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Citation: 2005TCC726
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Date: 20051206
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Docket: 2004-3987(GST)I
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BETWEEN:
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MUNICIPALITY OF CRABTREE,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
[OFFICIAL
ENGLISH TRANSLATION]
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REASONS FOR AMENDED JUDGMENT
Bédard J.
[1] On
May 31, 2002, the municipality
of Crabtree ("the Appellant")
acquired vacant land for $181,700 plus $12,719 in goods and services tax (GST).
[2] On
June 7, 2002, the Appellant entered into an agricultural lease, which is
attached to these Reasons as Schedule A. The lease was for a term of
one year and was renewable automatically for successive one‑year
periods unless notice was given to the contrary. The annual consideration was
$1,000. The Appellant claimed an input tax credit (ITC) of 100% of the GST it had paid when it acquired the land, that is,
$12,719. The Respondent, through the Quebec Minister of Revenue, instead
granted the Appellant a partial rebate (57.14%) of the GST it had paid when it
acquired the land.
[3] The
Appellant is appealing under the informal procedure from the assessment granting
it a partial rebate (57.14%) rather than an ITC of 100% of the $12,719 in GST
paid when the land was acquired.
Issue
[4] The
issue is whether the Appellant is entitled, in relation to the land, to an ITC in the amount of $12,719 ($181,700 x 7%) or a
partial GST rebate of $7,267.64 ($181,700 x 7% x 57.14%), that is,
whether the Appellant acquired the land for consumption, use or supply in the
course of its commercial activities or for making an exempt supply. To decide
this issue, I will have to characterize the agreement of June 7, 2002. I
will therefore have to determine whether that agreement is a lease or whether
it instead grants a right of use, as the Appellant submits.
The Law
[5] To
fully appreciate what is at issue, it is necessary to understand various parts
of the GST scheme and the way they apply to the facts of this case.
[6] The
GST is a tax imposed under the Excise Tax Act ("ETA"). It
is payable by the recipient
when a taxable supply is
made. In this case, the Appellant had to pay the GST when it acquired the
vacant land.
[7] A
person whose business is to make taxable supplies may apply for a rebate of the
GST the person has paid for property and services acquired for the person's
business.
That rebate is an "input tax credit" (ITC).
[8] To
be entitled to ITCs, a registrant must have acquired or imported property or a
service for consumption or supply in the course of the registrant's commercial
activities.
Subsection 123(1) of the ETA defines the term
"commercial activity" as follows:
"commercial
activity" of a person means
. . .
(c) the making of a supply (other than an
exempt supply) by the person of real property of the person, including anything
done by the person in the course of or in connection with the making of the supply;
Thus, the supply
of real property is a supply made in the course of a commercial activity,
provided that it is not an exempt supply.
[9] The
terms "real property" and "exempt supply" are defined as
follows in subsection 123(1):
"real property" includes
(a) in respect of property in the Province of Quebec, immovable property and every lease
thereof,
. . .
"exempt supply" means a supply included in
Schedule V;
[10] To focus the debate here, it should be added that the Appellant is a
municipality within the meaning of subsection 123(1) of the ETA and that a municipality is a public service body
within the meaning of the same subsection.
[11] Finally, it is necessary to refer to sections 20 and 25 of
Part VI of Schedule V to the ETA, which, for the relevant period,
listed exempt and non‑exempt supplies made by a municipality.
Section 20 provided, inter alia, that the supplies referred to
in paragraphs (a) to (i) were exempt while those referred to
in paragraphs (j) to (l) were not. Paragraph 20(l),
which is particularly important for the purposes of this case, provided that a
supply of a right to use property of the municipality was not an exempt
supply. Section 25 provided, inter alia, that a supply of real
property made by a public service body (including a municipality) was an exempt
supply, but this did not include certain supplies set out in paragraphs (a)
to (j). Paragraph 25(f), which is particularly important for
the purposes of this case, was worded as follows:
real property (other than short‑term
accommodation) made by way of
(i) lease, where the period throughout which
continuous possession or use of the property is provided under the lease is
less than one month,
(ii) a licence,
where the supply is made in the course of a business
carried on by the body;
Appellant's arguments
[12] During her oral argument, counsel for the Appellant basically
reiterated the arguments set out in paragraph 7 of the Notice of Appeal,
which read as follows:
[TRANSLATION]
a. The contract
entered into on June 7, 2002 is not a lease but a right of use under articles 1172
to 1176 of the Civil Code of Québec;
b. As provided
for in article 1427 of the Civil Code of Québec, each clause of the
contract must be interpreted in light of the others so that each is given the
meaning derived from the contract as a whole;
c. If the
contract is analysed in accordance with article 1427 of the Civil Code of
Québec, it can be concluded that it has the characteristics of a right of
use, since it provides that:
i. the lessee
does not have full enjoyment of the leased property and is entitled to use the
premises only for agricultural purposes;
ii. the lessee
must pay $1,000 a year;
iii. that $1,000
a year is not rent but an amount paid by the lessee for the right to cut the
grass on the lots and use it for the lessee's own agricultural purposes;
iv. the lessee
appropriates the fruits produced by the property, namely grass in this case;
v. the lessee is
responsible for the expenses incurred to produce the fruits and revenues, since
it is responsible for the expenses that must be incurred to cut the grass;
vi. the lessee undertakes
to maintain $1,000,000 in risk and liability insurance;
d. The
objections officer adhered to the literal meaning of the words and did not
interpret the contract in accordance with the parties' intention as provided
for in article 1425 of the Civil Code of Québec;
e. The parties'
intention was to enter into a contract providing for a right of use;
f. The supply
of a right of use is a taxable supply under paragraph 20(l) of
Part VI of Schedule V to the Excise Tax Act (GST) and under
the definition of "commercial activity" in subsection 123(1) of
the same Act;
g. Accordingly,
the Appellant is entitled to full input tax credits for the supply of lots G,
H, I and J;
h. The Appellant
disagrees with the objections officer's assertion that paragraph 25(f)
of Part VI of Schedule V to the Excise Tax Act takes priority
over the application of paragraph 20(l) of Part VI of
Schedule V to the same Act;
i. The
Ministère du revenu du Québec recognized that all the parts of lots described
in the contract, Exhibit R‑1, except lots G, H, I and J, were
purchased by the Appellant for use in the course of its commercial activities;
j. All the lots
described in the contract, Exhibit R‑1, including lots G, H, I
and J, were acquired from a contractor by the Appellant under a single contract
with a single objective, namely residential development, as can be seen from a
copy of the extract from the minutes of a regular session of the Appellant's
council held on January 14, 2002, Exhibit R‑6.
Analysis
[13] First of all, I want to emphasize that, where a contract is clear, the
judge's role is to apply it rather than interpret it. However, if there is
ambiguity, the rules of interpretation will exclude the literal meaning to make
way for the real intention of the contracting parties at the time the contract
was formed – contracting parties who, I stress, did not come to testify in
this case. I would add that a difference of opinion on the interpretation of a
contract does not necessarily mean that there is ambiguity. In the instant
case, it seems very clear that the agreement of June 7, 2002 is a lease.
Indeed, the terms [translation]
"lease", "lessor", "lessee", "leased premises"
and "rent" are used extensively in the agreement. The agreement also
contains the basic elements of a contract of lease, namely the obligation to
provide enjoyment of property, the obligation to pay rent and, from a certain
standpoint, the term of the contract. Although the agreement limits enjoyment
to agricultural purposes as well as entry onto the leased property for farming
work, the lessee always had enjoyment of property within the meaning of the Civil
Code of Québec. There is no provision of public order that prohibits a
lessor under a commercial lease from limiting enjoyment of the leased property.
In other words, the lessor in this case could limit enjoyment of the leased
property without the agreement of June 7, 2002
ceasing to be a contract of lease. The other clauses of the agreement of
June 7, 2002 are the usual clauses found in agricultural leases. It should
be noted that the parties to a commercial lease may agree to almost anything
that is not contrary to provisions of public order. Anything that is contrary
to public order is simply deemed unwritten. Here, the three essential elements
of a lease of property are found in the agreement of June 7, 2002, and this is all that matters. The right
of use is, of course, an institution comparable to a contract of lease in some
respects. The agreement of June 7, 2002 does, of course, have some
characteristics of a contract of use. Where an agreement has the essential
characteristics of a contract of lease and is described by the contracting parties
as a lease, does the fact that it has certain characteristics of a right of use
mean that it cannot be characterized as a contract of lease? I would add that
the agreement of June 7,
2002 does not include the
essential element of the right of use, which is the right to take the fruits
and revenues of property to the extent of the needs of the holder of the right
and the persons living with the holder or the holder's dependants.
[14] Since the agreement of June 7, 2002 is, in my opinion, a lease
for a term of more than one month and thus an exempt supply, the Appellant
was not entitled to ITCs. It will be recalled that a registrant is not entitled
to ITCs unless, inter alia, the registrant has acquired property in
the course of commercial activities and that a supply of real property (which
in Quebec includes a lease of immovable property) is a supply made in the
course of a commercial activity, provided that it is
not an exempt supply. The
opening portion of section 25 of Part VI of Schedule V clearly
provides that a lease is an exempt supply for a municipality. Certainly,
paragraph 20(l) of Part VI seems at first glance to contradict
the opening portion of section 25 of Part VI of Schedule V,
since it provides that a supply of a right to use property of the municipality
is not an exempt supply. However, this is not the case. A statute must be
interpreted in a manner that avoids, to the extent possible, inconsistencies or
contradictions between its components or parts. A clear, more specific
provision must therefore take precedence over a general provision. In my
opinion, the provision in paragraph 20(l) is more general than the
one in section 25.
[15] For these reasons, the appeal is dismissed.
Signed at Ottawa, Canada,
this 6th day of December 2005.
Bédard
J.
Translation
certified true
on this 5th day of
May 2008.
Brian McCordick,
Translator
Schedule A
[TRANSLATION]
LEASE OF LOTS
P-475-1 AND P-476 FOR FARMING PURPOSES
LEASE ENTERED
INTO BY
THE MUNICIPALITY OF CRABTREE, A LAWFULLY CONSTITUTED
CORPORATION HAVING ITS PRINCIPAL PLACE OF BUSINESS IN THE MUNICIPALITY OF
CRABTREE AT 111 4th AVENUE, REPRESENTED BY ITS MAYOR, DENIS LAPORTE, AND ITS SECRETARY‑TREASURER, SYLVIE MALO, BOTH
OF WHOM ARE AUTHORIZED FOR THE PURPOSES HEREOF, HEREINAFTER REFERRED TO AS
"THE LESSOR",
AND
ANDRÉ THIBODEAU,
RESIDING AT 1268 RANG DES CONTINUATIONS IN SAINT‑JACQUES,
HEREINAFTER REFERRED TO AS "THE LESSEE".
SPACE LEASED
The Lessor hereby leases to the Lessee a parcel of land having an area
of 22.34 ACRES entered on the assessment roll in force; the said land
being in the municipality of Crabtree and bearing lot numbers P‑475‑1 and P‑476.
As the whole stands at present, with and subject to all active and
passive servitudes attached to the said property, the Lessee being familiar
with the leased premises and their current condition.
CHARGES AND CONDITIONS
This lease is granted subject to the following charges, clauses and
conditions, which the Lessee undertakes and obligates himself to fulfil and comply
with:
(a) To pay rent of $1,000 a year for the said leased
premises.
(b) To use the leased premises only for agricultural purposes.
(c) To maintain
$1,000,000 in risk and liability insurance and provide the Lessee with proof of
that insurance.
(d) Not to use the
leased premises for purposes that may seem reprehensible to the Lessor.
(e) Not to sublease
the premises in whole or in part without the Lessor's written consent.
(f) Not to erect any
building, structure or other thing on the leased premises unless it is approved
by the Lessor.
(g) To comply with
all municipal by‑laws, health regulations and provincial regulations,
including but not limited to environmental by‑laws and regulations.
(h) To indemnify the
Lessor and hold it harmless from all losses, expenses or damages it may incur
and from all claims, losses, expenses, actions or other proceedings brought or
introduced by anyone that are attributable in any way to or result in any way
from the existence of this lease.
(i) The Lessee shall
go onto the above‑mentioned lots only to do farming work.
(j) If any work
whatsoever must be done, such as access culverts or other work, it shall be
done entirely at your expense, and you shall notify the Lessor before beginning
such work.
TERM AND RENEWAL
It is agreed that this lease shall be for a term of one (1) year from
January 1, 2002 to December 31,
2002.
Subsequently, this lease shall be renewed automatically for successive
periods of one (1) year from January 1 to December 31 of each year
unless either party wishes to terminate it; in such case, it shall give the
other party two (2) months' notice by November 1 of each year at the
latest.
PAYMENT
The rent shall be $1,000 a year and shall be payable on
December 1 of each year.
SIGNATURES
In witness whereof, the parties have signed at Crabtree on this 7th day
of the month of June 2002.
MUNICIPALITY OF CRABTREE LESSEE
_________________________________ ________________
Denis Laporte, Mayor André
Thibodeau
_________________________________
Sylvie Malo, Secretary-Treasurer
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