R. Mullen Construction Ltd. v. The Queen, docket 95-2662-GST-I (Informal Procedure)

Date: 19971210

Docket: 95-2662-GST-I

BETWEEN:

R. MULLEN CONSTRUCTION LIMITED,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Mogan, J.T.C.C.

[1] At all relevant times, the Appellant was engaged in the business of constructing houses in Lower Sackville, Nova Scotia. In 1991, the Appellant built a new house at 35 Armcrest Drive in Lower Sackville. The house was substantially completed by September 1991. At that time, the housing market was slow. The house was listed for sale with a real estate agent who suggested that some person, on behalf of the Appellant, occupy the house because it would be easier to sell if it were occupied, furnished and decorated. The issues in this appeal are concerned with (i) the impact of the goods and services tax (GST) on the sale of a new house; (ii) whether the liability for GST is affected by the occupancy of a new house before it is sold; and (iii) whether amounts paid to the Minister of National Revenue in error may be refunded. The Appellant has elected the Informal Procedure.

[2] Randy Mullen was vice-president and a 30% shareholder of the Appellant. In the summer of 1991, Randy and his wife were living with his brother-in-law (his wife’s brother). Randy and his wife decided to follow the real estate agent’s suggestion and so, in September 1991, they moved into 35 Armcrest to give it that “lived in” look. At all times from and after September 1991, 35 Armcrest was listed for sale. On March 20, 1992, the Appellant entered into an agreement of purchase and sale with Jacques and Deanna LaPierre to sell the house and land at 35 Armcrest for $101,900. The sale transaction closed on June 12, 1992 and, just before the closing, Randy and his wife moved out of 35 Armcrest.

[3] The agreement of purchase and sale between the Appellant as vendor and Jacques and Deanna LaPierre as purchasers is Exhibit A-1. It is difficult to determine from Exhibit A-1 whether the parties expected GST to apply to their transaction because of two conflicting conditions which appear as paragraphs 1(a) and 1(h) on the second page of Exhibit A-1:

1(a) Balance of the purchase price, subject to usual adjustments, to be paid to the Vendor on date of closing. Purchase price to include GST.

1(h) If this transaction is subject to GST imposed by Part IX of the Excise Tax Act R.S.C. 1985, c. E-15, then such GST shall be in addition to and not included in the purchase price, and GST shall be collected and remitted in accordance with applicable legislation. If this transaction is not subject to GST, the vendor agrees to provide on or before the closing to the purchaser or purchaser’s solicitor a certificate, in a form reasonably satisfactory to the purchaser or purchaser’s solicitor, certifying that the transaction is not subject to GST.

[4] Mr. David Melnick, the Appellant’s lawyer in the sale transaction, testified at the hearing and stated that both he and the solicitor representing the purchasers were of the view that condition 1(a) applied and the purchase price of $101,900 included GST. He also stated that this was the view most favourable to the purchaser, as opposed to condition 1(h). The statement of adjustments and accompanying trust statement for the closing of the sale are together in Exhibit A-2. The statement of adjustments accounts for the transaction as follows:

STATEMENT OF ADJUSTMENTS

CREDITS TO VENDOR

PURCHASE PRICE $95,233.64

TAXES PAID IN ADVANCE

FUEL OIL ADJUSTMENT

GST $ 6,666.36

TOTAL COSTS TO PURCHASER $101,900.00

CREDITS TO PURCHASER

DEPOSIT $ 3,000.00

VENDOR’S PORTION OF CURRENT

TAXES CALCULATED AS:

TAXES IN ARREARS

INTEREST ON O/S TAXES

TAX CERTIFICATE $ 40.00

MORTGAGE PAYOUT

RECORDING RELEASE(S) $ 42.00

TOTAL CREDITS TO PURCHASER..............................................$ 3,082.00

BALANCE REQUIRED TO COMPLETE TRANSACTION................. $98,818.00

[5] The statement of adjustments, viewed alone, indicates that GST was payable on the sale and that the amount of GST was $6,666.36. There is a conflict, however, between Exhibit A-1 (agreement of purchase and sale) and Exhibit A-2 (statement of adjustments) because Exhibit A-1 identified $101,900 as the purchase price whereas Exhibit A-2 identified $95,233.64 as the purchase price. There is no evidence that the vendor, the purchasers or the real estate agents had any knowledge of the notional purchase price of $95,233.64 shown in Exhibit A-2. I am satisfied from Exhibit A-1 and the oral testimony of Mr. Melnick and Randy Mullen that the amount of $95,233.64 was never in the minds of the vendor and purchasers when they signed Exhibit A-1. They were looking only at the agreed price of $101,900. If they really thought that condition 1(a) applied and condition 1(h) did not, then the agreed price of $101,900 was the maximum amount which the purchasers would be required to pay, and the vendor would pay any tax out of the proceeds of sale. The amount of $101,900 may have been the fair market value of 35 Armcrest Drive in the spring of 1992.

[6] I conclude that the amount of $95,233.64 was determined when the vendor’s lawyer assumed that the agreed price of $101,900 identified in Exhibit A-1 contained a GST amount of 7%. When the agreed price of $101,900 is divided by 107, and the result is multiplied by 100, the final amount is $95,233.64. In my view, the amounts $95,233.64 and $6,666.36 in Exhibit A-2 were determined by extrapolation, working backward from the agreed purchase price of $101,900 in Exhibit A-1.

[7] In evidence, Randy Mullen stated that the price in the LaPierre sale would remain the same without regard to whether the GST applied. He also said that if he had known that the Appellant would be “self-assessed” (the deemed sale in section 191 is referred to as “self-supply”), the sale price would have been increased. In cross-examination, he gave the following answers:

Q. Mr. Mullen, is it your evidence that the way the Agreement of Purchase and Sale is written that it was your intention that the price would remain the same regardless of whether GST was applicable or not?

A. Yes. In fact, that purchase price was done up including GST, with the rebate assigned to the purchaser, basically giving them a credit and reducing the price. Once we were told that we have to self-assess, and if I had known this before, the price would have actually gone up. Because as a corporation we were not entitled to the rebate, which meant that I would have had to increase the price by the rebate amount. So the price actually would have increased.

...

We have what we call “hard costs” in construction. They’re everything from land, excavation, building materials, right on up to plumbing, electrical, the whole works. As soon as we as a company are self-assessed and have to pay the GST to Revenue Canada, that becomes another hard cost that we cannot recover. So that has to be added on to the bottom line. So in effect it would increase the purchase price. It if is sold as new housing, with the GST rebate in effect, the purchaser gets that back, so we reduce the price accordingly.

(Transcript - pages 40-41)

These answers show that Randy Mullen had knowledge in 1992 of the new house rebate (36% of the GST) but he did not know of the deemed sale (self-supply) rule.

[8] I now turn to the relevant provisions of the GST legislation which came into force on January 1, 1991. It was a new and complicated method of taxing commercial transactions. There is a special provision (section 254 of the Excise Tax Act which contains the GST legislation) which creates a 36% rebate of the GST on the sale of a new house. The special provision works this way. The fixed rate of the GST is 7%. When applied to the sale of a new house, the GST increases the cost of a new house by 7%. To provide some relief from this increased cost (and, I assume, to provide some incentive for the construction of new houses) Parliament provides a rebate of 36% of the 7% GST which is 2.52%. When the rebate is taken into account, the net GST on the sale of a new house is only 4.48% (7% minus 2.52%). In substance, the rebate creates a net tax of about 4.5% on the sale of a new house. The legislation permitting this rebate is section 254 of the Excise Tax Act from which I will quote only the most relevant words:

254(2) Where

(a) a builder of a single unit residential complex ... makes a taxable supply by way of sale of the complex ... to a particular individual,

(b) at the time the particular individual becomes liable or assumes liability under an agreement of purchase and sale ... entered into between the builder and the particular individual, the particular individual is acquiring the complex ... for use as the primary place of residence of the particular individual ...

(c) the total ... consideration payable for the supply to the particular individual of the complex ... is less than $450,000,

...

(f) after the construction ... is substantially completed and before possession of the complex ... is given to the particular individual under the agreement of purchase and sale ...

(i) ... the complex was not occupied by any individual as a place of residence or lodging, and

...

(g) either

(i) the first individual to occupy the complex ... as a place of residence at any time after substantial completion of the construction or renovation is

(A) ... the particular individual or a relation of the particular individual, ...

the Minister shall, subject to subsection (3), pay a rebate to the particular individual equal to

(h) where the total consideration is not more than $350,000, an amount equal to the lesser of $8,750 and 36% of the total tax paid by the particular individual, and ...

When the Appellant filed its GST return for the period ending June 30, 1992, it withheld $2,400 as the 36% rebate and paid only $4,266 ($6,666 minus $2,400) with respect to the actual sale to LaPierre.

[9] There is a further provision in the GST legislation which had a direct bearing on the sale of 35 Armcrest. If the builder of a house gives possession of the house to a person as a place of residence under a lease or similar arrangement or occupies it himself, he is deemed to have sold the house at the time he gave possession or occupied it himself. Such a deemed sale under section 191 will cause the builder to incur a liability for GST. The relevant words from section 191 are as follows:

191(1) For the purposes of this Part, where

(a) the construction or substantial renovation of a ... single unit residential complex ... is substantially completed,

(b) the builder of the complex

(i) gives possession of the complex to a particular person under a lease, licence 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, 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 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.

[10] Neither the Appellant nor Randy Mullen knew about the “deemed sale” in section 191 when Randy and his wife moved into 35 Armcrest in September 1991. In the early summer of 1992, Revenue Canada performed a GST audit of the Appellant. At that time, Revenue Canada learned of the occupancy of 35 Armcrest by Randy Mullen and his wife from September 1991 to June 1992. By notice of assessment dated August 7, 1992, the Appellant was assessed under subsection 191(1) with respect to the occupancy of 35 Armcrest by Randy and his wife from September 1991 to June 1992. The deemed sale occurred in September 1991. The Appellant paid the GST of $6,666 with respect to the deemed sale but filed a Notice of Objection to the assessment of August 7, 1992. The Appellant’s objection was disallowed by the Minister of National of Revenue by Notice of Decision dated February 15, 1993. The Appellant did not appeal from the Minister’s disallowance. Apparently, the 36% rebate under section 254 does not apply to the deemed sale of a new house under section 191 because the rebate is available only with respect to an actual sale when the house has not been occupied as a place of residence before possession is given to the actual purchaser. See subparagraph 254(2)(f)(i) above.

[11] As stated above, the Appellant withheld the rebate amount ($2,400) when it paid $4,266 in July 1992 with respect to the actual sale to LaPierre. After the Minister had assessed the full GST on the deemed sale (self-supply) resulting from the occupancy in September 1991, the Minister further assessed the Appellant for the rebate amount ($2,400) which had been withheld on the actual sale. Randy Mullen stated in evidence:

A. Well, going back to 35 Armcrest, when we sold the house and subsequently remitted our GST, we remitted the GST which we had collected on the sale less the rebate. We were later forced to self-assess and pay the full 7% GST again and we were later assessed the rebate portion that we had withheld on the GST remittance, which in effect meant that we paid 14% GST on 35 Armcrest.    (Transcript - pages 36-37)

...

Q. And they also received six thousand, six hundred dollars ($6,600) from your company, being the amount that was paid in respect of your moving in in September.

A. Yes. And then on a later assessment they disallowed the rebate which I withheld when I made our remittance and therefore billed another twenty-five hundred dollars ($2,500). Transcript - (page 58)

[12] The Appellant is now in the financial difficulty of having paid the amount of $6,666.36 twice with respect to the construction, occupancy and sale of 35 Armcrest Drive. In chronological order, the Appellant paid $4,266 in July 1992 as a result of its actual sale to LaPierre on June 12. After the notice of assessment dated August 7, 1992 for the Appellant’s reporting period ending September 30, 1991, the Appellant paid $6,666.36 as a result of Randy Mullen occupying the house with his wife from early September 1991. And then the Appellant was assessed and paid the rebate amount ($2,400) which had been withheld from the $4,266 payment in July.

[13] The Respondent admits in paragraph 4(f) of the Reply to the Notice of Appeal that the Appellant was not required to collect or pay any GST on the actual sale of 35 Armcrest in June 1992. This admission follows as a consequence from the occupancy of the house by Randy Mullen and his wife from September 1991 to June 1992. The GST does not apply to the sale of a used house but only to the sale of a new house. Because GST was assessed and paid on the deemed sale in September 1991 (occupancy by the builder), the actual sale to LaPierre in June 1992 is regarded as the sale of a used house on which no GST is payable.

[14] In the first issue, the Appellant seeks to recover the amount ($6,666.36) which it paid with respect to the actual sale of 35 Armcrest in June 1992.

[15] In argument, I was referred to only two sections which could grant relief to the Appellant. Section 232 could permit the Appellant to deduct the amount of $6,666.36 in determining the net tax for a current or future reporting period. Under section 261, the Minister could be required to refund $6,666.36 to the Appellant. I will first review section 232:

232(1) Where a particular person has charged to, or collected from, another person an amount as or on account of tax under Division II in excess of the tax under that Division that was collectible by the particular person from the other person, the particular person may, in or within four years after the end of the reporting period of the particular person in which the amount was so charged or collected,

(a) where the excess amount was charged but not collected, adjust the amount of tax charged; and

(b) where the excess amount was collected, refund or credit the excess amount to that other person.

...

232(3) Where a particular person adjusts, refunds or credits an amount in favour of, or to, another person in accordance with subsection (1) ..., the following rules apply:

(a) the particular person shall, within a reasonable time, issue to the other person a credit note, containing prescribed information, for the amount of the adjustment, refund or credit, unless the other person issues a debit note, containing prescribed information, for the amount;

(b) the amount may be deducted in determining the net tax of the particular person for the reporting period of the particular person in which the credit note is issued to the other person or the debit note is received by the particular person, to the extent that the amount has been included in determining the net tax for the reporting period or a preceding reporting period of the particular person; ...

[16] The Respondent argues that the Appellant may not deduct the amount $6,666.36 under paragraph 232(3)(b) unless the Appellant first refunds that same amount to Jacques and Deanna LaPierre. In the circumstances of this case, the Respondent’s argument is absurd for the following reasons. Only the Appellant paid the GST of $6,666.36 under section 191 on the deemed sale with respect to the occupancy of 35 Armcrest by Randy Mullen and his wife in September 1991. It was the occupancy by Randy and his wife which made the actual sale to LaPierre a tax-free transaction. Because the legislation was new and the Appellant did not know about its liability for tax on the deemed sale under section 191, the Appellant paid $6,666.36 from the actual proceeds of sale to LaPierre. Randy Mullen’s unchallenged evidence is that the agreed price of $101,900 would remain the same without regard to whether the GST applied. I believe that evidence and conclude that the amount of $6,666.36 was obtained only by the vendor’s lawyer working backward from the agreed price of $101,900. The Appellant is now out-of-pocket $13,333 (two times $6,666.36) as a result of its construction, occupancy and sale of 35 Armcrest. The Respondent argues that if the Appellant will pay to Jacques and Deanna LaPierre a third amount of $6,666.36, the Appellant may under paragraph 232(3)(b) deduct that third amount in determining its net tax for a current or future reporting period. That would still leave the Appellant out-of-pocket $13,333 as GST paid on the construction, occupancy and sale of a house on which GST of only $6,666.36 should have been paid.

[17] There is no reason for the Appellant to refund $6,666.36 to Jacques and Deanna LaPierre if the Appellant is not going to be any further ahead as a result of such refund. Relying on the evidence of Randy Mullen, I am satisfied that $101,900 was the fair market value of 35 Armcrest in the spring of 1992. Although Jacques and Deanna LaPierre did not testify in this appeal, I conclude that they thought they were paying fair market value for 35 Armcrest when they signed Exhibit A-1 on March 20, 1992 agreeing to pay $101,900 for the house. They probably did not care whether the Appellant had to pay GST out of their purchase money any more than a person buying a bottle of liquor in Canada cares whether the vendor will pay any excise tax on that bottle. In the mind of a purchaser, words like “Purchase price to include GST” (as in paragraph 1(a) of Exhibit A-1) simply dump any tax liability into the lap of the vendor and place a ceiling on the amount which the purchaser is required to pay. One of the evils of a hidden or indirect tax is that the purchaser who indirectly pays the tax does not know and often does not care what the amount of tax is. It is simply merged in the fair market value of a particular product.

[18] Section 232 will apply only if a particular person has charged to, or collected from, another person an amount “as or on account of tax ... in excess of the tax ... that was collectible”. It is a fact that no tax was collectible on the sale of 35 Armcrest to LaPierre even though the vendor did not know that fact at the time of sale in June 1992. Relying on Exhibit A-1 and the oral evidence of Randy Mullen, I find that $101,900 was the fair market value of 35 Armcrest at the time of its sale in the spring of 1992. In other words, the sale price would have remained the same regardless of whether GST applied to the sale or not. Therefore, as I interpret section 232, it cannot be said that the Appellant “charged to, or collected from,” Mr. and Mrs. LaPierre any tax as GST if no GST was collectible and the LaPierres thought that they were paying fair market value. Section 232 does not apply to the Appellant’s sale to LaPierre in June 1992.

[19] Section 232 is primarily concerned with one person who has collected excess tax from another person. Section 261 is primarily concerned with a person who has paid excess tax to the Minister.

261(1) Where a person has paid an amount

(a) as or on account of, or

(b) that was taken into account as,

tax, net tax, penalty, interest or other obligation under this Part in circumstances where the amount was not payable or remittable by the person, whether the amount was paid by mistake or otherwise, the Minister shall, subject to subsections (2) and (3), pay a rebate of that amount to the person.

The Appellant and the Respondent are in agreement that, on the sale to LaPierre in June 1992, an amount of $6,666.36 was paid to the Minister as or on account of tax; and they further agree that no tax was payable with respect to that sale. The Respondent argues that any amount paid as tax by mistake within the meaning of section 261 was paid by Jacques and Deanna LaPierre. The Respondent relies on the statement of adjustments (Exhibit A-2). The Appellant argues that any such amount was paid by the Appellant and relies on the fair market value of 35 Armcrest in June 1992 as being $101,900, an amount which the purchasers were required to pay regardless of whether GST applied or not. I accept the Appellant’s argument and reject the Respondent’s argument. In my opinion, the amount of $6,666.36 in Exhibit A-2 was a figment of the imagination of the vendor’s lawyer in drafting the statement of adjustments. A sale price of $95,233.64 was never in the mind of the vendor Appellant or the purchasers (Jacques and Deanna LaPierre). Their agreed price of $101,900 was fair market value. The vendor, through its lawyer, made a mistake in drafting the statement of adjustments and breaking out a notional sale price of $95,233.64 and a mistaken tax amount of $6,666.36. The purchasers paid what they agreed to pay ($101,900) when they closed the transaction on June 12, 1992 without regard to whether the vendor (Appellant) may or may not have been required to pay some amount as GST. I find that the Appellant paid an amount as tax by mistake within the meaning of section 261.

[20] No argument was made that any provision in subsections (2) and (3) of section 261 would prevent the payment of a rebate by the Minister. Accordingly, I will order that the Minister pay a rebate of the amount of $6,666.36 to the Appellant.

[21] There is a second issue concerning the sale of a different house at 30 Armcrest Drive. When Randy Mullen and his wife moved out of 35 Armcrest just prior to its sale on June 12, 1992, they moved in with his wife’s parents. The construction of the house at 30 Armcrest was completed in early July and it was put up for sale. By agreement of purchase and sale (Exhibit R-3) dated July 20, 1992, the Appellant agreed to sell the property at 30 Armcrest Drive to Dale and Marie Lowe for $115,000; the transaction to close on August 25. Pursuant to a counter-offer (Exhibit R-4), the parties agreed to increase the price to $115,500. The counter-offer also contained the following provision:

The purchasers are aware that the vendor will be moving into said home but will deliver vacant possession on date of closing.

Randy Mullen’s evidence was that, when Mr. and Mrs. Lowe had agreed to buy 30 Armcrest and learned that Randy and his wife were living with in-laws, the Lowes said that they had no objection if Randy and his wife lived at 30 Armcrest until the closing. That is the basis on which the above provision was added to the counter-offer.

[22] Randy and his wife moved into 30 Armcrest in the last week of July 1992 and moved out before the closing on August 25, 1992. They lived there approximately 30 days. When Revenue Canada performed a GST audit in the summer of 1992 and applied the self-supply rule in section 191 to the occupancy of 35 Armcrest in September 1991, they also applied the self-supply rule to the occupancy of 30 Armcrest by Randy and his wife from late July to August 24, 1992. The Appellant filed a Notice of Objection objecting to the self-supply rule for 30 Armcrest. The Minister allowed the Appellant’s objection because of the provision in subparagraph 191(1)(b)(i) which permits possession or occupancy if it is under an arrangement arising as a consequence of an agreement of purchase and sale and it ends before the transfer of ownership. See the particular subparagraph quoted in full above.

[23] Having succeeded in its objection with respect to self-supply, the Appellant asked for the 36% rebate of the GST paid on the actual sale of 30 Armcrest on August 25, 1992. The Minister has refused to pay the rebate because one of the conditions of the rebate in subparagraph 254(2)(f)(i) is that the house was not occupied by any person as a place of residence after the construction was substantially completed and before possession was given to a purchaser under an agreement of purchase and sale. The Appellant claims that the Minister is being inconsistent because the Minster allowed the Appellant’s objection and did not apply the self-supply rule to 30 Armcrest when the occupancy was for only about 30 days.

[24] I have concluded that the Minister is not inconsistent in his refusal to pay the rebate and that the Appellant is not entitled to any rebate with respect to the actual sale of 30 Armcrest. The terms of subparagraph 254(2)(f)(i) are really different from the terms of subparagraph 191(1)(b)(i). In section 254, it is a condition of the Minister’s obligation to pay a rebate that the dwelling was not occupied by any person as a place of residence after construction was substantially completed and before possession was given to the first bona fide purchaser. In section 191, there is a deemed sale if the builder gives possession of the dwelling to any person as a place of residence under a lease or similar arrangement after construction was substantially completed. There is a clear exception, however, in subparagraph 191(1)(b)(i) for possession of the dwelling under a lease or similar arrangement arising as a consequence of an agreement of purchase and sale.

[25] Applying these provisions to 30 Armcrest Drive, the occupancy of that house by Randy Mullen and his wife from late July 1992 to August 24, 1992 was under an arrangement arising as a consequence of the agreement of purchase and sale with Dale and Marie Lowe. The words in the counter-offer (Exhibit R-4) are: “... will be moving into”. The occupancy by Randy and his wife was within the exception in section 191 and so there was no deemed sale. In section 254, there is no such exception. Simple occupancy as a place of residence will violate the condition and relieve the Minister of any obligation to pay a rebate. The Minister is not obliged to pay a rebate under section 254 because Randy and his wife occupied 30 Armcrest as a place of residence from late July to August 24, 1992.

[26] In summary, the appeal is allowed with respect to a refund of $6,666.36 under section 261 on the actual sale of 35 Armcrest Drive, but dismissed with respect to a rebate under section 254 on the actual sale of 30 Armcrest Drive. There is no order as to costs.

Signed at Ottawa, Canada, this 10th day of December, 1997.

"M.A. Mogan"

J.T.C.C.