Citation: 2008 TCC 540
Date: 20081104
Docket: 2008-1249(GST)I
BETWEEN:
GREGORY L. NIKEL,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
AMENDED REASONS FOR JUDGMENT
Jorré
J.
The Issue
[1]
The Appellant bought a property, a
condominium,
in a resort complex at Cap Tremblant in Mont-Tremblant, Québec.
[2]
The issue to be determined is
whether there is a change in use of the property and, if so, what is the
quantum of the change.
[3]
More specifically, the issue is
how to measure the proportion of business use and of personal use of the condo during
the periods in issue ― the reporting periods from May 30, 2003 to
December 31, 2005.
[4]
If there is a change of use
exceeding 10%, there will be a deemed supply of the property with a resulting
liability for GST (Goods and Services Tax) to the extent of the reduction in
commercial use of the property.
The Facts
[5]
The Appellant bought the condo on
June 13, 2003 for $241,500.
[6]
At the time of acquisition, the
intention of the Appellant was that substantially all of the use the condo was
to be used for the purpose of renting it in the course of a commercial
activity. The Appellant claimed and received an input tax credit of $16,905, an
amount equal to the GST paid on acquisition of the condo.
[7]
The complex in which the condo is
situated is operated as a resort that is open year-round, 24 hours a day
offering accommodation both to tourists and to persons wishing to hold
meetings. The complex is known since 2005 as “Wyndham Cap Tremblant”.
[8]
The facilities include an Italian
restaurant, conference facilities that can accommodate over 200 people, two
golf simulators, three tennis courts, swimming pools and spa facilities. One of
the swimming pools is open year-round.
[9]
The Appellant entered into two
successive agreements with Tremblant Sunstar Properties and, after April 2005,
Cap Tremblant Mountain Resorts Inc., a Wyndham co-franchisee. Tremblant Sunstar
or Cap Tremblant (hereinafter the “Operator”), rented, operated and managed the
Appellant’s condo when the Appellant was not using the unit.
[10]
Under the agreements, the Operator
takes care of marketing, advertising, reservations, reception and customer
services, establishing rental rates, condo housekeeping and linen services
(except when the condo is occupied by the owner); the Operator also carries out
repairs and replacements required due to wear and tear. As of the start of the
second agreement, Wyndham Cap Tremblant and its condos were listed on the
Wyndham reservation system.
[11]
The Appellant’s responsibilities
include: providing furnishings; paying the costs of repair and maintenance of the
condo and of furnishings as well as of replacing furnishings when needed;
providing basic phone service and basic cable television; providing insurance (including
$2 million personal liability insurance, rental interruption insurance and fire
and contents insurance); providing for landscaping and snow removal as well as
paying for spring and fall deep cleaning.
[12]
Under the agreements, the Operator
keeps 45% or 48% of “net rental income”. The “net rental income” is equal to
gross rental income less any agent commissions, promotional discounts or
royalties paid by the owner to Intersite Real Estate Development Corporation.
From the 55% or 52% he receives, the Appellant must cover all of his costs.
[13]
From April 3, 2005, the effective
date of the agreement with Cap Tremblant Mountain Resorts, royalties paid to
Wyndham and credit card fees are also deducted from gross rental income in
determining “net rental income”. It is also provided in the agreement that the
Appellant will pay all utilities.
(The agreement with Sunstar does not explicitly say who pays for utilities.)
[14]
The agreements provide that the
owner may reserve up to 36 days a year and may not reserve the condo if it
has already been reserved by a customer.
[15]
It is not entirely clear what
happens if the owner were to stay more than 36 nights. The agreement with
Sunstar provides, in effect, that if an owner were to stay beyond a reservation
for an extra night beyond the 36th night, the owner would pay the Operator
the prevailing daily room rate.
The agreement
with Cap Tremblant says nothing on this question.
[16]
One further provision in the
agreement with Sunstar is clause 4m). It requires the Operator to maintain
reception services 24 hours a day, except for week days when the
occupation rate of the condos managed by the Operator is less than 20%.
[17]
Usage of the Appellant’s condo is
set out in the three tables below:
2003 Usage (in days)
|
|
Total
|
Personal
|
Maintenance
|
Rented
|
Not Used
|
|
|
|
|
|
|
|
|
January
|
0
|
0
|
0
|
0
|
0
|
|
February
|
0
|
0
|
0
|
0
|
0
|
|
March
|
0
|
0
|
0
|
0
|
0
|
|
April
|
0
|
0
|
0
|
0
|
0
|
|
May
|
0
|
0
|
0
|
0
|
0
|
|
June
|
18
|
0
|
1
|
2
|
15
|
|
July
|
31
|
16
|
1
|
9
|
5
|
|
August
|
31
|
0
|
0
|
15
|
16
|
|
September
|
30
|
0
|
0
|
7
|
23
|
|
October
|
31
|
0
|
0
|
8
|
23
|
|
November
|
30
|
0
|
0
|
3
|
27
|
|
December
|
31
|
0
|
0
|
9
|
22
|
|
|
|
|
|
|
|
|
|
202
|
16
|
2
|
53
|
131
|
2004
Usage (in days)
|
|
Total
|
Personal
|
Maintenance
|
Rented
|
Not Used
|
|
|
|
|
|
|
|
|
January
|
31
|
0
|
0
|
8
|
23
|
|
February
|
29
|
0
|
0
|
13
|
16
|
|
March
|
31
|
0
|
0
|
17
|
14
|
|
April
|
31
|
6
|
0
|
0
|
25
|
|
May
|
30
|
0
|
0
|
2
|
28
|
|
June
|
30
|
5
|
0
|
0
|
25
|
|
July
|
31
|
22
|
0
|
0
|
9
|
|
August
|
31
|
0
|
0
|
12
|
19
|
|
September
|
30
|
0
|
0
|
6
|
24
|
|
October
|
31
|
0
|
0
|
6
|
25
|
|
November
|
30
|
0
|
0
|
3
|
27
|
|
December
|
31
|
0
|
0
|
8
|
23
|
|
|
|
|
|
|
|
|
|
366
|
33
|
0
|
75
|
258
|
2005 Usage (in days)
|
|
Total
|
Personal
|
Maintenance
|
Rented
|
Not Used
|
|
|
|
|
|
|
|
|
January
|
31
|
0
|
0
|
12
|
19
|
|
February
|
28
|
0
|
0
|
15
|
13
|
|
March
|
31
|
0
|
0
|
14
|
17
|
|
April
|
31
|
0
|
0
|
0
|
31
|
|
May
|
30
|
2
|
0
|
0
|
28
|
|
June
|
30
|
0
|
0
|
2
|
28
|
|
July
|
31
|
21
|
0
|
1
|
9
|
|
August
|
31
|
0
|
0
|
16
|
15
|
|
September
|
30
|
0
|
0
|
7
|
23
|
|
October
|
31
|
0
|
0
|
2
|
29
|
|
November
|
30
|
0
|
0
|
3
|
27
|
|
December
|
31
|
0
|
0
|
2
|
29
|
|
|
|
|
|
|
|
|
|
365
|
23
|
0
|
74
|
268
|
There was no evidence as to the Appellant’s revenues
from the rentals or output tax collected on the rentals.
[18]
During the period in issue, the
occupancy rate for the condo when it was available for rent was low:
|
Year
|
Approximate Occupancy Rate
|
|
|
|
|
2003 (about 6.5 months)
|
29%
|
|
2004
|
23%
|
|
2005
|
22%
|
[19]
If one excludes June 2003, where
the Appellant only owned the condo for 18 days, as well as the month of
July during the three years, a month where the Appellant used the condo for 16,
22 and 21 days respectively, there are 27 remaining months.
[20]
During those 27 months, there
were only three months during which the Appellant used the condo ― for six days, five days and two days, respectively.
In 11 of those 27 months the condo was either not rented or rented
for three days or less; put another way during 11 of those 27 months the condo
was rented 10% or less of the time.
[21]
The parties provided me with four
charts.
First was a chart showing the monthly total number of nights a condo was
occupied in the years ending April 30, 2006, 2007 and 2008. The first year
shown has nine months overlapping with the last nine months covered by the
assessment in this appeal. During that first year ending April 30, 2006,
the month of highest occupancy is July with 1,903 nights when a condo was
occupied in the complex.
[22]
The lowest month in that same year
is November when there were only 227 nights when a condo was occupied. We
do not know the number of condos in the complex at that time although the
evidence is that there either are now or there will eventually be
400 units.
[23]
The second chart, for the same
three years, shows the occupancy rate and is reproduced below. It shows the
same strong seasonality as the first chart. July and August have the best
occupancy ― the highest occupancy rate being about 60% in August
2006.
November and April have particularly low occupancy and the ski season appears
to be quite variable.
[24]
The third chart shows occupancy by
calendar year rather than by fiscal year. The fourth chart shows the monthly
revenue for the same three fiscal years as the first and second chart. Again,
there is strong seasonality with November and April being very low in Revenue
terms in all years. The peak month is December 2006 ― presumably because of strong revenue in the
Christmas/New Year season.
[25]
The key points that come out of
these charts are:
a) the very
strong seasonality with very low occupancy and revenue potential in certain
months. In the year with the best revenues shown on the fourth chart ― after the period in issue ― the best six months represent around three quarters
of the revenue while the three worst months represent around 6% of the revenue;
b) the
relatively low overall occupancy.
One should note that only the first nine months out of
the 36 months shown in the first, second and third charts overlap with the
period under appeal.
Analysis
[26]
The Appellant takes the position
that the appropriate measure of personal as opposed to business use is simply
the ratio of days of personal use to days available for rent. Using this method
the Appellant says that personal use has never exceeded 10%.
[27]
The Respondent has assessed on the
basis that it is more reasonable to use the ratio of actual days of personal
use to actual days of rental.
[28]
Subsection 141.01(5) in Part IX of
the Excise Tax Act (the GST) states:
Method of determining extent of use, etc.
(5) The methods used by a person in a fiscal year to
determine
. . .
(b) the extent to which the consumption or use of
properties or services is for the purpose of making taxable supplies for
consideration or for other purposes,
shall be fair and reasonable and shall be used consistently
by the person throughout the year.
[Emphasis added.]
The key question is whether the
Appellant’s method is “fair and reasonable”.
[29]
In Magog (City of) v. Canada,
2001 FCA 210, Noël J.A., speaking for the Court, sets out that the role of the
trial judge with respect to subsection 141.05(1) of the GST is to
determine whether the method used by the taxpayer was fair and reasonable.
There may be more than one fair and reasonable method and it is not the role of
the trial judge to choose the best method.
[30]
There is no question that the
Appellant’s condo is rented under an arrangement where there may be some
revenue year-round. The complex is open 365 days a year and the facilities,
including the meeting rooms, are designed to try to obtain customers
year-round.
[31]
If the Appellant made no use of
the condo there is no doubt that the use would be 100% in a commercial
activity.
[32]
Starting from that perspective, it
at first seems startling to suggest that withdrawing the condo from the market
for 33 days of the 2004 year in order to use it personally (about 9% of the
year) could result in a reduction of use in the rental activity to about 71%,
as computed
by the Minister, rather than 91% as argued by the Appellant.
[33]
On the other hand, considering the
low actual occupancy, the very high seasonality in spite of efforts to attract
a year-round clientele, I have reservations in accepting that one should simply
allocate all days the condo is rented or available for rent to the rental
activity, the commercial activity.
[34]
The best way I can explain these
reservations is as follows. The value of the condo is a function of a number of
factors that will influence the demand to rent the unit:
a) the
size and layout of the condo ― enabling it to
accommodate a certain number of persons ― as
well as certain other features affecting the inherent use that can be made of
it ― for example the presence or absence of kitchen
facilities;
b) its
location in a resort complex with certain facilities and in a resort area, Mont-Tremblant,
that offers a number of activities and services;
c) the
time of year.
[35]
The evidence here shows very
clearly that potential occupancy and potential revenue vary quite a bit at
different times of the year. For example, in the second chart at tab 5 of
Exhibit I-2 the ratio of the occupancy rate in the best month to the occupancy
rate in the worst month in each of the three years is of the order of 5 or 6 to
1. The revenue appears to be more variable than that.
[36]
If the condo were divided up in
time with ownership sold separately for each month of the year, the price would
vary quite substantially for different months. For example, given the relative
demand there is no question that persons buying every July or every August in
perpetuity would pay more than someone buying every November or April.
[37]
The Appellant’s primary use of the
condo is in July. It is clear that this July usage reduces the revenue
potential for the property more than in an average month and much more than in
a very low month such as November. While this is somewhat offset by limited use
in April of one year and May of another ―
both months of low demand ― the
Appellant’s method in no way takes account of this and appears to significantly
understate the personal use in relation to its impact on rental revenue.
[38]
However, it is not apparent to me
that the Minister’s approach is any more appropriate ― particularly given that the condo is professionally
managed, open year‑round and given that the Appellant does incur some
expenses he would not incur if the condo were not available for rent. Put
another way it does not appear to recognize that the condo is used in the
rental activity when the Appellant is not using the condo. The method also does
not take into account the fact that any hotel type operation will have a
certain level of vacancies. Finally I note that the Minister’s method could
produce surprising results if one considers that someone always used the condo
for the same four weeks every summer would have a different proportion of
personal use every year depending on the varying number of rentals from year to
year.
[39]
Neither party’s method seems
appropriate. In theory if one could determine the proper relative allocation of
the price of the condo over the different days of the year then the personal
use would be the sum of the prices of the price of each day of personal use divided
by the total value of the property for the year.
[40]
Such an approach, while having
theoretical merit, is impractical. It is hard to imagine how taxpayers could
comply or the Minister could administer this.
[41]
The question remains whether the
Appellant’s method is a fair and reasonable method. It is appropriate to take
into account practical considerations, specifically that methods used must be
relatively straightforward for the taxpayer to comply with and the Minister to
administer.
[42]
Given that it is not apparent that
there is a practical allocation method that gives a more reasonable allocation, given that the complex is
professionally managed, that the condo is available for rent whenever the
Appellant is not using it, that there are facilities in the complex aimed at
obtaining year-round customers, and given the expenditures the Appellant incurs
to keep the condo on the market during the year, notwithstanding that there are
serious weaknesses in the Appellant’s method,
I find that it is a fair and reasonable method.
[43]
Given my conclusion there is no
change in use of 10% or more. As a result of the operation of section 197 of
the GST, there is no deemed supply pursuant to subsection 207(2) of the GST
and no resulting output tax.
[44]
I hasted to add that in computing
personal use, one must take into account not only days of personal use but also
any days where the owner has kept the condo off the rental market by reserving
it or otherwise.
[45]
The factual circumstances in the
other cases cited to me are different from those in this case.
Conclusion
[46]
As a result, the appeal will be
allowed, without costs, and the matter is referred back to the Minister for
reconsideration and reassessment on the basis that the net tax assessed should
not have been increased by $5,172.93.
[47]
I wish to thank Mr. Fortin
and Mr. Morand for the organized and efficient way in which the case was
presented.
Signed at Ottawa, Canada, this 4th
day of November 2008.
"Gaston Jorré"
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