277287 Alberta Ltd. v. R., [1997] 3 C.T.C. 2380

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[1997] 3 C.T.C. 2380

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Text of decision

Bell T.C.J.:

Issue:

1 The issue is whether the Appellant, a land developer, is liable for tax in respect of the supply of real property building lots to certain purchasers. The issue will be resolved by the interpretation of subsection 336(1) of the Excise Tax Act (the “Act”), Part IX, which reads as follows:

Where
(a) a taxable supply by way of sale of real property is made to a person, and
(b) ownership or possession of the property is transferred under the agreement for that supply to the person before 1991,
no tax is payable in respect of the supply.

Facts:

2 In 1990 the Appellant entered into a written agreement with each of three purchasers for the sale of a lot in the Province of Alberta. Legal title was conveyed to each purchaser in 1991. One agreement provided for the payment of the full purchase price

upon the sale of #4 Varbrook Pl. N.W. Calgary or by June 1/91.

It also provided that if, before that time, a cash offer to purchase the property was made the purchaser “must close this deal within 7 working days”. Another agreement contained the condition of the

Purchaser obtaining valid bldg. permit from the M.D. of Rockview.

The third agreement provided for the payment of the purchase price

upon verification that power will be supplied to the property.

It also contained the condition

that the property be free of all encumbrances and no liens etc. subject to our lawyer checking this on our behalf.

3 The Appellant did not collect and did not report the collection of Goods and Services Tax (“GST”) on the conveyance of legal title of the lots in 1991. It was assessed for same together with interest and penalty and it is in respect of that assessment that this appeal is made.

4 The Respondent produced one Janet Caroll Fisher, a Revenue Canada Audit Official, as a witness. She referred to a document entitled

POLICY NUMBER P-111:
THE MEANING OF SALE WITH RESPECT TO REAL PROPERTY

This is described as having been issued on May 25, 1993 and revised in February, 1995. There was no revision to the portion which she read to the Court and upon which she based her decision to confirm the assessment. That reads as follows:

A. Transfer of Ownership
For purposes of the provisions relating to supplies of real property which refer to transfers of ownership, such as subsections 168(5) and 336(1), (2) and (3) of the Act, “ownership” generally refers to the legal ownership (that is “titled” ownership in the case of the underlying real property), rather than equitable ownership of property. Accordingly, references to agreements of sale or agreements to transfer ownership of the underlying real property are generally to the ownership of the property that is transferred on the closing of the transaction. As discussed subsequently, the transfer of legal ownership of an equitable interest in real property may be considered a sale of real property. Further, as subsequently discussed, unless specifically referred to in the provision, a sale of real property generally arises upon the transfer of ownership even where there may be no agreement to transfer ownership.
(emphasis added)

The Appellant stated that, with respect to the three purchasers, they wanted to enter into the Agreements to Purchase the lots in 1990 but did not want to obtain title until 1991. He then said,

The GST was coming into effect and individuals were concerned how this sale would affect them if the GST was payable, so was I. At that time GST had a hotline number for any inquiries and I called this number and was speaking with an individual and I explained the situation that I had customers that wanted to get an agreement to purchase this property but did not want the land transferred until sometime in the spring of '91 and we talked about the implications, at that time the manufacture stats and how it affected what it had to do with the GST, and he informed me that if we had an agreement to purchase this property in 1990 the GST would not be payable on this property, and I took that as being correct and handled it in that manner thereafter.

He said that he did not make notes of that conversation because he had “a specific question on GST to ask and he told me how to handle it and I presumed that I could follow this”.

Analysis and Conclusion:

5 The question to be answered is whether in each case ownership or possession of the lot was transferred to the purchaser before 1991. It is clear that possession was not conveyed in 1990. I have concluded that the Appellant became a trustee for the purchasers on the execution of the aforesaid agreements in 1990 and, therefore, they became the beneficial owners of the lots in that year. In Buchanan v. Oliver Plumbing & Heating Ltd. (1959), 18 D.L.R. (2d) 575 (Ont. C.A.), the Ontario Court of Appeal held that once a contract for the sale and purchase of land is carried into effect, whether by actual conveyance or by performance of all obligations short of the formal conveyance, the completion relates back to the date of the contract and the vendor may properly be regarded as trustee for the purchaser as beneficial owner. Schroeder, J.A., at page 579, in referring to the true relationship which exists between a vendor and a purchaser of lands after they have entered into a valid contract of sale, referred to the words of Jessel, M.R. in Lysaght v. Edwards (1876), 2 Ch. D. 499 (Eng. Ch. Div.), at pp. 505-6,

That being so, the next point I have to consider is, What is the effect of the contract? It appears to me that the effect of a contract for sale has been settled for more than two centuries; certainly it was completely settled before the time of Lord Hardwicke, who speaks of the settled doctrine of the Court as to it. What is that doctrine? It is that the moment you have a valid contract for sale the vendor becomes in equity a trustee for the purchaser of the estate sold, and the beneficial ownership passes to the purchaser, the vendor having a right to the purchase-money, a charge or lien on the estate for the security of that purchase-money, and a right to retain possession of the estate until the purchase-money is paid, in the absence of express contract as to the time of delivering possession.

With respect to the contract being completely carried into effect, the learned Justice referred to the principles enunciated by James L.J. in Rayner v. Preston (1881), 18 Ch. D. 1 (Eng. C.A.)at p. 13, namely:

I am of opinion that the relation between the parties was truly and strictly that of trustee and cestui que trust. I agree that it is not accurate to call the relation between the vendor and the purchaser of an estate under a contract while the contract is in fieri the relation of trustee and cestui que trust. But that is because it is uncertain whether the contract will or will not be performed, and the character in which the parties stand to one another remains in suspense as long as the contract is in fieri. But when the contract is performed by actual conveyance, or performed in everything but the mere formal act of sealing the engrossed deeds, then that completion relates back to the contract, and it is thereby ascertained that the relation was throughout that of trustee and cestui que trust. That is to say, it is ascertained that while the legal estate was in the vendor, the beneficial or equitable interest was wholly in the purchaser.... Wherever that state of things occurs, whether by act of the parties or by act or operation of law, whether it is ascertained from the first or after a period of suspense and uncertainty, then there is a complete and perfect trust, the legal owner is and has been a trustee, and the beneficial owner is and has been a cestui que trust.

Justice Schroeder then applied that principle to the facts of the case before him and determined that the completion of the contract related back to the contract itself so that there had been established a complete and perfect trust and that the plaintiff, Buchanan, was the trustee, and the plaintiff, James, the beneficial owner of the property, the cestui que trust. This decision was applied in a number of other cases.[FN1: Whiterose Construction Co. v. Etobicoke (City) Board of Education, [1968] 2 O.R. 311 (Ont. Co. Ct.)Edgeley Farms Ltd. v. Uniyork Investments Ltd., [1970] 3 O.R. 131 (Ont. C.A.)Townsend v. Bridgett(1987), 60 O.R. (2d) 146 (Ont. Dist. Ct.)Feeney v. Noble(1994), 19 O.R. (3d) 762 (Ont. Div. Ct.)Martin Commercial Fueling Inc. v. Virtanen(1993), [1994] 2 W.W.R. 348 (B.C. S.C.)Martin Commercial Fueling Inc. v. Virtanen(1997), 144 D.L.R. (4th) 290 (B.C. C.A.)]

6 Because of the completion of the contracts, the conditions under the agreements in this appeal are of no significance.

7 It is clear that “legal ownership” connotes the registration of title in the name of the legal owner. “Beneficial ownership” connotes an interest in the property, capable of leading to the acquisition of legal title. In the recent decision of the Federal Court of Appeal in Dale v. R.,[FN2: Judgment rendered on (April 21, 1997), Doc. A-15-94 (Fed. C.A.) not yet reported.] Robertson, J.A. said:

In determining whether a legal transaction will be recognized for tax purposes, one must turn to the law as found in the jurisdiction in which the transaction is consummated. Often that determination will be made without the aid of guiding precedents which are on point and, hence, the effectiveness of a transaction may depend solely on the proper application of general common law and equitable principles. In some instances it will be necessary for the Tax Court to interpret the statutory law of a province.

The Land Titles Act of Alberta, Chap. L-5, RSA 1980, section 1(s) defines “owner” as follows:

“owner” means a person entitled to any freehold or other estate or interest in land, at law or in equity, in possession, in futurity or expectancy.

A “beneficial owner” is clearly an “owner” within this definition. The word “ownership” is defined by The New Shorter Oxford English Dictionary, edited by Lesley Brown, Volume 2, as meaning

The fact or state of being an owner;

Accordingly, the Appellant had transferred “ownership” of the lots to the three purchasers before 1991.

8 In written submission, Respondent's counsel stated,

The Crown does not concede the contents of the alleged conversations that Mr. Herman stated he had with a Revenue Canada employee due to the fact that Mr. Herman is unable to name the employee or provide further information which would identify the employee.

9 I accept the Appellant's evidence that he did speak to a Revenue official on the “hotline” and I find it not unusual that he did not request and record the name of that official. I also accept his evidence that he was given the information and advice described above. It is noted that although that official in 1990 seemed clear in his appraisal of the Appellant's request it was not until some two and a half years later that the policy document described above was issued.

10 Respondent's counsel submitted that the words “ownership ... of the property is transferred to the person” means transfer of legal title and that this view conforms more closely with the object, spirit, and scheme of the legislation and the rules of statutory interpretation. She said that in subsections 336(1) and 168(5) the Department of Finance was attempting to identify a reasonably clear point in time for the incidence of taxation in the context of executory real estate contracts. She stated further that the Department of Finance had to use generic terminology applying to all territorial and provincial jurisdictions. However, it seems that that Department either failed to analyze the word “ownership” from a legal perspective or sought to impose the meaning it wished to attribute to that word by using that “generic terminology” instead of stating clearly what seems to have been intended. Subsection 168(5) reads in part as follows:

Notwithstanding subsections (1) and (2), tax under this Division in respect of a taxable supply of real property by way of sale is payable...
(b) in any other case, on the earlier of the day ownership of the property is transferred to the recipient and the day possession of the property is transferred to the recipient under the agreement for the supply

Counsel referred to the February, 1990 Explanatory Notes to Bill C-62 saying that Parliament's very clear intent was revealed therein. That note reads, in part, as follows

Under subsection 168(5), G.S.T. on a sale of real property is payable on the day on which possession or title to the property transfers to the buyer, whichever is earlier.
Subsection 336(1) confirms that no G.S.T. is payable in the case of real property sold to a person where title or possession of the property is transferred to the person before 1991.
(emphasis added)

11 She then referred to Explanatory Notes to Bill C-62 as passed by the House of Commons on April 10, 1990 which provide in part that

Subject to the condition that the amount of the consideration is ascertainable (see subsection 168(6)), this subsection provides that, in the case of a taxable sale of real property, GST generally is payable on the earlier of the day on which ownership is transferred to the recipient (i.e., “closing”) and the day on which possession of the property is transferred to the recipient.

In this situation the notes are more explanatory of the Department of Finance's views than they are of the accompanying legislation. This Court's function is not to be directed by them but to interpret the legislation that in fact was passed by Parliament. I reject the submission of Respondent's counsel that the Explanatory Notes make the intent of Parliament very clear. They make the intent of the Department of Finance clear. Why should a Court presuppose that Parliament's intent was shaped by the notes? Surely legislators should be expected, if not obliged, to read and understand draft legislation and not simply to rely on notes presenting an interpretation of the draft. These notes explain not what the legislation achieves but what the Department of Finance would like it to have achieved. The legislation is different in substance from those Notes. It would have been an easy task for the persons preparing this legislation to have used clear language had they sought to confine the meaning of “ownership” to legal title.[FN3: <ul>The concept of “legal ownership” and “beneficial ownership” is not unknown to legislators because it is employed in subparagraph 54(c)(v)(now paragraph 54(e)) of theIncome Tax Actwhich reads as follows<li>“disposition” of any property, except as expressly otherwise provided, includes...</li><li>(e) any transfer of property by virtue of which there is a change in the legal ownership of the property without any change in the beneficial ownership thereof, ...</li></ul>]

12 Counsel referred to the words of Bonner, J. of this Court in Atriums at Willowells Partnership v. R., [1996] G.S.T.C. 7 (T.C.C.). In deciding whether ownership of a condominium passed prior to 1991, he said

When para. 336(3)(b) speaks of ownership, it speaks of it as of something distinct from possession. The statutory language suggests to me that the legislature envisaged ownership as involving either legal title or something very close to it. It did not envisage an approximation of ownership derived from inferences of the sort which might be drawn from the Agreement of Purchase and Sale in this case.

That decision is of no assistance in this case because the subject matter of the trust, before registration of the condominium project, was an undivided interest in the entire project rather than a particular unit. She also referred to White Rock Management Corp. v. R., [1995] G.S.T.C. 50 (T.C.C.)where Sobier, J. of this Court said:

The purchasers were liable for GST, and were not entitled to the benefits under subsection 336(1) since ownership or possession was not transferred to them before 1991.

That matter was not in issue in that case and apparently no submissions were made in that regard, there being no discussion by the learned Judge of the elements taken into account in the present case.

13 Counsel also submitted that the Appellant's interpretation would produce a happy result for someone who entered into agreements for sale before 1991 but would accelerate the date of taxation under subsection 168(5). By this she apparently meant that on the basis of the Appellant's submission a person purchasing land under a five year agreement for sale without conveyance of legal title until full payment is made would be subject to tax in the first year. This may be so but it seems inappropriate to deny relief to the Appellant simply because other parties may be adversely affected. An amendment to the Act with retroactive effect, a well-known companion of Canadian tax legislators, would cure this situation.

14 For the foregoing reasons, the appeal is allowed.

15 Since the appeal is allowed, it will not be necessary to deal with any submissions respecting interest and penalties which of course will no longer be applicable.

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