REASONS
FOR JUDGMENT
D'Arcy J.
[1]
The issue before the Court is whether, during
certain GST reporting periods ending between September 1, 2008 and August 31,
2009 (the “Assessed Periods”), the Appellant,
for the purposes of Part IX of the Excise Tax Act (the “GST Act” or the “Act”), supplied certain
condominium units by way of sale or by way of lease.
[2]
I heard from the following witnesses: Ms. Diane
Bold, who during the relevant period was a mortgage specialist with the Royal
Bank; Mr. Robert Hager, who during the relevant period was the
president of a sales and marketing company called Tactx Project Sales and
Marketing (“Tactx”); and Mr. Brian Kevin
Bird, the president of the Appellant.
[3]
I found all three witnesses to be credible.
Summary of Facts
[4]
Unless otherwise noted, the following facts are
taken from the Partial Agreed Statement of Facts (PASF) attached as Appendix A
to these Reasons for Judgment.
[5]
The Appellant is a real estate development
company based in Kelowna, British Columbia. One of its projects was a
condominium development in Kelowna known as Terravita. The project as planned
by the Appellant was to consist of four private gated condominium buildings.
[6]
Between September 2007 and August 30, 2009, the
Appellant constructed three of the four Terravita condominium buildings. The
first condominium unit was available for occupancy around July 2008.
[7]
It appears that the Appellant began to market
the Terravita project in March of 2007. It retained Tactx to market and sell
the condominium units in the Terravita project (the “Terravita
Condo Unit(s)”).
[8]
Mr. Bird testified that the Appellant wanted to
sell the Terravita Condo Units as quickly as possible in order to pay down the
$33 million loan the Royal Bank had provided to finance the construction of the
project. In order to accomplish this goal in a very competitive real estate
market, it implemented a financing program referred to as the Terra-Living
Financing Program (the “Financing Program”).
Mr. Bird described the Financing Program as an interest- only financing
plan, nominally on $100,000.
[9]
The witnesses described the program using the
example of a Terravita Condo Unit with a $400,000 fair market value, where the
Appellant’s customer wished to use the Financing Program for $100,000 of the
$400,000 fair market value.
In such a situation, the program worked as follows:
•
The Appellant and its customer entered into an
offer to lease agreement (the “Offer to Lease”).
•
The Offer to Lease provided for the following:
•
An offer to lease the Terravita condo unit for a
99-year term.
•
A monthly lease payment ($333.33 in the example)
for the first three years of the lease. This amount was calculated as the
interest payable on a specific amount ($100,000 in the example) financed at 4%
(the “Monthly Lease Payment”).
•
A prepaid lease payment ($300,000 in the
example), paid on the closing of the transaction (the “Closing
Date”), equal to the difference between the fair market value of the
condominium ($400,000 in the example) and the amount used to calculate the
Monthly Lease Payment ($100,000 in the example) (the “Prepaid
Lease Payment”).
•
An option for the Appellant’s customer to
purchase the condominium (the “Purchase Option”)
for an amount which was set at three hundred times the Monthly Lease Payment
(the $100,000 used to calculate the Monthly Lease Payment).
[10]
Before taking possession of a Terravita condo
unit, the Appellant’s customer signed a lease, which is referred to as the “Express Charge Terms Form of Lease” (the “Condo Lease”).
[11]
The Royal Bank and the Valley First Credit Union
provided financing to customers in respect of the Prepaid Lease Payments. Ms. Bold described it as
financing involving a lease component. Mr. Bird agreed that the customers
granted the Royal Bank a mortgage of lease.
[12]
Ms. Bold and Mr. Bird, using the example
referred to above, described the financial benefits of the Financing Program.
Ms. Bold noted that the Appellant’s customer’s monthly cash outflow was reduced
since he/she only paid interest on the $100,000 used to calculate the Monthly
Lease Payment.
[13]
She explained that the Financing Program also
reduced the amount of the down payment required by the Royal Bank. If the
customer simply purchased a Terravita Condo Unit for $400,000, then the Royal
Bank could provide 80% financing on the $400,000, resulting in an $80,000 down
payment. However, under the Financing Program the Royal Bank could finance up
to 95% of a $300,000 Prepaid Lease Payment if the customer intended to live in
the condominium, resulting in a down payment of $15,000. If the customer
intended to rent the condominium to a third party, then the Royal Bank could
finance up to 80% of a $300,000 Prepaid Lease Payment, resulting in a down
payment of $60,000.
[14]
Mr. Bird testified that, in the Appellant’s
eyes, the Financing Program lowered the purchase price by $100,000. He
testified that the $100,000 represented the Appellant’s profit on the sale of a
condominium. The Appellant was content, in the short term, to receive the 4%
interest on the $100,000. The management of the Appellant believed (on the
basis of their experience in the local real estate market) that, when the
customer sold his/her leasehold interest in the condominium to a third party,
he/she would exercise the Purchase Option and the Appellant would receive the
$100,000.
[15]
It is clear from the Appellant’s financial
statements that the Financing Program was a financial success for the Appellant
in 2008 and 2009, two very difficult years in the real estate market because of
the financial crisis.
[16]
The Appellant initially supplied all strata lots
in Terravita by way of the Offer to Lease. However, between 2007 and 2009 the
fair market value of the Terravita Condo Units fell by anywhere from $80,000 to
$120,000. This resulted in the Financing Program generating negative cash flows
for the Appellant. As a result, the Appellant started to sell a number of the
Terravita Condo Units to customers using written offers to purchase pursuant to
which the customer agreed to purchase the condominium on the closing date of
the sale (the “Agreement of Purchase and Sale”).
[17]
During the Assessed Periods, the Appellant
supplied seventy-six of the Terravita Condo Units as follows:
•
For 18 of the condominiums, the recipient of the
supply signed the Offer to Lease but exercised the Purchase Option prior to the
closing date.
•
For 44 of the condominiums, the recipient of the
supply signed an Offer to Lease, did not exercise the Purchase Option and
signed the Condo Lease (the “44 Terravita Condo Units”)
•
For 14 of the condominiums, the recipient
purchased the unit pursuant to the Agreement of Purchase and Sale. In these cases
the recipient did not enter into an Offer to Lease.
[18]
During the Assessed Periods, the Appellant
collected and remitted GST on the full purchase price in respect of the
supplies to the 18 recipients who exercised the Purchase Option prior to the
closing date and to the 14 recipients who purchased their units pursuant to the
Agreement of Purchase and Sale. The Minister accepted the Appellant’s treatment
of these sales.
[19]
The Appellant did the following in respect of
the supplies of the 44 Terravita Condo Units:
•
Signed a Certificate of GST stating that the
supply was a sale subject to GST.
•
Collected from the recipients, and remitted, GST
on the Prepaid Lease Payment ($300,000 in the example).
•
Self-assessed and remitted GST on the amount on
which the Monthly Lease Payment was calculated ($100,000 in the example).
•
When calculating its net tax claimed a credit of
$36,189.02 in respect of the subsection 254(2) new housing rebates that certain
recipients of the supplies had assigned to the Appellant.
•
Did not collect GST on the Monthly Lease Payments.
[20]
The Minister assessed the Appellant additional
net tax for the Assessed Period consisting of GST of $599,605.34 deemed to be
collectable on a deemed self-supply of the 44 Terravita Condo Units, assessed GST collected but
not reported of $11,499.95, and disallowed the credits of $36,189.02 claimed in
respect of the subsection 254(2) new housing rebate.
[21]
The Appellant accepts that it is liable for the
$11,499.95 of GST collected but not reported, but does not agree with the other
adjustments. It is the Appellant’s position that the supply of the 44 Terravita
Condo Units pursuant to the Offer to Lease and the Condo Lease was not subject
to the so-called self‑supply rules because the Appellant supplied these
units by way of “sale” and not by way of “lease, licence or similar arrangement”.
The Law
[22]
During the relevant periods, every recipient of
a taxable supply that was made in British Columbia was required to pay GST
equal to 5% of the value of the consideration for the supply.
[23]
There is no issue in this appeal with respect to
the recipient of the supply, the place of the supply or the total amount paid
by the recipient of the supply.
[24]
The issue is whether the Appellant supplied the 44
Terravita Condo Units to its customers by way of sale or by way of lease.
[25]
The GST Act contains detailed rules with
respect to the taxation of supplies of real property. As with most property,
the Act taxes sales and leases of real property in very different ways. This is
particularly true when the supply in question is a supply of a residential
property such as a residential condominium.
[26]
Pursuant to the definitions in subsection
123(1), each Terravita Condo Unit is a residential condominium unit, a
residential unit and a residential complex for the purposes of the GST Act.
Taxation of Sales and Leases of New Residential
Condominium Units
[27]
The sale of a new residential condominium unit
constitutes a taxable supply. Generally speaking, the sale of a used
residential condominium unit constitutes an exempt supply and is not subject to
GST. While the seller of a used residential condominium unit is not
required to collect GST on the sale, the seller is not entitled to claim input
tax credits for any tax paid on the acquisition of the unit.
[28]
Leases of both new and used residential
condominium units constitute non‑taxable exempt supplies provided the
lease is for at least one month and the condominium unit is being leased for the
purpose of its occupancy as a place of residence or lodging by an individual. In such a situation, the lessor
of the residential condominium unit is not entitled to claim input tax credits
for any GST paid on the acquisition of the condominium unit or with respect to
expenses incurred in respect of the leasing of the condominium unit.
[29]
A lease of a new or used residential condominium
unit constitutes a taxable supply if the unit is supplied for a period of less
than 30 days, such as in the case of a daily or weekly supply of a condominium
unit at a resort.
Timing Rules
[30]
The GST Act contains specific rules
relating to when a GST/HST registrant must collect and remit amounts in respect
of the GST. A registrant remits its net tax for each of its GST
reporting periods. Generally speaking the net tax of a registrant for a
GST reporting period is equal to all the GST/HST that was actually collected by
the registrant during the GST reporting period, plus all GST/HST that became
collectable during the period, minus all input tax credits claimed in the
GST/HST tax return for the reporting period.
[31]
GST becomes collectable by a registrant at the
time it becomes payable by the recipient of the supply. Sections 168 and 152 of the GST
Act contain a number of timing rules that determine when the GST becomes
payable by the recipient of the supply.
[32]
Subsection 168(5) contains the timing rules for
real property. This provision provides that, in most instances, the GST in
respect of a taxable supply of real property by way of sale is payable on the
earlier of the day ownership of the property is transferred to the recipient
and the day possession is transferred under the agreement for the supply.
[33]
However, subsection 168(5) contains a special
rule applicable to the taxable supply by way of sale of a residential
condominium unit. This rule applies when the supplier transfers possession of
the condominium unit to the recipient of the supply before the condominium
complex in which the unit is situated is registered as a condominium: in other
words, in a situation where the supplier provides the recipient with possession
of the condominium but cannot transfer ownership, since the supplier can only
transfer ownership once the condominium complex is registered as a condominium under
the applicable provincial law.
[34]
In such a situation the GST is deemed to be
payable on the earlier of the day ownership is transferred and sixty days after
the condominium is registered.
[35]
If a residential condominium unit is supplied by
way of sale, and possession is not transferred until after the condominium is
registered, the general rule applies; the GST is payable by the recipient and
collectable by the supplier on the earlier of the day ownership of the
residential condominium unit is transferred to the recipient and the day
possession is transferred under the agreement for the supply.
[36]
If a residential condominium unit is supplied by
way of taxable rental or lease (e.g., for a period of less than one month),
then, generally speaking, the GST is payable on the day the recipient of the
supply is required to make the rental or lease payment.
Self-Supply Rules
[37]
Section 191 contains rules that are referred to
as the self-supply rules.
[38]
As discussed previously, leases of both new and
used residential condominium units for a period in excess of one month
constitute non-taxable exempt supplies. Subsection 191(1) contains rules that attempt
to ensure that a builder of a single unit residential rental property pays the
same amount of non‑refundable tax as a person who purchases a new single
unit residential rental property from a third party.
[39]
One situation in which the rules in subsection
191(1) apply is where a builder of a residential condominium unit gives
possession or use of the unit to a particular person under a lease, licence or
similar arrangement entered into for the purpose of its occupancy by an
individual as a place of residence.
[40]
In such a situation, the subsection deems the
builder to have made and received a taxable supply by way of sale of the
residential condominium unit. The builder is also deemed to have paid as a
recipient under the Act and to have collected as a supplier under the Act tax
in respect of the deemed supply calculated on the fair market value of the
residential condominium unit.
[41]
The effect of the rule is that the builder of
the residential condominium unit is required to remit tax on the fair market
value of the unit.
[42]
Similarly to the timing rules in subsection
168(5), subsection 191(1) recognizes the situation in which the possession or
use of a residential condominium unit is given under a lease to an individual
who has entered into an agreement of purchase and sale to purchase the
residential condominium unit once the condominium is registered. In such a
situation, the self-supply rules do not apply.
The Appellant’s Arguments
[43]
The Appellant’s main argument is that, for the
following reasons, the Appellant supplied the 44 Terravita Condo Units by way
of “sale” and not by way of “lease, licence or similar arrangement”, as those
terms are used in the GST Act:
1. The GST Act distinguishes between a supply by way of “lease, licence or similar arrangement” and a supply
by way of “sale”.
2. “Sale”
includes a transfer of possession of property under an agreement to transfer
ownership of the property.
3. A “sale” can occur where there is
possession before ownership.
4. The Appellant’s supply of each of the 44 Terravita Condo Units in
question involved a transfer of possession of each of the condominium units
under an agreement to transfer ownership of the condominium units.
5. To treat the supply of the 44 Terravita Condo Units otherwise than as
a “sale” for the purposes of the Act would give
rise to absurd results.
[44]
The Appellant also argued that, if the supply of
the 44 Terravita Condo Units constituted a supply by way of “lease, licence or similar arrangement”, the
subsection 191(1) self-supply rules did not apply since the supply fell within
the exclusion in subparagraph 191(1)(b)(i).
Taxation of a Sale vs. a Lease of the 44 Terravita Condo
Units
[45]
The GST is a transaction tax levied on a
specific supply according to the nature of the supply at the time the supply is
deemed to be made under the GST Act.
[46]
If the supply of each of the 44 Terravita Condo
Units constituted a sale under the GST Act, the supply constituted a
taxable supply of real property.
The supply would be deemed to have been made at the time the parties entered
into the Offer to Lease,
with the Appellant being liable to collect from the recipient GST on the value
of the consideration for the supply.
Assuming the relevant Terravita condominium building was registered as a
condominium prior to the Closing Date for each of the 44 Terravita Condo Units
at issue, GST on the full value of the consideration for each of the 44
Terravita Condo Units was collectable by the Appellant and payable by the
recipient on the Closing Date.
[47]
In such a situation, the subsection 191(1) self-supply
rules would not apply to the Appellant, since it did not supply the property by
way of lease, licence or similar arrangement.
[48]
If the supply of each of the 44 Terravita Condo
Units constituted a supply by way of lease, licence or similar arrangement,
then such supply will constitute a non-taxable exempt supply under section 6 of
Part I of Schedule V to the GST Act. This will be the result since the
Condo Lease provides for a lease of at least one month for the purpose of its
occupancy as a place of residence or lodging by an individual.
[49]
If the Appellant supplied each of the 44
Terravita Condo Units by way of lease, licence or similar arrangement, it was
required to self-assess GST under subsection 191(1), unless the exclusion in
paragraph 191(1)(b)(i) applied to the transaction. If one assumes that
the exclusion did not apply, the Appellant would be required to self‑assess
tax on the fair market value of the units.
Appellant’s treatment of the GST
[50]
In respect of the supply of the 44 Terravita
Condo Units, the Appellant collected from the recipients and remitted GST on
the Prepaid Lease Payment. The Appellant also self-assessed and remitted GST on
the amount on which the Monthly Lease Payment was calculated.
[51]
In effect, the Appellant used what I will call a
hybrid method when accounting for the GST. It treated the portion of the supply
that related to the Prepaid Lease Payment as a supply of a Terravita condo unit
by way of sale and the remainder of the supply as a lease of a Terravita condo
unit. This is the result since the Appellant would only have to self-assess GST
under the self-supply rules if it made a supply by way of lease.
[52]
There are no provisions in the GST Act
that allow a portion of a single supply of a residential condominium unit to be
taxed as a sale and another portion of the same supply to be taxed as a lease.
[53]
Therefore, even if I find that the Appellant
supplied the 44 Terravita Condo Units by way of sale, the Appellant still has
not properly accounted for the GST. If it were a sale, then, as just discussed,
the Appellant should have collected GST from the recipients in respect of the
full purchase price for the 44 Terravita Condo Units. Technically, if a sale
did occur, the recipients of the supplies of the 44 Terravita Condo Units are
still liable for GST on the portion of the purchase price that is in excess of
the Prepaid Lease Payment. This liability is not extinguished until the
recipient either pays the tax to the supplier or remits the tax directly to the
CRA.
Application of the Law to the Facts Before the Court
[54]
The definition of sale in subsection 123(1) of
the GST Act states the following: “in respect of
property, includes any transfer of the ownership of the property and a transfer
of the possession of the property under an agreement to transfer ownership of
the property”. Because the definition uses the word “includes”, a sale according to the common law meaning
of the word is also a sale for GST purposes.
[55]
The inclusion in the definition of sale of any
transfer of ownership of property ensures that any agreement providing for the
transfer of the beneficial ownership of a property will constitute a sale.
[56]
The GST Act contemplates situations where
a single supply may result in the transfer of possession prior to the transfer
of ownership pursuant to the same supply.
The inclusion in the definition of sale of a transfer of possession under an
agreement to transfer ownership ensures that, if at the time the supply is
deemed to be made under the GST Act only possession is given to the
recipient, the supply will still constitute a sale if the agreement for the
specific supply provides for the subsequent transfer of ownership of the
property.
[57]
In my view, regardless of when a supplier
provides possession to the recipient, the supply will only constitute a sale
under the GST Act if it is made under an agreement that, at the time the
supply is made, binds the supplier to transfer ownership of the property and
binds the recipient to acquire such ownership. If the supplier provides the
recipient with possession and, at the time the supply is made, there is no
agreement binding on both parties to transfer ownership, then, in most
instances, the supply will be by way of lease, licence or similar arrangement.
[58]
The Offer to Lease and the Condo Lease refer to the situation where
the Appellant provides possession of the condominium units to the recipient
under a lease for a 99-year term with the option to purchase the unit at a
future date.
[59]
Sections 1, 2 and 3 respectively of the Offer to
Lease state:
-
The offer is to lease those lands designated . .
.
-
The offer is to lease the Premises upon the
terms and conditions set forth in the Lease . . .
-
The Lease will be for a term of Ninety-nine (99)
years and shall commence on . . .
[60]
The Condo Lease clearly states that the
transaction is a lease of a condominium unit. The Recitals and Articles 1.01
and 13.05 of the Condo Lease state the following:
EXPRESS CHARGE TERMS
FORM
OF LEASE
THIS LEASE dated
the ____ day of _____, 2007.
WHEREAS the
Transferor (in these Express Charge Terms referred to as the “Landlord”) is the registered owner of those lands
described in . . .
AND WHEREAS the
Transferee (in these Express Charge Terms referred to as the “Tenant”) wishes
to lease the Lands from the Landlord.
. . .
1.01 WITNESS that in consideration of the rents reserved and the
covenants and provisos herein contained on the part of the Tenant, the Landlord
hereby leases to the Tenant the Leased Premises to hold for and during the term
of ninety-nine (99) years . . .
. . .
13.05 The sole relationship between the parties hereto is that of
Landlord and Tenant and nothing contained herein nor any acts of the parties
hereto will be deemed to create any other relationship.
[61]
Further, the documents contain most of the terms
one would expect to find in a lease of a residential unit such as a residential
condominium.
[62]
Article 2.01 of the Condo Lease sets out the
rent for the term of the lease; Article 2.04 deals with operating costs and
states that the lease shall be a completely carefree net lease; Article 4
addresses insurance; Article 5 addresses the tenant’s use of the premises; Article
6.01 addresses the maintenance and repair of the units during the term of the
lease; Article 8 addresses assignments of the lease and subleasing; and Article
10 deals with defaults by the tenant, including the failure to pay the rent
when it is due.
[63]
The agreement when read as a whole clearly
evidences a lease, not a sale, of each of the 44 Terravita Condo Units. The
following facts from the PASF support my conclusion:
•
“The Appellant held
title to the condos.”
•
“The Appellant
registered the Agreement [the Condo Lease] at the Land Titles Office as leases
on the Appellant’s titles.”
•
“The Recipients had no
right to a return of any of the Prepaid Rent or Monthly Rent.”
•
“Payment of the rent did
not automatically entitle or transfer ownership of the Condos to the Recipients.”
[64]
The Condo Lease provides the transferee with the
use of the property during the term of the lease, with the Appellant retaining
ownership of the condominium during the term of the lease.
[65]
The Condo Lease does grant the recipient the
option to acquire ownership of the condominium. Article 16.01 of the Condo
Lease states the following:
In consideration of the premises and the covenants entered into by
the Tenant, the Landlord hereby grants to the Tenant or the Tenant’s Mortgagee
or assigns the option, during the term of the Lease or any renewal thereof to
purchase the Lands for the sum of [sic] equal to the product of the
current monthly rent payment as provided in Section 2.01 multiplied by the
number 300.
[66]
In my view, an option that grants a lessee the
ability to obtain ownership of the leased asset upon the lessee’s election to
exercise the option does not convert a lease into a sale for the purposes of
the GST Act. The option is not, at the time the supply is made, a
binding agreement by the supplier to transfer, and by the recipient to acquire,
beneficial ownership of the property. Rather, it is a clause in the lease that
provides the recipient with the option of acquiring ownership of the property
in the future. Further, the provision of the property by way of lease and the
subsequent transfer of ownership of the property upon the exercise of the
option granted under the lease are separate supplies.
[67]
The Appellant agrees that the option granted in
the Condo Lease is not, at the time the supply is made, a binding agreement to
transfer ownership of the condominium that is subject to the Condo Lease. The
PASF states that the recipients of the supply of the 44 Terravita Condo Units
were not obligated to purchase the condominiums, and the Appellant retained
title to the condos unless the recipients exercised the option to purchase.
[68]
Counsel for the Appellant argued that the Condo
Lease was part of a financing mechanism to facilitate sales of the condominiums.
He focused on the fact that the plan reduced the recipient’s payments to be
made at the time of the supply. He argued that it facilitated sales of the
condominiums by, in his words, “giving the prospective
owner the ability to get ownership of their condo unit at any time without
penalty, and with the minimal amount of hoops to jump through”.
[69]
I do not agree with this argument. Suppliers in
many instances use leases as a financing method to facilitate the supply of
property. However, they are still leases. The fact that a lessee has the option
to elect to purchase the leased property on some future date does not convert
the lease into a sale. In my view, it is only when property is supplied pursuant
to an agreement that is referred to as a lease, but which requires the
recipient, at the time the supply is made, to purchase the property, that the
so-called lease may be considered a sale for the purposes of the GST Act.
[70]
Counsel for the Appellant also argued that it is
not in every situation that an option results in a sale. However, he argued,
such is the result in the fact situation before the Court, primarily because
all of the recipients intend to exercise the option to purchase prior to the
expiry of the 99-year term. For the reasons just stated, I do not accept his
argument.
[71]
In addition, as this Court has noted on numerous
occasions, the form of the transaction matters. In Friedberg v. Minister of
National Revenue (1991), 135 N.R. 61, the Federal Court of Appeal stated at
paragraph 4:
In tax law, form matters. A mere subjective intention, here as
elsewhere in the tax field, is not by itself sufficient to alter the
characterization of a transaction for tax purposes. If a taxpayer arranges his
affairs in certain formal ways, enormous tax advantages can be obtained, even
though the main reason for these arrangements may be to save tax (see Irving
Oil Ltd. v. Minister of National Revenue (1991), 126 N.R. 47; 91 D.T.C.
5106, per Mahoney, J.A.). If a taxpayer fails to take the correct formal steps,
however, tax may have to be paid. If this were not so, Revenue Canada and the
courts would be engaged in endless exercises to determine the true intentions
behind certain transactions. Taxpayers and the Crown would seek to restructure
dealings after the fact so as to take advantage of the tax law or to make
taxpayers pay tax that they might otherwise not have to pay. While evidence of
intention may be used by the courts on occasion to clarify dealings, it is rarely
determinative. In sum, evidence of subjective intention cannot be used to “correct” documents which
clearly point in a particular direction.
[72]
If I were to find that the recipient’s intention
determined the taxation of the supply, then the supplier, the Canada Revenue
Agency and the Court would be engaged in endless exercises to determine such
intention. This would place a particularly harsh burden on the supplier.
[73]
While the GST Act imposes the tax on the
recipient, it requires the supplier to collect GST as an agent for the Crown
and then remit such tax. If the recipient does not pay the proper amount of
tax, then normally it is the supplier, not the recipient, who is assessed. As a
result, the supplier must have some degree of certainty with respect to the
application of the GST Act to a specific supply. For example, a supplier
of a residential condominium unit must know, at the time the supply is made,
whether he/she/it is required to collect GST on the full consideration for the
property, to self-assess GST on the fair market value of the property, or to collect
tax on monthly lease payments.
[74]
A supplier could not make such a determination
with any degree of certainty if it was based on a subjective factor such as
whether or not a recipient intended to exercise an option to purchase.
[75]
In addition, the evidence before me is that, for
commercial law purposes, the Appellant treated the Condo Lease as a legal lease
of the individual condominium units. This can be seen from the Appellant’s
treatment of a default by one of its customers under the Condo Lease. The
particular customer had received financing from the Royal Bank, presumably to
fund a portion of the Prepaid Lease Payment. The Royal Bank then placed a
mortgage of lease on the condominium.
[76]
At some point in time, the customer became
bankrupt and stopped making the Monthly Lease Payments, which constituted a
default under the Condo Lease.
The Appellant’s solicitor then sent a letter to the Royal Bank demanding that
they either exercise the option contained in the Condo Lease or remove their mortgage
of lease. The letter stated the following:
Please be advised
that we are solicitors for 0703008 B.C. Ltd. which is the owner (the “Landowner”) of land legally described as PID
027-794-466 (Strata Lot 90, Plan KAS3485) in Kelowna, B.C. (the “Property”). The Tenants entered into a lease of the
Property from the Landowner (the “Lease”). The
Tenants granted RBC the Mortgage of Lease which RBC registered in the Kamloops
Land Title Office under the number shown above.
The Tenants have
defaulted on the Lease by virtue of having made an assignment in bankruptcy and
the Lease is now terminated. The Landowner is entitled to remove the Lease and
the Mortgage of Lease from title to the Property immediately. The Landowner, however,
wishes to provide RBC with a reasonable period of time within which to redeem
the Property from the Landowner and thereby protect RBC’s security.
[77]
Mr. Bird testified that the Royal Bank first
paid the outstanding Monthly Lease Payments and then hired a realtor to find
someone who was willing to exercise the option or assume the lease.
[78]
The Appellant’s treatment of defaults is clear
objective evidence that it viewed the Condo Lease as a lease of a condominium
unit, not a sale.
[79]
In summary, on the evidence before me I have
concluded that the Appellant, when entering into the Offers to Lease and Condo
Leases in respect of the 44 Terravita Condo Units, made supplies under the GST
Act by way of lease, licence or similar arrangement.
[80]
The Appellant also argued that, even if the
supply was by way of lease, the subsection 191(1) self-supply rules did not
apply to the supply as a result of the exclusion in subparagraph 191(1)(b)(i).
[81]
That subparagraph provides that the self-supply
rules will only apply if the builder of the complex (the Appellant) gives
possession or use of the complex to a particular person under a lease, licence
or similar arrangement entered into for the purpose of its occupancy by an
individual as a place of residence, “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”
(Emphasis added).
[82]
The exclusion only applies if possession is
given under or as a consequence of an agreement of purchase and sale and if the
possession only lasts until ownership of the complex is transferred to the
purchaser under the agreement of purchase and sale. Similarly to the timing
rules in subsection 168(5), this provision recognizes the situation where the
supplier provides the recipient with possession of the condominium but cannot
transfer ownership until some future date when the condominium is registered
under the applicable provincial law as a condominium. In effect, it ensures
that the self-supply rules do not apply to a sale of a condominium.
[83]
The exclusion does not apply to the supply by
the Appellant of the 44 Terravita Condo Units. Possession of the individual
units was not given to the Appellant’s customers under or as a consequence of
an agreement of purchase and sale. There was no agreement of purchase and sale.
The only agreement relating to the Appellant’s customers’ possession of the
condominium units was the Condo Lease, which was a lease not an agreement of
purchase and sale.
[84]
Counsel for the Appellant also argued that the
Court’s acceptance of the Respondent’s position that the 44 Terravita Condo
Units were supplied by way of lease would lead to the following consequences
which he called absurd:
(1)
except for $6,000 the appellant will have
previously remitted the full amount of GST on all of the 44 Terravita condo units
in question;
(2)
the Minister will receive $593,605.34 again;
(3)
the Minister will recoup $36,189.02 of the
assigned new housing rebate[s] that the appellant claimed as an input tax
credit which were assigned by homeowners;
(4)
the Minister has reassessed the appellant such a
. . . length after the supply of the 44 Terravita units in question took place,
and undertook such minimal efforts to advise those unit owners of the tax paid
in error rebate that only a quarter of the condo unit owners were paid
tax-paid-in-error rebates totaling $142,669.18.
. . .
. . . The end result . . . is that the Minister is
going to have a windfall of . . . $487,125.18 . . . .
. . . That is the $593,605.34 for the reassessed
amount, plus the 36,189 that it will recoup of the new housing rebates, less
the $142,669.18 for the tax-paid-in error rebates. . . .
[85]
I do not accept that my finding that the
Appellant supplied the 44 Terravita Condo Units by way of lease leads to an
absurd result.
[86]
The only GST payable under the GST Act on
the supplies of the 44 Terravita Condo Units was payable by the Appellant under
the subsection 191(1) self-supply rules. No GST was payable by the recipients
of these supplies. The GST that the Appellant collected from the recipients on
the Prepaid Lease Payments constitutes tax paid in error.
[87]
A registrant is required to remit all amounts
that become collectable under the GST Act and “all
other amounts collected by the person . . . as or on account of tax . . .”. As
a result, the Appellant was required to remit the tax it collected in error in
respect of the Prepaid Lease Payment.
[88]
The GST Act provides two mechanisms for
refunding tax paid in error that a supplier has collected and remitted. The
supplier may refund the tax itself, issue a credit note containing prescribed
information and then claim a credit on its GST for the refunded tax paid in
error.
Alternatively, the person who paid the tax in error may claim a rebate under
section 261. Both mechanisms are subject to a two-year time limitation.
[89]
There is no windfall to the Minister. All of the
tax paid in error was refundable under the GST Act to the recipients. In
fact, the Minister accepted all applications for rebates filed by the
recipients for tax paid in error. Such rebates totalled $142,669.
[90]
Apparently the Appellant is arguing that the
windfall arises because the CRA did not inform either the Appellant or the
recipients in a timely manner of the fact that tax was paid in error and that the
recipients had a right to recover the tax paid in error. However, the evidence
before me is that the first supply of one of the 44 Terravita Condo Units was
made on September 25, 2008.
The Appellant was reassessed on March 11, 2010, well within the two-year
limitation period for the refunding of the tax paid in error by the Appellant
or the claiming of a rebate by a recipient. It was clear from the reassessment
that the Minister believed the recipients had paid tax in error.
[91]
Further, if the Appellant was concerned about
the recipients’ not knowing of the rebate for tax paid in error, it could have
itself, under section 232, refunded to the recipients the tax paid in error and
then claimed a credit for the amount refunded.
[92]
The second portion of the Appellant’s argument
with respect to absurdity relates to the fact that the Minister denied the
credit the Appellant claimed for assigned new housing rebates.
[93]
The Minister correctly denied the claim with
respect to the subsection 254(2) new housing rebates since the Appellant did
not supply the 44 Terravita Condo Units by way of sale. However, the Appellant
was entitled to claim rebates for new residential rental property under section
256.2, provided it satisfied certain conditions contained in that section. In
fact, the Appellant has applied for and been allowed new residential rental
property rebates in respect of 38 of the 44 Terravita Condo Units.
[94]
In summary, my finding that the Appellant
supplied the 44 Terravita Condo Units by way of lease does not produce an
absurd result. The proper person pays the tax levied under the GST Act,
the proper rebate is claimable by the Appellant, and there is no windfall to
the Minister.
[95]
For the foregoing reasons, the appeal is
dismissed with costs. The Minister’s assessment reflects the correct amount of
additional net tax remittable by the Appellant.
Signed at Antigonish, Nova Scotia, this 20th
day of August 2015.
“S. D’Arcy”
Appendix
A
PARTIAL AGREED STATEMENT OF FACTS
The parties
agree to and admit the following facts for the purpose of these appeals. The
parties may adduce further evidence at trial that is relevant to the issues in
these appeals, provided that the evidence is not contrary to this statement of
facts.
Agreed
Facts:
The
Appellant
1.
The Appellant is a real estate development
company based in Kelowna, British Columbia.
2.
The Appellant was incorporated in British
Columbia on August 30, 2004.
3.
The Appellant’s place of business is 105B – 347
Leon Avenue, Kelowna, British Columbia.
Terravita
4.
During the reporting periods from September 1,
2008 to August 31, 2009 (the “Period”), the
Appellant owned land on Auburn Road in West Kelowna, British Columbia.
5.
The Appellant planned to develop this land as
four private gated condominium buildings.
6.
The project was known as Terravita.
7.
As proposed, Terravita consisted of 142 strata
lots in four buildings located at 2780, 2770, 2760, and 2750 Auburn Road.
8.
The Terravita project was subdivided into condominiums
by way of a strata plan registered with the Osoyoos Division Yale Land District
as Strata Plan KAS3485.
9.
During the Period, the Appellant built three of
the four Terravita buildings, those located at 2780, 2770, and 2760 Auburn
Road.
Lease Agreements
10.
The Appellant initially supplied all strata lots
in Terravita by way of an Offer to Lease Agreement.
11.
The three Terravita buildings were substantially
complete when the Appellant signed the relevant lease agreement.
12.
The Appellant supplied a total of seventy-six
units in Terravita during the Period. Of the seventy-six units:
(a)
for fourteen of the units, the recipients
ultimately signed an Offer to Purchase and Agreement of Purchase and Sale
rather than an “Express Charge
Form Terms of Lease” (the “Agreement”), and paid the full amount of the unit prior to closing;
(b)
for eighteen of the units, the recipients signed
an Agreement but exercised a right to purchase the units prior to the closing
date; and
(c)
for forty-four of the units, the recipients
signed an Agreement for the units (the “Condos”) and
did not exercise a right to purchase the units prior to closing.
The issues in this appeal relate solely
to the forty-four Condos for which the recipients signed an Agreement and did
not exercise a right to purchase the units prior to closing (the “Recipients”).
13.
The Agreement had a ninety-nine year term.
14.
The Appellant held title to the Condos.
15.
The Appellant registered the Agreement at the
Land Titles Office as leases on the Appellant’s titles.
16.
The Agreement set a basic rent for the
Condos, which consisted of two amounts: an amount referred to in the agreement
as “Prepaid Rent”, and an
amount referred to in the agreement as “Monthly Rent”.
17.
The Monthly Rent was set for a three year term,
then increased by a formula in the Agreement every three years for the duration
of the ninety-nine year term.
18.
For forty of the Recipients, the Monthly Rent
was calculated as if $100,000 were financed at 4%.
a. For four of the Recipients, the Monthly Rent was calculated as if
$150,000, $130,000, $120,000, and $200,000, respectively, were financed at 4%.
b. The Prepaid Rent amount consisted of the difference between the fair
market value of the Condos and the amount upon which the monthly rent was
calculated.
19.
The Recipients had an option to purchase the
Condos, which was set at three hundred times the monthly rent.
20.
The option to purchase could be exercised
without penalty on thirty days notice to the Appellant.
21.
The Appellant retained title to the Condos
unless the Recipients exercised the option to purchase.
22.
The Recipients had no right to return of any of
the Prepaid Rent or Monthly Rent.
23.
The Recipients were not obligated to purchase
the Condos.
24.
Payment of the rent did not automatically
entitle or transfer ownership of the Condos to the Recipients.
Goods and
Services Tax (“GST”) Treatment
of the Condos
25.
The Appellant signed a Certificate of GST when
it supplied the Condos, stating that the supply was a sale subject to GST.
26.
The Appellant collected and remitted GST from
the Recipients on the Prepaid Rent amount.
27.
For all but one of the Condos governed by an
Agreement, the Appellant self-assessed itself, and remitted GST on the amount
on which the Monthly Rent was calculated.
28.
The Appellant claimed $36,189.02 of New Housing
Rebates on behalf of eight of the Recipients to whom it credited, in total,
that amount.
29.
The Appellant claimed that $36,189.02 as input
tax credits in calculating its net tax.
30.
The Canada Revenue Agency audited the
Appellant’s income tax return for the taxation year ending October 31, 2009 and
the Minister of National Revenue did not reassess the Appellant’s computation
of its income from the Terravita Project units.
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