Citation: 2011 TCC 353
Date: 20110802
Docket: 2009-3264(GST)I
BETWEEN:
CANPAR DEVELOPMENTS INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
(Delivered orally from the bench on March 2, 2010, in Toronto, Ontario.)
Paris J.
[1]
This is an appeal from
an assessment of GST arising from a transfer by the Appellant of a house it was
building to its two shareholders. The Appellant did not collect or remit GST
on the transfer. The Appellant says that it only transferred legal title to
the property to its shareholders and retained the beneficial interest, and
therefore, that there was no supply that would give rise to an obligation to
collect GST.
[2]
The Minister assessed
the Appellant on the basis that it transferred both the legal and beneficial
interest in the property to its shareholders, thereby resulting in a supply of
property on which GST was required to be collected pursuant to sections 165 and
221 of the Excise Tax Act.
[3]
The assumptions of fact
relied upon by the Minister in assessing are set out in paragraph 9 of the
Reply to Notice of Appeal and will form part of these reasons:
a) the appellant is a small scale builder of new residential
housing;
b) the appellant was, at all material times, registered for GST
purposes;
c) the appellant’s sales of new residential housing were taxable at
a rate of 7 per cent;
d) Terry Canning (“Canning”) and Subhash Parmar (“Parmar”) each held
50 per cent of the common shares of the appellant at all material times;
e) Canning and Parmar controlled the appellant;
f) Canning and Parmar were not a arm’s length with the appellant;
g) on or about September 9, 2005, the appellant transferred the
Oakridge Property to Canning and Parmar for fair market value (“Transfer”);
h) prior to September 9, 2005, the Oakridge Property was one of the
properties held by the appellant in its inventory;
i) on or about September 9, 2005, Canning and Parmar obtained a
mortgage in respect of the Oakridge Property of $401,250 from the
Toronto-Dominion Bank;
j) the fair market value of the Oakridge Property at the time of
Transfer was $495,000;
k) no bare trust was established in respect of the Oakridge
Property;
l) Canning and Parmar did not hold the Oakridge Property in trust
for the appellant after the Transfer;
m) Canning and Parmar made all of the decisions in respect of the
Oakridge Property after the Transfer;
n) the appellant did not hold any legal or beneficial interest in
the Oakridge Property after the Transfer;
o) the amount of GST collectible in respect of the transfer of the
Oakridge Property was $34,650;
p) the appellant did not report any revenue or GST collectible in
respect of the transfer of the Oakridge Property in its GST returns;
q) the appellant did not claim Input Tax Credits (“ITCs”) in respect
of the Oakridge Property after the date of the Transfer; and
r) the appellant failed to remit any GST collectible in respect of
the transfer of the Oakridge Property to the Receiver General.
[4]
Mr. Subhash Parmar, a
director and 50 percent shareholder of the Appellant, gave evidence that the Appellant
had borrowed money to finance the purchase of the lot on Oakridge Trail in
Oshawa in 2004 and that it borrowed an additional amount to finance the
construction of a house on the lot. In the summer of 2005, the lenders
demanded repayment, and the Appellant was required to find replacement
financing.
[5]
Mr. Parmar approached
the Bank of Nova Scotia and TD Canada Trust, but both refused to loan money to
the Appellant and would only consider giving a mortgage on the property if it
was put into the names of Mr. Parmar and Mr. Canning, the other shareholder.
Mr. Parmar said that in order to obtain the financing from TD Canada Trust, the
Appellant transferred the property to Mr. Canning and himself. Documents in
evidence showed that the property was registered in their names as tenants in
common on September 9th, 2005.
[6]
Mr. Parmar said the
transfer was only done to obtain financing and that the Appellant continued to
be treated as the owner of the property. It paid all of the remaining
construction costs as well as the utility bills. When the property was
ultimately sold in January 2008, the net proceeds from the disposition were
deposited into the Appellant's bank account.
[7]
Evidence adduced by the
Respondent showed, however, that at the time of the transfer, the Appellant
recorded it as a sale to Mr. Parmar and Mr. Canning. In the Appellant's books,
the property was removed from inventory and the shareholder loan accounts of
Mr. Parmar and Mr. Canning were debited for an amount equal to the Appellant's
cost of the property. Mr. Parmar said that this representation of the sale of
the transfer was made in error by the Appellant's bookkeeper and was later
reversed by the Appellant.
[8]
The first matter that I
am required to address is whether Mr. Parmar and Mr. Canning held the property
in trust for the Appellant subsequent to the transfer of title which occurred
on September 9th, 2005. Three criteria must be met in order to establish a
valid trust. These are certainty of intention, certainty of subject matter and
certainty of objects. It must be clear that the settlor of a trust intended
that the property transferred to the trustee be held in trust as a binding
obligation. The property that is the subject of the trust and the
beneficiaries of the trust must be identifiable, and the interest the
beneficiaries in the trust property must be defined.
[9]
The Appellant has the
onus to show that the requirements for the creation of a trust have been met.
In this case, the requisite certainty of intention has not been established.
Firstly, the existence of the trust was not recorded on the transfer
documents. Secondly, the evidence shows that TD Canada Trust required that the
property be held by the two shareholders as a condition of obtaining the
necessary financing. It is illogical, in my view, that TD would have accepted
that the property still be beneficially owned by the Appellant after the
transfer when it, Toronto Dominion, was advancing funds on the basis that the
property was registered in the names of the shareholders. I can see no other
reason why TD Canada Trust would have required the property to be put into the
names of the shareholders except that it required them to have beneficial
ownership of it.
[10]
Thirdly, as pointed out
by counsel for the Respondent, there was no evidence that either Mr. Parmar and
Mr. Canning ever advised TD Canada Trust of the existence of a trust with
respect to the property, and I infer from this that no such representation was
made. This is inconsistent, in my view, with an intention to create a trust. The comments of Justice Bowman in Erb v. The Queen, 2000 D.T.C.
1401 in this regard, I think, are appropriate. Justice Bowman said at
paragraph 26:
It strikes me that where a person transfers property to someone else
by a deed or conveyance that on its face is absolute and does so to achieve a
purpose that is premised upon a transfer on beneficial ownership that would
require very cogent evidence to establish that the transferor had no intention
of doing what the documentation unequivocally shows that it did do and that
intended to withhold from the grantee beneficial title to the property.
[11]
It is my impression
that Mr. Parmar and Mr. Canning were very anxious to obtain replacement
financing for the property in the summer of 2005 and that the transfer of the
property was done without any consideration of the tax consequences that would
flow from it. I infer that neither Mr. Parmar nor Mr. Canning turned their
mind to the creation of a trust at the time of the transfer.
[12]
I am also not convinced
the manner in which the transaction was first recorded by the Appellant in its
books and records was an error. The records were not amended until after the
commencement of the audit by the CRA which led to the subject assessment.
Furthermore, I draw a negative inference from the Appellant's failure to call
the bookkeeper, Ms. Cunningham, as a witness to corroborate Mr. Parmar's
testimony on this point.
[13]
I accept that after the
transfer of the property to the shareholders, the Appellant continued to pay
the expenses related to the property, but this alone does not outweigh the
factors which point to the lack of an intention to create a trust.
[14]
The Appellant's
representative also suggested that the transfer of the property to Mr. Parmar
and Mr. Canning fell within section 134 of the Excise Tax Act as the
transfer of a security interest and therefore should be deemed not to be a
supply. Section 134 reads:
For the purpose of this part where, under an agreement entered into
in respect of a debt or obligation, a person transfers property or an interest
in property for the purpose of securing payment of the debt or performance of
the obligation, the transfer shall be deemed not to be a supply, and where on
payment of the debt or performance of the obligation or the forgiveness of the
debt or obligation, the property or interest is retransferred, the retransfer
of the property or interest shall be deemed not to be a supply.
[15]
However, there is no
evidence that the Appellant transferred the property to Mr. Parmar and Mr.
Canning in order to secure the payment of a debt or the performance of an
obligation to them. The debt or obligation referred to in section 134 is one
that is owed by the transferor of the property to the transferee.
[16]
According to David
Sherman's Analysis:
The objective of section 134 is clear. A pledge, mortgage or
similar transfer made for the purpose of securing a debt is not really a
transfer of the property. Unless and until the security is realized to pay for
the debt, no transfer of the property has taken place.
[17]
For these reasons, I
find that the Appellant was liable to collect and remit GST on the transfer of
the property to Mr. Parmar and Mr. Canning on September 9th, 2005.
[18]
The second issue before
me is whether gross negligence penalties were properly imposed under section
285 of the Excise Tax Act. That section reads as follows:
Every person who knowingly, or under circumstances amounting to
gross negligence, makes or participates in, assents to, or acquiesces in the
making of a false statement or omission in a return, application, form,
certificate, statement, invoice or answer (each of which in the section is
referred to as a “return”) made in respect of a reporting period or transaction
is liable to a penalty of --
The section goes on to set out the manner in which the
penalty is calculated.
[19]
In Venne v. The
Queen, 84 D.T.C. 6247, Mr. Justice Strayer stated:
Gross negligence must be taken to involve
greater neglect than simply a failure to use reasonable care. It must involve
a high degree of negligence tantamount to intentional acting and indifference
to whether the law is complied with or not.
[20]
Furthermore, as noted
by Justice Bowman in Farm Business Consultants Inc. v. The Queen,
95 D.T.C. 200, a court must be extremely cautious in sanctioning the imposition
of a gross negligence penalty.
[21]
In the circumstances of
this case, I am not satisfied that the Appellant's conduct regarding the
failure to collect and remit GST on the transfer of the property in issue
amounted to gross negligence on its part. I accept that Mr. Parmar and Mr.
Canning believed that GST would not become payable until the property was
disposed of to an arm's length party. I also accept that they believed that
the Appellant maintained some interest in the property given that it continued
to pay the expenses related to it. Although that belief was incorrect in law, it
appears to me that Mr. Parmar maintained that subjective belief and I infer
Mr. Canning did as well. I believe they were negligent in not seeking legal
advice regarding the tax consequences of the transfer, but this was not in
itself tantamount to an intentional of disregard of its obligations under the Excise
Tax Act.
[22]
In my view, the tax
consequences of a transfer between non-arm's length parties is often a complex
matter and one that experienced business people may misunderstand. Again, this
alone while amounting to negligence would not constitute gross negligence as
that term has been defined in the case law.
[23]
For these reasons, the
appeal is allowed in part and the matter shall be
referred back to the Minister of National Revenue for
reassessment on the basis that
the section 285 gross negligence penalty be deleted.
Signed at Vancouver, British Columbia, this 2nd
day of August 2011.
“B.Paris”
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