT), the Canadian International Trade
Tribunal, without any reference to the doctrine of mechanics liens, found that
a taxpayer acquired an interest in a home while it was in the process of being
built because it had supplied all the materials and labour. However, the
caselaw in this area is inconsistent and in Tugwell v. M.N.R., [1994]
G.S.T.C. 31 (CITT), the NHR was disallowed even though the Tribunal was faced
with a similar set of facts as in Brial Holdings. The distinction
between contractor and builder was discussed in 494743 BC Ltd. v. The Queen,
[2007] G.S.T.C. 4, at paragraphs 25 to 28:
25 Section
254 of the Act enables a purchaser to recover the
GST housing rebate directly from the builder by way of a payment of the rebate
by the builder or credit against GST payable at the time of the sale. However,
it is the submission of counsel for the Respondent that the Appellant is a
general contractor and not a builder. Builder is defined in subsection 123(1)
of the Act.
26 The
definition in the Act for a "builder" is
different from the ordinary connotations of the word. To be a builder under the
Act, an interest in the real property is required or
an interest in the complex had to have been acquired.
27 In this
case, the land was owned by the purchasers not the Appellant. In this situation
the Appellant had no interest in the land as is required to be a builder.
28 In this
situation the purchasers hired the Appellant as a general contractor to
construct their homes. For those reasons the Appellant does not meet the
requirements of subsection 123(1) of the Act and is
not a builder for the purposes of the Act. I have
therefore concluded that the provisions in section 254 do not apply to the
Appellant and it is not entitled to the New Housing Rebate.
[70] There is no way that these apparent inconsistencies in the
jurisprudence can be reconciled. However, since the legislation requires that a
builder have only an interest in the property, I believe that the Appellant had
that interest as supported by the documentary evidence. Exhibit A-6, the Preliminary
Service Agreement – which according to Mrs. Nowak was the only service
agreement – refers to the Appellant agreeing to purchase the lot on Mr.
Selwent’s behalf and supervising and assisting with all stages of the building
process. This clearly identifies the Appellant as the builder of the
residential complex although for the purposes of the Service Agreement, the
Appellant is referred to as a contractor. According to the several pieces of
correspondence at Exhibit A-7, the Appellant was required to authorize the
direct transfer of title in 3135 to Mr. Selwent. The land developer, in its
correspondence to solicitor David Block, encloses the skip transfer of title
and references the written authorization by the Appellant for this transfer to
occur. The developer also imposes several trust conditions on this transfer to
Mr. Selwent, one of which was that the transfer document could not be used
until “… Stan Wire’s share of the City of Calgary 2002 Property Taxes …” be
forwarded. All of this implies that all parties concerned with this transfer
believed that the Appellant had an “interest” in 3135 that required its written
consent before title could be transferred.
[71] In summary, the Appellant was a builder pursuant to subsection 123(1)
of the ETA and therefore the Appellant is entitled to the NHR in respect
to 3135 that had been assigned to it by the purchaser, Mr. Selwent. In
addition, I accept the Appellant’s evidence respecting the amount of $761.36,
which the Respondent claimed that the Appellant failed to report. On
cross-examination, Mrs. Nowak stated that she always reported the actual GST
paid and not generally the tax because some small contractors and suppliers for
various reasons did not charge GST.
Property 1169:
[72] Although the Minister did not assess a FMV difference in respect to
1169, the Respondent submits that the Appellant provided its services to build
1169 and that the Nowaks received goods and/or services on which GST should
have been paid. The Appellant has been assessed therefore for unremitted GST.
Because the Appellant and the Nowaks are not dealing at arm’s length, section
155 of the ETA is triggered to deem any supplies by the Appellant to the
Nowaks to be made at FMV, for which tax is to be remitted.
[73] The Nowaks submit that the Appellant was not involved in the
construction process of 1169 and did not claim ITCs.
[74] The evidence supports that the Nowaks used the Appellant as a conduit
through which they dealt with the suppliers. Exhibit R-2 makes this clear. In
particular cheques 0159, 0169, and 0174 of this exhibit substantiate that the
Appellant was in fact involved in the construction process of 1169. What must
be addressed therefore is whether the Appellant’s involvement constituted a
“supply” pursuant to the ETA and in particular did the Appellant render
a service to the Nowaks.
[75] The Appellant set the Nowaks up with the suppliers and completed
transactions on their behalf. The Appellant’s involvement could be compared to
the service performed by a placement agency where clients are put in touch with
prospective employers. Because of the breadth of the scope of the definition of
“service” pursuant to subsection 123(1), I think this involvement is a service
and therefore a taxable supply.
[76] In terms of valuing this service, the only evidence adduced of the
Appellant’s involvement was the cheques contained at Exhibit R-2. A reasonable
value of this service would seem to be the Appellant’s normal management fee,
that is 10 to 15%, in proportion to the amount of these cheques. In addition,
the Appellant produced no evidence to counter the Minister’s assumption that
the Appellant provided a builder’s warranty on 1169. This is also a service
which the Appellant provided for which it should have charged and collected
tax. However, there was no evidence adduced to enable me to attach a value to
this service.
Section 280 ETA Penalties:
[77] Gross negligence penalties were assessed in accordance with the former
penalty provision – section 280 of the ETA. This appeal is largely
valuation driven and as a result varying opinions may exist without a precise
resolution being produced. Bell J. in Marall Homes Ltd. v. The Queen, [1995] G.S.T.C. 70,
stated:
… This is a valuation case where
difference of opinion is expected. To levy a penalty in a valuation case is, in
my opinion, inappropriate unless the taxpayer’s initial filing was demonstrably
wrong and made without any attempt to determine market value. …
[78] The evidence supports that the Appellant made inquiries respecting the
FMV of the properties. The Appellant also charged itself amounts which were
similar to amounts it charged third party customers. In these circumstances, I
do not believe that penalties are warranted.
[79] The appeals are therefore allowed to reflect the following:
Income Tax Issues:
(1) Property 160 was transferred by the Appellant to the
Nowaks at the correct FMV, as assigned by the Appellant, of $266,276.00.
Therefore there are no additional amounts to be included in the Appellant’s
income.
(2) The Appellant, having never acquired property 3139,
cannot dispose of it thereby rendering the FMV issue moot.
(3) The Nowaks’
testimony, respecting the amount of $761.36, which the Respondent asserts was
not reported by the Appellant, provided a satisfactory explanation for this
difference.
GST Issues:
(1) Based on my conclusion that property 160 was
transferred at its FMV, the Appellant will be entitled to the NHR as assigned
by the Nowaks.
(2) There was no under-reporting of GST because the
underlying value of 160 used in the Appellant’s calculation was accurate.
(3) Property 3139 was purchased as a primary place of
residence as defined in the ETA and therefore the Nowaks will be
entitled to the NHR with the result that the assignment to the Appellant has been
validly made.
(4) In respect to property 3135, based on my finding that
the Appellant was a builder pursuant to subsection 123(1) of the ETA,
the Appellant will be entitled to the NHR assigned to it by the Purchaser.
(5) The Nowaks’ testimony, respecting the amount of
$761.36, which the Respondent asserts was not reported by the Appellant,
provided a satisfactory explanation for this difference.
(5) In respect to property 1169, the Appellant
provided a service in assisting the Nowaks with this construction and therefore
the value of this service shall be the Appellant’s usual management fee 15% in
proportion to the amount of the cheques at Exhibit R-2: $294.00, $1,401.05 and
$2,461.76.
Penalties:
(1) Penalties shall be deleted.
[80] There shall be no order as to costs.
Signed at Ottawa, Ontario, this 23rd day of October 2009.
Campbell J.
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