Mallow v. The Queen, docket 2000-4622-GST-I (Informal Procedure)

Date: 20010611

Docket: 2000-4622-GST-I

BETWEEN:

JOHN MALLOW,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasonsfor Judgment

Hamlyn, J.T.C.C.

FACTS

[1]            This is an appeal with respect to Notice of Reassessment numbered 116785285-11EU dated August 10, 2000 under Part IX of the Excise Tax Act (the "Act"). The appeal relates to purportedly under-reported net tax for the period from January 1, 1993 to March 31, 1999 (hereinafter the "assessment period").

[2]            John Mallow was, during the assessment period, a registrant for the purposes of the Act and operated an auto body and paint shop under the name "JM Auto Body N' Paint", located at S4 C1 R.R.#1, Crescent Valley, British Columbia (hereinafter the "property"). The Minister of National Revenue (the "Minister") assumed for the period from January 1, 1993 to December 31, 1996, the Appellant rented out a building located on the property. The rental building was not a residential complex or unit and was not used as a place of residence by the tenant. Rather, the tenant used it as a workshop. In filing his income tax returns for the 1993, 1994, 1995 and 1996 taxation years, the Appellant reported revenue totalling $40,000.00 in respect of the rental building. However, he did not remit any amount of GST with respect to this property.

[3]            It is the Minister's contention that the Appellant made a supply of real property by way of lease, licence or similar arrangement with respect to the rental property. The Minister thus contends that the amount of $40,000.00 included in the Appellant's income in respect of the rental building included GST of $2,616.82, which the Appellant failed to remit.

[4]            The Appellant argues that the supply of the rental building does not constitute a taxable supply. He submits in his Notice of Appeal "the transaction was a loan and although John Mallow's gain on the settlement of the loan is a taxable supply under section 80 of the Income Tax Act, the gain does not constitute a taxable supply".

SIGNIFICANT EVIDENCE

[5]            The Appellant maintains his accountant made a mistake to treat the $40,000.00 loan as rental revenue paid in advance on a four-year lease. He states that it was a loan from a friend, Dave Herr, who was severely injured in a motor vehicle accident and who had the funds from the accident settlement. He stated it was merely a "gentleman's agreement" and that he had been paying the loan back slowly and sporadically over several years and that the use by Dave Herr of the building was merely a personal incidental matter to the loan and not in any way in a commercial activity.

[6]            For four successive taxation years, 1993 to 1996 (Exhibits R-2, R-3, R-4, R-5 and R-6), the Appellant, in his T-1 returns, had as an explanatory note to his unaudited financial statements that the $40,000.00 loan was:

Deferred Revenue [which] represents rental revenue paid in advance on a four year lease agreement to lease a portion of the shop for a period of four years ending December, 1996. It will be allocated to income over this period at the rate of $833.34 per month including GST.

The Appellant signed at least one tax return (Exhibit R-2) certifying the contents therein as correct. Through the reassessment stage to the objection stage to his Notice of Appeal the Appellant repeatedly stated:

In March '93, John Mallow, the proprietor, entered into an agreement with Dave Herr to build him a shop for his personal use on land owned by the business for a period of four years for a contribution of $40,000. [Exhibit R-1, Notice of Appeal]

[7]            The Appellant did not call Dave Herr as a witness.

ISSUE

[8]            The issue to be determined is whether the Appellant under-reported GST collected by $2,616.82 in respect of a supply of real property.

ASSESSMENT OF THE EVIDENCE

[9]            When an appellant asserts to the Minister, for several years, one set of facts in several documents, including at least four years of T-1 forms and certifies the contents, and after the several stages of reassessment, objection and appeal, still asserts those same facts and then at trial asserts a different set of facts, the onus of proof, to say the least, is heavy. The Appellant's evidence at trial was not compelling and on a balance of probabilities did not dislodge the Minister's assumptions. Nor can I conclude the sporadic amounts of money paid to Dave Herr have been sufficiently linked on the evidence to the loan.

[10]          More particularly, the courts have recognized that estoppel applies in circumstances where a taxpayer makes a representation of fact to the Minister to induce a course of conduct by him and where an act or omission by the Minister results from the representation. In Canada (A.G.) v. Jencan Ltd., [1998] 1 F.C. 187, inter alia, the Federal Court of Appeal stated the following , at page 212:

I am of the view that, in an appropriate case, the Minister may rely upon the doctrine of estoppel by representation where a claimant induces the Minister to rely on a state of affairs which no longer exists, thereby causing the Minister to make a determination based on inaccurate information.

[11]          In the present appeal, the assessment was based on the representation. Had the Appellant not made this representation, the Minister's assessment would have been different. In my view, this is a detriment suffered by the Minister as a consequence of acting pursuant to the representation. The Appellant is therefore estopped from relying on a whole new set of facts.

ANALYSIS

[12]          Whether the Appellant under-reported GST collected by $2,616.82 in respect of a supply of real property.

[13]          Pursuant to section 221 of the Act, every person who makes a taxable supply shall, as agent of Her Majesty in right of Canada, collect the tax under Division II payable by the recipient in respect of the supply. Subsection 123(1) of the Act defines "taxable supply" as a supply made in the course of a commercial activity. Also, pursuant to subsection 123(1), commercial activity is:

[...] (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;

[14]          In the present appeal, it has been stated by way of assumption that the rental building was not a residential complex or unit and was not used as a place of residence by the tenant. It follows that to the extent that the Appellant's supply regarding the rental property was a supply of real property within the meaning of subsection 123(1), it was a taxable supply. In order to determine whether the Appellant's supply in the present case was a supply of real property, subsection 136(1) is also relevant. It provides:

136. (1) For the purposes of this Part, a supply, by way of lease, licence or similar arrangement, of the use or right to use real property or tangible personal property shall be deemed to be a supply of real property or tangible personal property, as the case may be. [emphasis added]

[15]          The Appellant supplied to the tenant the right to use the rental building. He therefore made a supply of real property within the meaning of subsection 136(1), which constitutes a taxable supply.

[16]          The Appellant did not actually receive a rent from the tenant but rather rented the building in return for the settlement of a loan, he nevertheless made a supply of a right to use real property by the way of lease, licence or similar arrangement, within the meaning of subsection 136(1). As a result, he made a taxable supply and was required to collect and remit GST in respect of that supply.

CONCLUSION

[17]          For the period from January 1, 1993 to December 31, 1996, the Appellant rented out a building on his property. The building was not a residential complex or unit, the building was not used as a place of residence. The tenant, Dave Herr, used the building as a workshop. The Appellant made a taxable supply of real property by way of lease, licence or similar arrangement. In filing his GST returns the Appellant under-reported GST collected by $2,616.82 in respect of the supply of real property.

DECISION

[18]          The appeal is dismissed.

Signed at Ottawa, Canada, this 11th day of June 2001.

"D. Hamlyn"

J.T.C.C.

COURT FILE NO.:                                                 2000-4622(GST)I

STYLE OF CAUSE:                                               John Mallow and

                                                                                                Her Majesty the Queen

PLACE OF HEARING:                                         Castlegar, British Columbia

DATE OF HEARING:                                           May 31, 2001

REASONS FOR JUDGMENT BY:      The Honourable Judge D. Hamlyn

DATE OF JUDGMENT:                                       June 11, 2001

APPEARANCES:

Agent for the Appellant:                     Mark McPhail

Counsel for the Respondent:              Johanna Russell

COUNSEL OF RECORD:

For the Appellant:                

Name:                               

Firm:                 

For the Respondent:                             Morris Rosenberg

                                                                                Deputy Attorney General of Canada

                                                                                                Ottawa, Canada

2000-4622(GST)I

BETWEEN:

JOHN MALLOW,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeal heard on May 31, 2001 at Castlegar, British Columbia, by

the Honourable Judge D. Hamlyn

Appearances

Agent for the Appellant:             Mark McPhail

Counsel for the Respondent:      Johanna Russell

JUDGMENT

          The appeal from the reassessment made under Part IX of the Excise Tax Act, notice of which is dated August 10, 2000 and bears number 116785285-11EU, is dismissed in accordance with the attached Reasons for Judgement.

Signed at Ottawa, Canada, this 11th day of June 2001.

"D. Hamlyn"

J.T.C.C.