Citation: 2006TCC357
Date: 20060622
Docket: 2000-3494(GST)G
2000-3496(GST)G
2000-3497(GST)G
BETWEEN:
BONIK INC., SERBCAN INC. and
THE NIKOLIC CHILDREN TRUST,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
McArthur J.
[1] While these appeals under the Excise Tax Act, for various periods, were heard on common evidence, the only link among the three Appellants was that they were all controlled and managed by Bozidar ("Bob") Nikolic, and his wife, Svetlana Nikolic. Each of these appeals involves different construction projects and different relevant facts. As such, I will deal with each appeal separately.
[2] Some general comments may be helpful. The form of Notice of Appeal prescribed by the Tax Court of Canada Rules (General Procedure)[1] requires that the Appellants relate the material facts relied on, specify the issues to be decided, refer to the statutory provisions relied on, and set forth the reasons upon which they intend to rely. The pleadings of the Appellants provided limited facts and reasons, and failed to adequately specify the issues or the statutory provisions relied upon. In fact, the issues did not become clear until the closing submissions of the Respondent.
[3] Further, section 55 of the Rules clearly states how amendments to pleadings are to be made:
55(1) An amendment to a pleading shall be made by filing a fresh copy of the original pleading as amended, bearing the date of the amendment and of the original pleading, and the title of the pleading, preceded by the word "amended".
(2) An amendment to a pleading shall be underlined so as to distinguish the amended wording from the original.
The Appellants filed Amended Notices of Appeal in the three appeals, yet none was drafted in accordance with subsection 55(2), making them difficult to follow.
[4] The Respondent's pleadings, while helpful in determining the issues, contained errors with respect to the periods reassessed, and merely copied sentences from one appeal to the other. This included a whole paragraph in the Reply to the Notice of Appeal for Serbcan Inc., which clearly did not belong. More care should have been taken by the Respondent in the preparation of its pleadings.
[5] With respect to documents filed by both parties, there was a substantial amount of duplication in the materials. It would have been helpful to have had a joint book of documents for those common documents, which were each filed separately. To the Appellants, in particular, it was disappointing to see several copies of the same document in different exhibits before the Court. These appeals were already confusing, without added disorder.
[6] For reasons which will become apparent, it would have been helpful to have heard from a witness for the Respondent who could have explained how the calculations were made, and the reasoning behind them. This was especially important with respect to the date of substantial completion of Building 'C' in the appeal of The Nikolic Children Trust. As such, I have drawn an adverse inference against the Respondent where I could not justify the calculations of its auditors, without clarification.
[7] Mr. Nikolic struck me as a forthright man, although somewhat self-serving and unyielding, who was doing his best to understand and apply a complicated and new statute. He hired several professionals along the way to advise him, but at the same time, received what appeared to be contradictory advice from different representatives of Revenue Canada. I find that although the Appellants failed to file the requisite documents properly, completely, and on time, it was not as a result of willfulness, gross negligence, or false statements. Particularly, at the outset of the GST legislation, very few understood its complexity, including those retained by the Minister of National Revenue to administer it.
[8] At the commencement of the hearing of the appeals, the Respondent raised an issue with respect to the jurisdiction of this Court to hear these three appeals. This same issue was raised in the case of Bokrica Inc. v. Canada,[2] which was heard immediately before these appeals, and counsel for the Respondent referred to his submissions in that appeal. As in Bokrica, I find that Mr. Nikolic was a de facto director of both Serbcan and Bonik Inc. during the relevant periods. As such he enjoys all the rights, duties and liabilities of a director, including the authority to institute and litigate the two appeals. In addition, as the trustee for The Nikolic Children Trust, his authority to institute and litigate that appeal is evident.
[9] Mr. Nikolic, who took over the affairs of his late father, including responsibility for the corporate Appellants, along with his wife, testified on behalf of the Appellants. The Respondent did not call any witnesses. As mentioned above, I will deal with these three appeals separately.
bonik inc. v. the queen (2000-3494(gst)g)
[10] Bonik appeals the reassessment of the Minister of National Revenue under the Excise Tax Act,[3] in the amount of $32,477.08, for the period of April 1, 1994 to June 30, 1996. The issues are: (a) whether Bonik is entitled to a Federal Sales Tax ("FST") rebate in the amount of $421,727; (b) whether Bonik is entitled to the ITCs it claimed in respect of its construction costs at the Galaxy Tower project in the amount of $154,694, pursuant to subsection 169(1) of the Act, and (c) whether Bonik is liable for penalties pursuant to section 285.
[11] In reassessing Bonik, the Minister made the following assumptions of fact:
(a) the Appellant was a registrant under Part IX of the Excise Tax Act (the "Act") affective January 1, 1991;
(b) at all relevant times, the Appellant had a business year end of December 31 for GST purposes;
(c) at all relevant times, the Appellant was required to file GST returns on a quarterly basis;
(d) the Appellant's main business is the construction of new residential houses;
(e) during the period 1987 to 1990 the Appellant constructed a 77 unit residential complex ("Galaxy Tower");
(f) the majority of the units were sold and the preclosing completed in 1990;
(g) the purchasers initiated a court action in 1990 alleging deficiencies in the building of Galaxy Tower;
(h) by Interlocutory Order dated July 4, 1991 the Honourable Mr. Justice S.D. Loukidelis ordered that the sales agreements be terminated and that Galaxy Tower was to be vacated until further work could be completed to meet the building code;
(i) pursuant to subsection 191(2) of the Act, the Appellant is deemed to have made a taxable supply when the sales agreements were terminated and thereafter Galaxy Tower was a "used residential complex" and therefore an exempt activity;
(j) the Appellant is not entitled to claim investment [sic] tax credits in respect to an exempt activity.
At the commencement of the hearing, Bonik abandoned its appeal in respect of the FST rebate.
[12] In making its claim for ITCs in the amount of $154,694, Bonik submitted five volumes to the Court, including hundreds of pages of documents yet, neither Mr. Nikolic, in his testimony, nor counsel for the Appellant, in his submissions, referred to any one page that summarized how this amount was calculated. Subsection 169(4)[4] of the Act outlines the documentation required from a registrant claiming an ITC. It states:
169(4) A registrant may not claim an input tax credit for a reporting period unless, before filing the return in which the credit is claimed,
(a) the registrant has obtained sufficient evidence in such form containing such information as will enable the amount of the input tax credit to be determined, including any such information as may be prescribed; ...
The prescribed information required under paragraph 169(4)(a) can be found in section 3 of the Input Tax Credit Information (GST/HST) Regulations:[5]
3 For the purposes of paragraph 169(4)(a) of the Act, the following information is prescribed information:
(a) where the total amount paid or payable shown on the supporting documentation in respect of the supply or, if the supporting documentation is in respect of more than one supply, the supplies, is less than $30,
(i) the name of the supplier or the intermediary in respect of the supply, or the name under which the supplier or the intermediary does business,
(ii) where an invoice is issued in respect of the supply or the supplies, the date of the invoice,
(iii) where an invoice is not issued in respect of the supply or the supplies, the date on which there is tax paid or payable in respect thereof, and
(iv) the total amount paid or payable for all of the supplies;
(b) where the total amount paid or payable shown on the supporting documentation in respect of the supply or, if the supporting documentation is in respect of more than one supply, the supplies, is $30 or more and less than $150,
(i) the name of the supplier or the intermediary in respect of the supply, or the name under which the supplier or the intermediary does business, and the registration number assigned under subsection 241(1) of the Act to the supplier or the intermediary, as the case may be,
(ii) the information set out in subparagraphs (a)(ii) to (iv),
(iii) where the amount paid or payable for the supply or the supplies does not include the amount of tax paid or payable in respect thereof,
(A) the amount of tax paid or payable in respect of each supply or in respect of all of the supplies, or
(B) where provincial sales tax is payable in respect of each taxable supply that is not a zero-rated supply and is not payable in respect of any exempt supply or zero-rated supply,
(I) the total of the tax paid or payable under Division II of Part IX of the Act and the provincial sales tax paid or payable in respect of each taxable supply, and a statement to the effect that the total in respect of each taxable supply includes the tax paid or payable under that Division, or
(II) the total of the tax paid or payable under Division II of Part IX of the Act and the provincial sales tax paid or payable in respect of all taxable supplies, and a statement to the effect that the total includes the tax paid or payable under that Division,
(iv) where the amount paid or payable for the supply or the supplies includes the amount of tax paid or payable in respect thereof and one or more supplies are taxable supplies that are not zero-rated supplies,
(A) a statement to the effect that tax is included in the amount paid or payable for each taxable supply,
(B) the total (referred to in this paragraph as the "total tax rate") of the rates at which tax was paid or payable in respect of each of the taxable supplies that is not a zero-rated supply, and
(C) the amount paid or payable for each such supply or the total amount paid or payable for all such supplies to which the same total tax rate applies, and
(v) where the status of two or more supplies is different, an indication of the status of each taxable supply that is not a zero-rated supply; and
(c) where the total amount paid or payable shown on the supporting documentation in respect of the supply or, if the supporting documentation is in respect of more than one supply, the supplies, is $150 or more,
(i) the information set out in paragraphs (a) and (b),
(ii) the recipient's name, the name under which the recipient does business or the name of the recipient's duly authorized agent or representative,
(iii) the terms of payment, and
(iv) a description of each supply sufficient to identify it.
The only helpful documents before me can be found at Tabs 6, 21 and 23 of Exhibit A-6, but none of these documents satisfy the requirements in paragraph 169(4)(a) of the Act, or section 3 of the Regulations (collectively referred to as the "reporting requirements"). I am left with counsel's submission that the claim for ITCs was simply 7% of the $2,210,000 cost to complete the project, which were incurred after Justice Loukidelis ordered the sales agreements terminated and Galaxy Tower vacated. This is simply not enough.
[13] Additionally, Bonik entered into evidence a GST return[6] dated March 30, 1998 for the reporting period of October 1, 1997 to December 31, 1997, wherein it claimed ITCs in the amount of $363,487.17, and a net refund in the amount of $153,487.17. Counsel for the Respondent submitted that this return represents Bonik's claim for the ITCs at issue in this appeal, and that because it is based on a reporting period that is not before this Court, the appeal should be dismissed on that ground alone. I agree with that conclusion. Bonik clearly claimed the alleged ITCs at issue in this appeal after the period before me. Had it produced any invoices or documentation that satisfied the reporting requirements, and were for expenses incurred during the relevant reporting period, or during such time before the period as allowed by subsection 225(4), Bonik may have been eligible for those ITCs, provided of course that it was not a used residential complex. Unfortunately for Bonik, it failed to do so.
[14] Although based on my reasoning above, it is unnecessary for me to address the issue of whether Galaxy Tower was a used residential complex, I will make some comments nonetheless, as counsel for both parties made submissions on this point. The applicable provisions of the Act are subsections 191(1) and (2):
191(1) For the purposes of this Part, where
(a) the construction or substantial renovation of a residential complex that is a single unit residential complex or a residential condominium unit is substantially completed,
(b) the builder of the complex
(i) gives possession of the complex to a particular person under a lease, license or similar arrangement (other than an arrangement, under or arising as a consequence of an agreement of purchase and sale of the complex, for the possession or occupancy of the complex until ownership of the complex is transferred to the purchaser under the agreement) entered into for the purpose of its occupancy by an individual as a place of residence,
(ii) gives possession of the complex to a particular person under an agreement for
(A) the supply by way of sale of the building or part thereof in which the residential unit forming part of the complex is located, 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,
other than an agreement for the supply of a mobile home and a site for the home in a residential trailer park, or
(iii) where the builder is an individual, occupies 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 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 complex is so given to the particular person or the complex 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.
191(2) For the purposes of this Part, where
(a) the construction or substantial renovation of a residential condominium unit is substantially completed,
(b) the builder of the unit gives possession of the unit to a particular person who is the purchaser under an agreement of purchase and sale of the unit at a time when the condominium complex in which the unit is situated is not registered as a condominium,
(c) the particular person or an individual who is a tenant or licensee of the particular person is the first individual to occupy the unit as a place of residence after substantial completion of the construction or renovation, and
(d) the agreement of purchase and sale is at any time terminated (otherwise than by performance of the agreement) and another agreement of purchase and sale of the unit between the builder and the particular person is not entered into at that time,
the builder shall be deemed
(e) to have made and received, at the time the agreement is terminated, a taxable supply by way of sale of the unit, and
(f) except where possession of the unit was transferred to the particular person before 1991, 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 fair market value of the unit at that time.
[15] In this case, the parties have agreed that the agreements to purchase the condominium units in Galaxy Tower were entered into prior to 1991, that the complex was 75% complete as of January 1, 1991, and that 52 of the 77 units were occupied in 1989 and 1990, before the implementation of the GST regime. The Respondent has submitted that because the purchase and sale agreements were terminated in July 1991, Bonik is deemed to have made a taxable supply under subsection 191(2) of the Act and, therefore, is not eligible for ITCs incurred after that time. Bonik meanwhile, argues that the building was not substantially complete when the agreements were terminated, as evidenced by the fact that over $2 million was spent to complete the building after July 1991.
[16] For GST to be collectible under either subsection 191(1) or (2) of the Act, the unit in question must be substantially complete. Based on the testimony of Mr. Nikolic, the admissions of the parties, and the fact that in July 1991, Justice Loukidelis ordered that Galaxy Tower was to be vacated until further work could be completed to meet the building code, I find that the Galaxy Towerunits were not substantially complete at that time. Rather, over $2 million of further construction was done to the property over approximately three years, and the building was finally completed sometime in 1994. I accept the testimony of Mr. Nikolic that Galaxy Tower was turned into a rental property in 1994, under the name Starbury Tower, and that the units were not sold, but rather rented out beginning in July 1994.
[17] For these reasons, I find that Galaxy Tower was not a used residential complex after 1991, but rather was still under construction. I cannot, however, grant Bonik's ITCs in the amount of $154,694, as it both failed to meet the reporting requirements, and claimed those ITCs in a future reporting period.
[18] Finally, with respect to the section 285 penalties imposed on the GST which Bonik had collected on the sale to Mr. Wadden, I find once again that although Bonik failed to remit the GST it collected, and that its records appear to be disorganized, this does not meet the level of gross negligence or willfulness, required for the imposition of gross negligence penalties. Mr. Nikolic did not remit the GST because he felt that Bonik was owed ITCs and an FST rebate that more then offset the $3,850 of GST it failed to remit. Although I did not grant Bonik those ITCs, I did so only because it failed to meet the reporting requirements and filed its GST return in a future period, not because it did not incur those ITCs. For these reasons, I feel that the interest and penalties mandated by section 280 of the Act are sufficient. Further, the Respondent did not set out the calculation and amount of section 285 penalties it was claiming.
[19] The Bonik appeal is allowed only to waive the penalties under section 285, and the reassessment is referred back to the Minister for reconsideration and reassessment in accordance with this basis.
serbcan inc. v. the queen (2000-3496(gst)g)
[20] Serbcan appeals the reassessment of the Minister under the Excise Tax Act in the amount of $9,508.26, for the period of January 1, 1994, to March 31, 1996. The issues are whether Serbcan is entitled to claim a bad debt deduction of $4,830 with respect to the sale of the Paquette Lot, pursuant to subsection 231(1) of the Act; and whether Serbcan is entitled to the input tax credits it claimed in respect of construction costs at the Mount Atlee subdivision, in the amount of $14,309.06, and at Building 'B' of Serbian Village, in the amount of $77,896.42, both pursuant to subsection 169(1) of the Act.
[21] In reassessing Serbcan, the Minister made the following assumptions:
(a) the Appellant was a registrant under Part IX of the Excise Tax Act (the "Act") affective January 1, 1991;
(b) at all relevant times, the Appellant had a business year end of December 31 for GST purposes;
(c) at all relevant times, the Appellant was required to file and filed GST returns on a quarterly basis;
(d) the Appellant's main business is the construction of new residential houses and land development;
(e) in the period ending March 31, 1994 the Appellant sold Lot 27 in the Mount Atlee subdivision ("Lot 27") for which GST of $4,830 (the "Amount") was charged but not remitted to the Minister;
(f) the Appellant claims that the Amount was never collected from the sale of Lot 27;
(g) the Appellant has never established that the Amount is a bad debt by writing off the Amount in the books of account;
(h) the Appellant requested additional ITC with respect to the Mount Atlee subdivision resulting in that portion that could be substantiated being allowed by the Minister.
[22] Mr. Nikolic testified that Serbcan sold Lot 27 to Mr. Paquette, and that the proceeds of that sale were paid to Mr. Zito, who was acting as legal counsel for Serbcan. Mr. Nikolic further testified that those proceeds were used to discharge a mortgage on the property, but it is unclear whether the GST portion of the proceeds, specifically $4,830, was: (a) also used to discharge the mortgage; (b) used by Zito to pay any possible outstanding Serbcan accounts; or (c) stolen outright by Mr. Zito. While counsel for Serbcan submitted that Mr. Zito appropriated the funds, no evidence was tendered to substantiate that beyond Mr. Nikolic's testimony.
[23] The law is clear that once an agent receives the proceeds of a transaction, he or she is deemed to have received them on behalf of his or her principal. This is especially true in cases where the agent and principal are both disclosed. As such, Serbcan is deemed to have received the funds from Mr. Zito and is liable for the GST collected on the sale of Lot27. If Mr. Zito in fact misappropriated any part of those proceeds, Serbcan's remedy lies in taking legal action against Mr. Zito. It remains liable, however, for the GST collected on its behalf by Mr. Zito. There is no bad debt for Serbcan to write off.
[24] Even if I were to consider the $4,830 as a legitimate account receivable for Serbcan, it would still not be eligible for the bad debt reduction under subsection 231(1) which provides that the supplier can only claim a bad debt adjustment if it had initially reported, and remitted, the tax collectible in respect of the supply it now considers uncollectible, during the period in which it became collectible. In this appeal, the Appellant has not presented sufficient documentary evidence to show that it collected and remitted the tax for which it is now claiming a refund.
[25] In addition, for Serbcan to claim a bad debt adjustment it must have first taken "reasonable steps to determine if the debt was uncollectible and unrecoverable", as stated by Justice Hamlyn in Davies v. Canada.[7] This position was also adopted by Chief Justice Garon in Paquin v. Canada,[8] where he referred to Davies with approval, and further held:
... it was not established that the appellant had taken reasonable measures to attempt to collect the debt ... For the appellant's company, this debt was a substantial amount ... His simple statement that the debt in question was bad was not sufficient with regard to the provisions of section 231 of the Excise Tax Act. In fact, the appellant did absolutely nothing to collect the amount owing to him.
Serbcan has not presented any evidence that it made reasonable attempts to collect this alleged bad debt.
[26] The last requirement for a supplier to claim a bad debt adjustment is that the accounts receivable must be formally written off in the supplier's books and records as unrecoverable.[9] The only evidence presented by Serbcan that it had formally written off the debt was a letter from KPMG to Revenue Canada,[10] which does not meet the recording requirement for a bad debt adjustment. In addition, the letter was dated April 17, 1997, after the period being reassessed, and does not state when the debt was written off. For the above reasons, I find that Serbcan is not entitled to claim a bad debt deduction with respect to the $4,830 it claims was unrecoverable from Mr. Zito.
[27] With respect to the ITCs claimed by Serbcan in respect of the construction costs of Building 'B' of Serbian Village, the Appellant presented no documentary evidence to substantiate its claim that it incurred over $77,896.42 in ITCs. Serbcan has not met the requirements outlined in paragraph 169(4)(a) of the Act, and the documents to satisfy the reporting requirements of the Act and the Regulations.
[28] Further, when questioned about the ITCs of $77,896.42, Mr. Nikolic claimed that he did not know how that number was determined. Counsel for the Respondent meanwhile, pointed to a document submitted by Serbcan which established that the $77,896.42 it claimed actually represented the total of an alleged unpaid portion of an FST rebate, plus the penalties and interest charged to Serbcan for not initially self-assessing the building on time, as advised by Revenue Canada.[11] In conclusion, Serbcan's own documents and its counsel's submissions in rebuttal, lead me to conclude that the $77,896.42 claimed by Serbcan was not in fact related to any GST it may have paid on the construction of Building 'B'.
[29] Finally, based on the testimony of Mr. Nikolic, the documents before me, and the submissions of both counsel, Building 'B' was substantially completed in September 1991. At that point, therefore, there would have been a deemed self-supply under section 191 of the Act, and Serbcan would not be eligible for ITCs with respect to any expenses it incurred after that date. It is difficult to believe that over $1 million of work was completed on Building 'B' after it was substantially (90%) completed in 1991, especially when no receipts were presented to justify this claim.
[30] With respect to the ITCs claimed by Serbcan in respect of construction costs at Mount Atlee, the only documentary evidence before me can be found at Exhibit A-5, Tab 16, and Exhibit A-1, Tab 24, none of which was referred to by counsel for the Appellant. This evidence includes several invoices as well as a handwritten ledger that lists the expenses relating to Mount Atlee, including the amount paid in GST. This ledger, however, does not include the GST registration numbers of the respective suppliers, as required under subsection 169(4) of the Act, and section 3 of the Regulations, and only some of the invoices included were actually billed to Serbcan and included a GST registration number. After reviewing these documents, I conclude that Serbcan is eligible for ITC's on the GST it paid on the following invoices, provided that they have not been claimed in a previous period:
(a) City of Sudbury - $256.17;
(b) KPMG, Peat Marwick Thorne - $140.00; and
(c) KPMG, Peat Marwick Thorne - $297.50.[12]
[31] With respect to the section 285 penalties, I find that although the Appellant failed to remit the GST it collected, accurately and on time, and that its records appear to be disorganized, this does not rise to the level of gross negligence or willfulness required for the imposition of this penalty. The mandatory interest and penalties under section 280 of the Act are sufficient.
[32] The Serbcan appeal is allowed and the assessment referred back to the Minister for reconsideration and reassessment in accordance with the foregoing reasons.
The Nikolic Children Trust v. Canada(2000-3497(gst)g)
[33] The Trust appeals the reassessment of the Minister under the Excise Tax Act, in the amount of $307,780.54, for the period of January 1, 1993, to December 31, 1996. The issues are: a) the date of substantial completion of Building 'C'; and b) whether the Trust is entitled to the ITCs it claimed in respect of construction costs for Building 'C', in the amount of $39,056.42, pursuant to subsection 169(1) of the Act.
[34] In reassessing the Trust, the Minister made the following assumptions of fact:
(a) the Appellant was a registrant under Part IX of the Excise Tax Act (the "Act") affective January 1, 1993;
(b) at all relevant times, the Appellant had a business year end of December 31 for GST purposes;
(c) the Appellant's main business is to act as a trust account for minor children;
(d) on January 12, 1992 the ownership to a building under construction ("Building C") was transferred to the Appellant by a related company, Serbcan Inc.;
(e) Building C is a multiple unit residential complex;
(f) Building C consists of 100 units on 7 floors;
(g) occupancy of the units began in March, 1993 and by December 31, 1993, 69% of the units were occupied;
(h) 90% of the construction costs of Building C were incurred by December 31, 1993;
(i) the fair market value of Building C at December 31, 1993 was $2,749,000;
(j) the Appellant is deemed, pursuant to subsection 191(3) of the Act, to have made a taxable supply by way of sale of Building C at December 31, 1993;
(k) at the time of the deemed sale of Building C, December 31, 1993, and thereafter Building C was a "used residential complex" and therefore an exempt supply;
(l) the Appellant is not entitled to claim investment [sic] tax credits in respect to an exempt supply.
[35] The outcome of this appeal centers on the date of substantial completion of Building 'C'. Before I address that issue, however, I must address the applicability of the decision of the Federal Court of Appeal in Bruner v. R,[13] where the Court held that "a taxpayer is not entitled to challenge an assessment where the success of the appeal would either make no difference to the taxpayer's liability for tax entitlement to input tax credits or refunds, or would increase the taxpayer's liability for tax".
[36] The Respondent argued that even if the Trust was successful in its appeal, and the date of substantial completion of Building 'C' was in fact December 31, 1996, it would in turn be liable for the GST on the increased value of the building, specifically $71,967.70.[14] Counsel for the Respondent added that since this increase in GST liability would not be offset by the ITCs claimed by the Trust, this appeal should be dismissed pursuant to the Bruner decision.
[37] Counsel for the Trust meanwhile, took the position that a change in the date of substantial completion would reduce the Trust's liability for accruing penalties and interest, and that that amount should be taken into account in determining the applicability of the Bruner decision. I agree with this interpretation. Common sense would dictate that a reduction in penalties and interest is equivalent to a reduction in the tax liability of a taxpayer. Therefore, the issue is whether the taxpayer would be better off, and all figures should be taken into account in making that determination.
[38] Counsel for the Respondent further submitted, however, that this increase in GST liability would offset any savings for the Trust in interest and penalties, presuming that the ITCs it claimed were not granted. Counsel made this submission, without presenting any specific calculations, after consulting with someone who presumably was from the Canada Revenue Agency, yet he failed to have that person give evidence to support his calculations. This has left me in the unenviable position of attempting to calculate the different possible outcomes of this case, without any guidance from either party, to determine if the Bruner decision applies.
[39] Based on my own calculations,[15] I have estimated that if the Trust was successful in this appeal, its savings in interest and penalties would be approximately $79,858.33, which is clearly in excess of any increase in GST collectible. Since the Respondent failed to plead the relevant facts with respect to this issue however, it bore the burden of proof. To that end, counsel for the Respondent failed to provide any material to assist in making the proper calculations. As a result of my calculations, I find that if the Trust is successful in its appeal, it will decrease its overall tax liability, and as such, the Bruner decision does not apply.
[40] I now turn to the issue of substantial completion and the following relevant provisions of the Act:
191(3) 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.
[41] The Respondent alleges that Building 'C' was substantially completed, and as such, subject to a self-supply of GST pursuant to subsection 191(3) of the Act, on December 31, 1993, with a fair market value of $2,749,000. The Trust argues that the building was not substantially completed until December 31, 1996, with a fair market value of $3,777,110.
[42] The Respondent made an assumption of fact that Building 'C' was substantially complete on December 31, 1993. The Trust in turn, challenged that assumption through the testimony of Mr. Nikolic, who was a credible witness with respect to the costs and specifics of the construction of Building 'C'.
[43] While Mr. Nikolic may not have had a complete understanding of the Act and the application of GST, he appeared to know his business, and the costs of construction. He referred to documents that outlined the occupancy of Building 'C', as well as its costs, which included an estimate to complete the project. Those figures can be summarized as follows:
|
Time
|
Amount
|
% complete
|
|
Incurred to March 1993
|
$4,001,457
|
82.34%
|
|
Incurred to December 1993
|
$255,818
|
87.60%
|
|
Incurred to December 1994
|
$40,800
|
88.44%
|
|
Incurred to December 1995
|
$4,110
|
88.53%
|
|
January 1, 1996 to completion
|
$557,500
|
100.00%
|
|
Total Cost of Building 'C'
|
$4,859,685
|
|
[44] The estimated cost to complete Building 'C' was broken down by the Trust, including details with respect to the outstanding work. In providing those details, the Appellant successfully challenged the Respondent's assumption of fact, thus placing the burden on the Respondent to show how it calculated substantial, or 90% completion. The Respondent attempted to do so by specifying which of the outstanding items included in the Trust's estimate it considered to be allowable as expenses. A comparison of the estimated expenses to complete Building 'C', with those allowed by the Respondent, are summarized as follows:
|
|
|
Estimated by
|
Allowed by
|
|
Details
|
|
the Trust
|
Respondent
|
|
Blasting & Excavation
|
|
$9,000
|
NIL
|
|
Concrete Floor
|
13 @ 2,515
|
$32,695
|
$27,665*
|
|
Plumbing
|
13 @ 2,966
|
$38,558
|
$32,626*
|
|
Electrical
|
13 @ 2,754
|
$35,802
|
$30,294*
|
|
Heating
|
13 @ 2,235
|
$29,055
|
$24,585*
|
|
Insulation
|
13 @ 1,475
|
$19,175
|
$16,225*
|
|
Partitions
|
13 @ 1,378
|
$17,914
|
$15,158*
|
|
Drywall
|
13 @ 2,476
|
$32,188
|
$27,236*
|
|
Painting
|
13 @ 975
|
$12,675
|
$10,725*
|
|
Cabinetry
|
13 @ 2,125
|
$27,625
|
$23,375*
|
|
Finishing Work
|
13 @ 1,650
|
$21,450
|
$18,150*
|
|
Flooring
|
13 @ 2,224
|
$28,912
|
$24,464*
|
|
Exercise room
|
|
$15,200
|
NIL
|
|
Moisture protection
|
|
$54,500
|
$54,500
|
|
Fencing
|
|
$55,000
|
NIL
|
|
Metal railings
|
|
$22,000
|
NIL
|
|
Retaining walls
|
|
$76,200
|
$76,200
|
|
Park accessories
|
|
$20,000
|
NIL
|
|
Miscellaneous
|
|
$10,000
|
NIL
|
|
|
TOTAL
|
$557,949
|
$381,203
|
[45] The Respondent took the position that the cost to complete should be based on a complex containing 100 units as opposed to 102 units. That explains the reduced amounts above marked with an asterisk. Additionally, the Respondent appears to have disallowed the costs of those items that, in its opinion, were not relevant to the inhabitable nature of the apartment complex and ultimately peripheral to the purpose of the project. These are marked "NIL" above. As mentioned, the Respondent did not produce a witness to explain theses calculations however, resulting in an attempt to discern how the Minister determined the revised amounts.
[46] The effect of the disallowed amounts on the cost to complete Building 'C', and the resulting date of substantial completion, can be summarized as follows:
|
Time
|
Amount
|
% complete
|
|
Incurred to March 1993
|
$4,001,457
|
85.44%
|
|
Incurred to December 1993
|
$255,818
|
90.90%
|
|
Incurred to December 1994
|
$40,800
|
91.77%
|
|
Incurred to December 1995
|
$4,110
|
91.86%
|
|
January 1, 1996 to completion
|
$381,203
|
100.00%
|
|
Total Cost of Building 'C'
|
$4,683,388
|
|
Based on the amounts disallowed by the Minister therefore, the Respondent submitted that the date of substantial completion of Building 'C' was December 31, 1993.
[47] Based on the documents I referred to above, I find that the estimated cost of completion provided by the Appellant was actually for 100 units and not 102 units. According to Mr. Nikolic's letter to Syd Manley, the appraiser, dated February 24, 1998, and located at page 3 of Tab 18 of Exhibit A-5, there were 87 units completed as of the end of 1995, with 13 more to be completed after January 1, 1996. As for the amounts disallowed as peripheral to the project, I disagree, and find that they were relevant to the habitable nature of the complex as a whole. As such, their costs were improperly disallowed by the Minister when determining the estimated cost to complete.
[48] It is clear that Building 'C' was not substantially complete on December 31, 1993. The more difficult question is what was the actual date of substantial completion? Mr. Nikolic could not provide a specific date of substantial completion because he felt that the building was never substantially complete before National Mortgage Corporation repossessed the property sometime in 1998. At that time, there were still ten units to be completed. In testimony, Mr. Nikolic equated occupation with completion, which is not the correct way to determine substantial completion pursuant to the Act, yet it would be helpful in this specific case. It appears that Building 'C' was constructed on an as needed basis, and that units were not completed unless there was an occupant expressing an interest, at least with respect to the final units in the building.
[49] If I consider occupation, as did Mr. Niklolic, it becomes apparent that the building was 90% occupied at the end of 1995, based on 100 total units. My analysis does not end there, however, as other costs must be considered, including the exercise room, fencing, metal railings and other items disallowed by the Minister. Taking these items into consideration, and in conclusion, the testimony of Mr. Nikolic, the documents submitted on behalf of the Trust, specifically those at Tabs 13 and 44 of Exhibit A-2, Tabs 18 and 24 of Exhibit A-5, and Tab 19 of Exhibit R-2, and the fact that there was no clarification from the Respondent with respect to the calculations, I find that Building 'C' was substantially complete on December 31, 1996.
[50] With respect to the ITCs claimed by the Trust, presumably for costs incurred in the construction of Building 'C', like in the above appeals, the Trust has failed to meet the reporting requirements set out in subsection 169(4). Although the documents before me include handwritten ledgers, they do not include invoices or other documents to substantiate the Trust's claim for ITCs. The only invoice before the Court was from KPMG Peat Marwick Thorne, and as such I will allow the appeal, but only to grant the Trust an ITC for that invoice in the amount of $297.50, and to delete section 285 penalties.
[51] The Nikolic Children Trust appeal is therefore allowed and the assessment referred back to the Minister for reconsideration and reassessment in accordance with the foregoing reasons.
Signed at Ottawa, Canada, this 22nd day of June 2006.
"C.H. McArthur"
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