Sarai v. The Queen, docket 2001-1212-GST-I (Informal Procedure)

Date: 20010910

Docket: 2001-1212-GST-I

BETWEEN:

INDERBIR (ANOY) SARAI,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasonsfor Judgment

Beaubier, J.T.C.C.

[1]            This appeal pursuant to the Informal Procedure was heard at Nanaimo, British Columbia, on August 23, 2001. The Appellant was the only witness.

[2]            Paragraphs 9 to 13 inclusive of the Reply of the Notice of Appeal read:

9.              By Notice of Assessment numbered 00000000408, dated June 12, 2000, the Minister of National Revenue (the "Minister") assessed the Appellant and his partner, Mr. Indra Narayan Singh for unreported GST in the amount of $21,042.00 plus penalty of $3,084.53 and interest of $2,402.66.

10.            The Appellant filed a Notice of Objection on July 5, 2000.

11.            By Notice of Decision issued on January 17, 2001, the Minister confirmed the assessment.

12.            In so assessing the Appellant, the Minister relied on the following assumptions of fact:

                a)              the facts stated and admitted above;

b)             Messrs. Inderbir Singh Sarai and Indra Narayan Singh registered under Part IX of the Excise Tax Act R.S.C. c. E-15 (the "Act"), as amended, on March 1, 1996, and assigned a Goods and Services Tax ("GST") registration number 894223734;

c)              Messrs. Inderbir Singh Sarai and Indra Narayan Singh r               egistered as a partnership;

d)             the GST registration form indicated the Partnership's major activity as construction;

e)              the Partnership was required to file annual GST returns, and make annual remittances;

f)              the Partnership filed a GST return for the reporting period from January 1, 1997 to December 31, 1997, reporting Nil GST and no input tax credits ("ITC");

g)             the Partnership did not file a GST return for the reporting period from March 1, 1996 to December 31, 1996;

h)             the Partnership did not pay to the Vendors, and did not remit to the Minister, any GST on the acquisition of Property;

i)               the Partnership constructed or paid someone to construct a single unit residential complex having a civic address of 8511 Glenwood Close, Burnaby, (the "House") on the Property;

j)               on or about April 11, 1997, the Partnership sold the partially completed House to Mr. Indra Narayan Singh and his spouse Ms. K. Kushma Wati Singh (the "Purchasers);

k)              Mr. Singh paid the Partnership $289,000.00 for the Property;

l)               at all material times, the Partnership was involved in the construction industry;

m)             the Partnership made a taxable supply of real property respecting the Property;

n)             at all material times, the Partnership was required to charge and collect GST on the supply of real property;

o)             at all material times, the Partnership was not dealing at arm's length with the Purchasers;

p)             the Partnership was required to collect GST on the fair market value of the Property;

q)             the fair market value of the House and Property at the time of disposition was not less than $300,600;

r)              the Partnership was required to collect and remit GST of $21,042.00;

s)              the Partnership did not report and remit any GST; and

t)              the Partnership failed to provide sufficient documentation to substantiate any eligible ITCs the period under appeal.

B.             ISSUES TO BE DECIDED

13.            The issue is whether the Partnership was required to collect and remit GST on the sale of the House.

[3]            Assumptions 12 b), c), d), e), f), g), h), l), n), p), s) and t) were not refuted.

[4]            The land which formed part of the property in question was transferred from their respective corporations to the Appellant and Indra Singh on March 21, 1996 (Exhibit R-1, Tab 2). The two men had formed a partnership to construct and sell this house at a profit and planned to build the house on the lot ("Lot 1") which was situated in Burnaby, British Columbia. This is the partnership's only enterprise. They described the consideration as "$1.00 and other valuable consideration" and the market value as $190,000 in the transfer. No goods and services tax ("GST") was paid or remitted at the time of this transfer because they expected to do that when the property was sold.

[5]            The partners began to build a house on the property in 1996. However, the relationship of the two partners deteriorated. There is no written partnership agreement in evidence, so it is a common law partnership governed by the laws of British Columbia where both partners resided and the partnership carried on business.

[6]            On April 11, 1997, the partnership was in financial trouble. In particular, neither the partnership nor the Appellant had the money to continue the construction.

[7]            On that day the partner transferred the lot and the footings they had constructed on it to Indra Singh and his wife Kushma Singh who proposed to complete the construction of the house on Lot 1 and sell it at a profit. The consideration was "$1.00 natural love and affection" and the market value shown on the transfer was $270,000 (Exhibit R-1, Tab 3).

[8]            The value of $300,600 described for the 1997 transfer is based on the assessment value for 1997 determined by the British Columbia Assessment Authority (Exhibit R-1, Tab 4). However, this value is presumably that at the end of 1997 (and for the whole of 1997) and not on April 11, 1997, when the transfer occurred, and only the footings had been completed.

[9]            After Singhs acquired Lot 1 on April 11, 1997 they proceeded to pay the debts previously incurred respecting the property.

[10]          On November 27, 1997 Indra Singh and the Appellant signed an agreement in which Indra Singh agreed to pay out the mortgage on Lot 1, in consideration for which the Appellant granted Indra Singh a mortgage for $50,000 on some other property in Surrey, British Columbia. Thereupon Indra Singh further agreed to accept such liability, "including GST", arising from the construction of a home on Lot 1 (Exhibit R-1, Tab 5).

[11]          After construction was completed, the Singhs moved in the house on Lot 1.

[12]          The Appellant's counsel submitted two arguments:

1.              The original partnership was continued by Mr. and Mrs. Singh and the Appellant withdrew from it as Mrs. Singh entered it so that it carried on the business.

               

2.              The GST was not due until the Singhs moved into the house completed on Lot 1.

With respect to argument 1, paragraph 35(1)(b) of the Partnership Act, RSBC 1996, Chap. 348, reads:

35(1) ... a partnership is dissolved ...

(b)            if entered into for a single adventure or undertaking, by the termination of that adventure or undertaking...

That was so in this case, where the two partners' sole business purpose was to build and sell a house for a profit on Lot 1. Thus when Lot 1 was transferred, the undertaking terminated. Appellant's counsel further argued that Mr. and Mrs. Singh, the transferees constituted a continuation of the Singh-Sarai partnership. But there is no partnership agreement in evidence indicating that this might have occurred so this proposition is not accepted due to the lack of satisfactory evidence. Therefore, their partnership terminated April 11, 1997. With respect to argument 2, and pursuant to section 133 of the Excise Tax Act, the supply for the Singh-Sarai partnership occurred as between the transferor and the transferee, and so become taxable, when the transfer was executed, as assumed, on April 11, 1997.

[13]          The Respondent's counsel argued that when Lot 1 was sold to Singhs there was a taxable supply. For the foregoing reason, that argument is accepted.

[14]          Respondent's counsel argued that the November 27, 1997 agreement was after the fact. However, the evidence is that the Appellant and Indra Singh were no longer on friendly terms and the Court believes that because it is clear that their partnership lost money. Moreover, each bargained for something as set out on November 27, 1997, when they broke up on April 11, 1997.

[15]          Thus the consideration to the Appellant on April 11, 1997 was the result of the termination of the partnership on that date and the division of assets between the parties at that time in what had become a losing venture. In these circumstances the November 27, 1997 agreement merely puts into writing what the deal between the two partners was on April 11, 1997 and it goes to the question of value.

[16]          Unless otherwise specified, each partner is entitled to one-half of the partnership's profits or losses. Because the partners terminated an unhappy, losing relationship, the Court believes that the market value agreed to by them on April 11, 1997 as $270,000 is correct. The Appellant was entitled to one-half of that gross figure, namely $135,000. From that gross of $135,000, the Appellant must subtract liabilities of $50,000 based upon the terms of the November 27, 1997 agreement, since, by its terms the $50,000 appears to represent his one-half share of the partnership's liabilities as at April 11, 1997, which leaves the balance as his share of the value of the property transferred as $85,000.

[17]          Reversing this calculation back to the partnership of the Appellant and Indra Singh, which on the evidence lost money, indicates that the actual price paid to the partnership by Indra and Kushma Singh was a gross of $270,000 and a net of $170,000. However, there is no evidence as to whether the partnership's indebtedness of $100,000 was partly or wholly assumed when the partnership acquired Lot 1 or if it was incurred thereafter or, for that matter, by the previous corporate owners.

[18]          The appeal is referred to the Minister of National Revenue for reconsideration and reassessment in accordance with these reasons.

Signed at Saskatoon, Saskatchewan, this 10^th day of September, 2001.

"D.W. Beaubier"

J.T.C.C.

COURT FILE NO.:                                                 2001-1212(GST)I                   

STYLE OF CAUSE:                                               Inderbir (Anoy) Sarai v. The Queen

PLACE OF HEARING:                                         Nanaimo, British Columbia

DATE OF HEARING:                                           August 23, 2001

REASONS FOR JUDGMENT BY:      The Honourable Judge D. W. Beaubier

DATE OF JUDGMENT:                                       September 10, 2001

APPEARANCES:

Counsel for the Appellant: Robert Scoffield

Counsel for the Respondent:              Nadine Taylor

COUNSEL OF RECORD:

For the Appellant:                

Name:                               

Firm:                 

For the Respondent:                             Morris Rosenberg

                                                                                Deputy Attorney General of Canada

                                                                                                Ottawa, Canada

2001-1212(GST)I

BETWEEN:

INDERBIR (ANOY) SARAI,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeal heard on August 23, 2001 at Nanaimo, British Columbia,

by the Honourable Judge D.W. Beaubier

Appearances

Counsel for the Appellant:          Robert Scoffield

Counsel for the Respondent:      Nadine Taylor

JUDGMENT

          The appeal from the assessment for goods and services tax made under the Excise Tax Act, notice of which is dated June 12, 2000 and bears number 00000000408 is allowed and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the attached Reasons for Judgment.

Signed at Saskatoon, Saskatchewan, this 10^th day of September, 2001.

"D.W. Beaubier"

J.T.C.C.