News of Note

A closely-held corporation (“3.38”) run by a retired notary (Blouin) made a mortgage loan to an individual who, a year after the second advance under the loan, defaulted, with 3.38 then foreclosing and, five months later (after having done some minor work on the home) selling it at a gain, representing 32% of the sales proceeds.

In finding that 3.38 had been carrying on a money-lending business, notwithstanding that it had only made two loans prior to this one, Davignon JCQ noted inter alia the rebuttable presumption in Marconi that a corporation’s activities constitute a business, the high level of risk evidenced by the 15% interest rate charged on the loan and the commercial experience of Blouin. Before further concluding that “3.38 clearly acquired the Building in the ordinary course of its business of lending money,” so that its gain on sale was income from that business, Davignon JCQ stated:

The very short period of time during which the taxpayer owned the Building clearly testifies to the animating intention at the time of its acquisition. It was never its intention to hold it as an investment, but simply to use it to recover its debt, seeing in it a business opportunity to make a profit.

Neal Armstrong. Summary of Investissements 3,38 inc. v. Agence du revenu du Québec, 2022 QCCQ 2534 under s. 9 – capital gain. v. profit – real estate.

CRA seemed to confirm that where a builder appeals a CRA assessment made under ETA s. 191(3) that challenged the FMV used by the builder at the time of first occupancy:

• CRA Appeals will refer the valuation issue to a second CRA appraiser, rather than the original appraiser;
• it will not generally ask the second appraiser to prepare a second appraisal (so that, by implication, the second appraiser generally will only review the first appraisal and, perhaps, supplement it); and
• there is no policy that the original appraiser cannot have contact with Appeals.

Neal Armstrong. Summary of 25 March 2021 CBA Commodity Taxes Roundtable, Q.2 under ETA s. 191(3).

We have published summaries of the questions posed at the 2021 CBA Commodity Taxes Roundtable and the full text of the CRA written responses (translated by us, where applicable).

Regarding Q.1, CRA confirmed that where an appeal of the builder against a CRA assessment under ETA s. 191(3) (showing an increased FMV of a new multiple unit residential complex at the time of first occupancy) resulted in that assessment being reduced or vacated, CRA has the authority (without regard to the usual time limitation periods) under ETA s. 298(6) to make a consequential reassessment to reduce the builder’s new residential rental property (“NRRP”) rebate (which also is affected by the building’s FMV).

Neal Armstrong. Summary of 25 March 2021 CBA Commodity Taxes Roundtable, Q.1 under ETA s. 298(6) and s. 301(1).

Para. (d) of the ETA definition of “builder” generally has the effect of exempting an assignment of an agreement to purchase a home from the builder where the assignor was acquiring the home for personal use, and para. (f) effectively provides a further exemption regarding such an assignment where the assignor is an individual who is not engaged in an adventure in the nature of trade or a business – whereas ETA draft s. 192.1 will eliminate this exemption. Comments of CRA on the effects of this new rule include:

• Under the new rule, where the (post-May 22, 2022) assignment agreement indicates that a part of the consideration is attributable to the reimbursement of a deposit paid by the assignor to the builder under the subject purchase and sale agreement, that deposit amount is excluded from the taxable amount of the assignment – whereas under the old regime, if the assignment was taxable, the total consideration for the assignment - including any portion referable to the assignment of the deposit - was taxable.
• Given that the amount of the new housing rebate is based on the total consideration for the taxable supply of the house, including any consideration paid by an assignee for a taxable assignment sale of an agreement to purchase the house from the builder (but excluding the amount attributable to a deposit assignment), the new rule will affect the Ontario or federal new housing rebate amounts.
• As only one new housing rebate application can be made for each new house, and the builder (“Builder A”) does not receive the consideration for the assignment of the purchase contract to the assignee:

[T]he assignee purchaser may want to file their new housing rebate application directly with the CRA rather than through Builder A. In this way, the assignee purchaser can include in the new housing rebate application the tax paid to Builder A and the tax paid to the assignor in determining the amount of their GST/HST new housing rebate and, where applicable, a provincial new housing rebate.

Neal Armstrong. Summaries of GST/HST Notice 323, Proposed GST/HST Treatment of Assignment Sales, May 2022 under ETA s. 123(1) – builder – (d), s. 254(1) - single unit residential complex, s. 254(2)(i), s. 254(4), s. 256.2(3) and s. 192.1.