Citation: 2007TCC46
Date: 20070123
Docket: 2006-2208(GST)I
BETWEEN:
LORI FOOTE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Angers J.
[1] This is an appeal from an assessment under Part IX of the Excise Tax Act (Act) dated October 8, 2004. The Minister assessed the appellant for amounts of $11,167.68 in net tax, $468.03 in interest and $1,317.16 in penalties in respect of goods and services tax/harmonized sales tax (GST/HST) returns.
[2] The appellant was living with her parents when she decided to build herself a home. With a view to having help in paying off the cost of the new home, she bought a parcel of land on which the construction of rental units was permitted. She eventually built a three-storey residential complex (complex) in which each storey contained one residential unit, all identical in size. The bottom two units of the complex were the rental units, with the appellant occupying the third-storey unit. A staircase was built for access to the second and third storeys which, according to the appellant, made the second- and the top-floor units larger. She agrees though that she does not occupy more than 50% of the complex.
[3] The appellant testified that the construction of the complex was centered on her unit in that the purpose of the complex was for her to have a place to reside. The appellant therefore invested more money in her own unit and all aspects of the construction were tailored to her unit and to her needs. The rental income is used to pay the mortgage on the complex.
[4] The complex was completed on April 25, 2002, and the appellant occupied her unit the following month. As for the tenants of the two rental units, they moved in about a month after the appellant.
[5] The appellant applied for a new housing rebate, which was refused. It was then that she found out about the self-supply rule. She was assessed on the basis of that rule. She admitted to not having consulted an accountant or a lawyer with respect to any tax consequences regarding the building of the complex. The amount assessed is not in issue, except as regards the penalty.
[6] The issue is whether under the self-supply rule the appellant is required to collect and remit GST/HST on the supply of the complex, and if she is, should a penalty be assessed?
[7] The appellant argues that she is not a builder as defined in subsection 123(1) of the Act and that, if she is, the self-supply rule would still not apply, for she satisfies the four requirements to be met under subsection 191(5) of the Act in order for the rule not to apply, and in particular, the requirement that the complex be used primarily as a place of residence for her. The respondent argues that the appellant was in fact the builder of a multiple-unit residential complex that was not used primarily as a place of residence by the appellant.
[8] The relevant provisions of the Act are reproduced below.
123(1) Definitions - In section 121, this Part and Schedules V to X,
"builder" of a residential complex or of an addition to a multiple unit residential complex means a person who
(a) ata time when the person has an interest in the real property on which the complex is situated, carries on or engages another person to carry on for the person
(i) in the case of an addition to a multiple unit residential complex, the construction of the addition to the multiple unit residential complex,
(ii) in the case of a residential condominium unit, the construction of the condominium complex in which the unit is situated, and
(iii) in any other case, the construction or substantial renovation of the complex,
(b) acquires an interest in the complex at a time when
(i) in the case of an addition to a multiple unit residential complex, the addition is under construction, and
(ii) in any other case, the complex is under construction or substantial renovation,
(c) in the case of a mobile home or floating home, makes a supply of the home before the home has been used or occupied by any individual as a place of residence,
(d) acquires an interest in the complex
(i) in the case of a condominium complex or residential condominium unit, at a time when the complex is not registered as a condominium, or
(ii) in any case, before it has been occupied by an individual as a place of residence or lodging,
for the primary purpose of
(iii) making one or more supplies of the complex or parts thereof or interests therein by way of sale, or
(iv) making one or more supplies of the complex or parts thereof by way of lease, licence or similar arrangement to persons other than to individuals who are acquiring the complex or parts otherwise than in the course of a business or an adventure or concern in the nature of trade, or
(e) in any case, is deemed under subsection 190(1) to be a builder of the complex,
but does not include
(f) an individual described by paragraph (a), (b) or (d) who
(i) carries on the construction or substantial renovation,
(ii) engages another person to carry on the construction or substantial renovation for the individual, or
(iii) acquires the complex or interest in it,
otherwise than in the course of a business or an adventure or concern in the nature of trade,
(g) an individual described in paragraph (c) who makes a supply of the mobile home or floating home otherwise than in the course of a business or an adventure or concern in the nature of trade, or
(h) a person described in any of paragraphs (a) to (c) whose only interest in the complex is a right to purchase the complex or an interest in it from a builder of the complex;
"business" includes a profession, calling, trade, manufacture or undertaking of any kind whatever, whether the activity or undertaking is engaged in for profit, and any activity engaged in on a regular or continuous basis that involves the supply of property by way of lease, licence or similar arrangement, but does not include an office or employment;
191(3) Self-supply of multiple unit residential complex - For the purposes of this Part, where
(a) the construction or substantial renovation of a multiple unit residential complex is substantially completed,
(b) the builder of the complex
(i) gives, to a particular person who is not a purchaser under an agreement of purchase and sale of the complex, possession of any residential unit in the complex under a lease, licence or similar arrangement entered into for the purpose of the occupancy of the unit by an individual as a place of residence,
(i.1) gives possession of any residential unit in the complex to a particular person under an agreement for
(A) the supply by way of sale of the building or part thereof forming part of the complex, and
(B) the supply by way of lease of the land forming part of the complex or the supply of such a lease by way of assignment, or
(ii) where the builder is an individual, occupies any residential unit in the complex as a place of residence, and
(c) the builder, the particular person or an individual who is a tenant or licensee of the particular person is the first individual to occupy a residential unit in the complex as a place of residence after substantial completion of the construction or renovation,
the builder shall be deemed
(d) to have made and received, at the later of the time the construction or substantial renovation is substantially completed and the time possession of the unit is so given to the particular person or the unit is so occupied by the builder, a taxable supply by way of sale of the complex, and
(e) to have paid as a recipient and to have collected as a supplier, at the later of those times, tax in respect of the supply calculated on the fair market value of the complex at the later of those times.
. . .
(5) Exception for personal use - Subsections (1) to (4) do not apply to a builder of a residential complex or an addition to a residential complex where
(a) the builder is an individual;
(b) at any time after the construction or renovation of the complex or addition is substantially completed, the complex is used primarily as a place of residence for the individual, an individual related to the individual or a former spouse or common-law partner of the individual;
(c) the complex is not used primarily for any other purpose between the time the construction or renovation is substantially completed and that time; and
(d) the individual has not claimed an input tax credit in respect of the acquisition of or an improvement to the complex.
[9] The "builder" of a residential complex (which includes a multiple-unit residential complex) is a person who, at a time when that person has an interest in real property on which the complex is situated, carries on the construction of the complex. To be excluded from being a builder, a person would need to carry on the construction otherwise than in the course of a business or an adventure or concern in the nature of trade. In the present case, the question is whether the appellant was involved in a business or an adventure or concern in the nature of trade. Mr. Justice Rouleau in Happy Valley Farms Ltd. v. The Queen, [1986] 2 C.T.C. 259 (FCTD), has set out the criteria to be used in determining such a question. The appellant has built a three-unit multiple-unit residential complex of which two units were for the purpose of earning income. The nature of the property and the motive for which the complex was built are sufficient for me to conclude that the appellant was a builder within the meaning of the definition of that term in subsection 123(1). The definition of business also covers the activity engaged in here. No evidence was adduced that the appellant was not the one carrying on the construction.
[10] Is the appellant exempt from the application of subsection 191(3) by virtue of subsection 191(5)? It is not disputed by the respondent that three of the four conditions have been met and the case thus falls to be decided on the basis of whether the complex is used primarily as a place of residence for the appellant. There is no doubt that the purpose of building a three-storey residential complex with one residential unit on each storey was, for the appellant, primarily to provide herself with a place of residence, but one cannot ignore the fact that the complex is used to generate income from the other two units. All three units are of the same size, each occupying a storey. The appellant uses a crawl space and the staircase, which is in part shared by the second-storey occupant. By her own admission, she uses less than 50% of the entire complex.
[11] The question of the meaning of "primarily" has been addressed by the courts in previous decisions. In Mid-West Feed Ltd. v. M.N.R., 87 DTC 394, Chief Judge Couture (as he then was) of the Tax Court of Canada held that the world "primarily" means in excess of 50% of the total use of the asset. Mr. Justice Pratte of the Federal Court of Appeal wrote in Mother's Pizza Parlour (London) Ltd. v. The Queen, 88 DTC 6397, that when different parts of the same building are permanently used for what are considered to be two different purposes, the most important factor in determining the purpose for which the building is primarily used is the amount of space in the building that is used for each one of those two purposes.
[12] In the present case, two units of the three-storey complex are used for the purpose of earning rental income. As much as I can appreciate the fact that, for the appellant, the object of the project was to build herself a residence, I cannot ignore the other use of the complex. A qualitative assessment may nevertheless be relevant. The Federal Court of Appeal in Burger King Restaurants of Canada Inc. v. The Queen, 2000 DTC 6061, said that the qualitative evidence must be sufficiently persuasive and must be capable of being analysed in such a way as to cause the court to displace the result of the quantitative space test. Although, the appellant may have invested more money in her own unit, the evidence is insufficient to allow this court to analyse such a possibility and conclude that the qualitative evidence displaces the result of the quantitative space test. I therefore conclude that the complex was not primarily used as a place of residence for the appellant and that the self-supply rule under subsection 191(3) does apply in the present case.
[13] On the issue regarding the penalty, no evidence of due diligence was adduced by the appellant. In fact, the appellant admitted that she took no steps to enquire as to her legal obligations under the Act with regard to the construction of the complex. Therefore, no steps were taken to prevent failure to remit the tax. A person relying on the defence of due diligence must show that a reasonable person would have made the same mistake and that he himself misunderstood the rules. See Corp. de l'École Polytechnique c. R., [2004] G.S.T.C. 39.
[14] For these reasons, the appeal is dismissed.
Signed at Ottawa, Canada, this 23rd day of January 2007.
François Angers
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