File : 11643-1
11783-2/Ss. 183(3)
XXXXX August 11, 1995
We are writing to you concerning the above-captioned draft application ruling submitted to this division by XXXXX of your staff. We regret the delay in responding.
The draft application ruling concerns the tax status of a sale of real property pursuant to an order of the Alberta Court of Queen's Bench and, more specifically, whether or not the sale was a supply within the scope of subsection 183(3) of the Excise Tax Act ("the Act"), that is a supply deemed to be made otherwise than in the course of a commercial activity and therefore not subject to the Goods and Services Tax ("GST"). XXXXX was concerned that the Department did not appear to have previously dealt with a similar transaction and, for this reason, asked us to review the draft ruling. Since the matter at issue involves a very specific fact situation, we will set out the relevant facts below.
Facts
On June 2, 1993, the plaintiffs in an action, XXXXX and XXXXX obtained from the Court a judgement for fraud against the defendant, XXXXX , and were awarded damages in the amount of XXXXX On June 4, 1993, XXXXX attempted to defraud the plaintiffs of the judgement debt by conveying title to a property, XXXXX to a corporation, XXXXX The plaintiffs sought further relief from the Court.
On January 10, 1994, the plaintiffs obtained a further judgement against the defendant whereby the Court declared the deed of conveyance to be fraudulent and void against the plaintiffs and other creditors of the defendant. In paragraph 2 of that judgement, the Court ordered that the property be listed with a realtor of the plaintiffs' choice, or sold by private sale by the plaintiff, either sale to be subject to Court approval.
The court order was made pursuant to subsection 383(1) of the Rules of Court (Alberta) which provides a streamlined method to satisfy a judgement creditor's claim under the Fraudulent Preferences Act instead of the regular method whereby the judgement creditor seizes the judgement debtor's property. It gives the Court the authority to order the sale of the property to satisfy the judgement debt. Subsection 383(1) of the Rules of Court (Alberta) states:
"Where a judgement creditor alleges that he has a right to relief under either The Fraudulent Preferences Act or under the Statute 13 Eliz., Chapter 5, it is not necessary to commence an action to set aside the conveyance with respect to which the relief is sought, but the court may, on motion in the judgement creditor's action served upon the judgement debtor and upon the persons to whom it is alleged the property was conveyed, order the property or part of the property to be sold to realize the amount to be levied under execution." [Alta. Reg. 313/81]
Further, in paragraph 3 of the judgement, the Court ordered the defendant to deliver the keys to the property to the office of the plaintiffs' solicitor within five days of the defendant having been served with the court order, failing which the plaintiffs would have the right to enter the premises with a locksmith and change the locks. We also note that Rule 323 of the Rules of Court (Alberta) was waived.
On April 25, 1994, the plaintiffs accepted an offer to purchase the property from a third party, subject to the approval of the Court.
On May 9, 1994, the Court made an order whereby the sale of the property from XXXXX to the third party was approved. The Court also ordered that the sale proceeds were to be paid to the plaintiffs' solicitor, XXXXX , who was to pay out amounts owing to specific persons. Further XXXXX was ordered to retain in trust and pay any GST owing on the sale and remit the balance of the proceeds to the Sheriff's office for distribution to the writ holders on record.
Paragraph 6 of the court order should be noted. It states:
"The subject property is declared seized by an officer of the Court and the sale to XXXXX and XXXXX is a seizure within the meaning of subsection 183(3) of the Excise Tax Act and no GST is payable on the said sale."
It is important to note that the property in question, a residential complex, had not been used as a residence and had been used as a show home by the defendant.
Therefore, if the sale of the real property pursuant to the order of the Court was a supply within the scope of subsection 183(3) of the Act, then there would be a loss of revenue to the Crown equal to 7 percent of the value of the consideration less the GST new housing rebate, if any, that would be payable to the purchaser(s) in respect of the complex pursuant to subsection 254(2) of the Act.
Our Comments
In order for the deeming provision of subsection 183(3) to apply, the following specific conditions must have been satisfied:
1. There must be an order of a court;
2. The order must give direction to an officer of the court to seize property;
3. The order to seize the property must have been made for the purpose of satisfying an amount owing under a judgement of the court;
4. After the seizure, the court must make the supply of the property.
Based on the facts presented in the draft application ruling, it appeared that the first and third conditions had been satisfied. However, the second and fourth conditions were more problematic. For this reason, we discussed the matter with legal services and submitted a request for a written legal opinion. Further, since the matter involved both the law of real property in the Province of Alberta and that province's Rules of Court, our counsel consulted with, and obtained a written legal opinion from, a colleague in the Department of Justice who practices in Edmonton, Alberta.
As you are aware, this division has not yet received the written legal opinion that we requested. However, we have discussed the matter with counsel and have received a draft opinion that addresses the case at hand. On that basis, we will proceed with our response in order to expedite and finalize this case.
Counsel has advised us that, on balance, it would be difficult for the Department to conclude otherwise than that subsection 183(3) applies. Accordingly, it is our view that the Department give an affirmative ruling, namely, that subsection 183(3) applies to the sale of the real property to XXXXX and XXXXX made pursuant to the Order of the Alberta x Court of Queen's Bench dated May 9, 1994 and, therefore, the sale is not subject to the GST.
In view of the foregoing, please proceed with the draft application ruling as it is currently written. However, we would suggest that two minor changes be made. First, that the ruling requested be phrased in the affirmative by replacing the phrase "... as to whether ..." with the word "that". Second, that the ruling requested be given the heading "Ruling Requested" in conformity with the Department's standard format for application rulings.
In closing, we would like to reiterate that the application of subsection 183(3) is still under review pending the receipt of the legal opinion that we requested and the formalization of our policy regarding the general application of subsection 183(3). For that reason, should you receive any further written inquiries concerning subsection 183(3) which do not involve the same fact situation as the case at hand, we would appreciate it if you would forward it to us for comment.
If you require any further information, please do not hesitate to contact Duncan Jones at (613) 952-9210 or Peter Scanlan at (613) 952-0328.
J. Sitka
A/Director,
Financial Institutions and Corporate Reorganizations Division
GST Rulings and Interpretations
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