398722 Alberta Ltd. v. The Queen, docket 97-1392-GST-G

Date: 19981028

Docket: 97-1392-GST-G

BETWEEN:

398722 ALBERTA LTD.,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Teskey, J.T.C.C.

[1] The Appellant appeals an assessment under the Excise Tax Act (the "Act") pertaining to the period of April 1, 1992 to December 31, 1995. The Appellant's GST account number being 109383943 and the Notice of Assessment bears number 10CT9601498.

Issues

[2] The issues, as pleaded by the Appellant, are:

a. Whether the Appellant, as a deemed recipient under subsection 191(3), was entitled to claim ITCs based on the fair market value of the 4-plex, to offset the GST it is deemed to have paid as a recipient.

b. Further or in the alternative, whether the Appellant was entitled to claim ITCs, as a registrant, under section 193 of the Excise Tax Act, and, if so, in what amount.

c. Further or in the alternative, whether the deemed self-supply of the 4-plex was an exempt supply, in whole or in part, under section 6.1 and/or section 7 of Schedule V of the Excise Tax Act.

d. Further or in the alternative, whether the Appellant was entitled to a rebate under section 256 of the Excise Tax Act.

e. Further or in the alternative, whether the supply of the 4-plex is deemed not to be a supply by virtue of subsection 191(7) of the Excise Tax Act.

f. Further or in the alternative, whether the supply of the 4-plex was necessarily incidental to the Appellant's business operations in Banff and as such either the self-supply rules do not apply or the Appellant was entitled to claim ITCs based on the fair market value of the 4-plex.

Facts

[3] At trial, no viva voce evidence was adduced. Filed with the Court was an Agreed Statement of Facts (Exhibit A-1), a Supplemental Agreed Statement of Facts (Exhibit A-2) and a Book of Documents (Exhibit A-3). The Agreed Statement of Facts reads as follow:

Agreed Statement of Facts

1. The assessments under the Excise Tax Act in the within appeal pertain to the period of April 1, 1992 to December 31, 1995. The Appellant's GST Account Number is 109383943 and the assessment number was 10CT9601498.

2. The Appellant was incorporated on March 7, 1989 and is an Alberta corporation carrying on business in and about Banff National Park and the Town of Banff.

3. Effective May 21, 1991 the Appellant purchased a leasehold interest in property located in the Town of Banff legally described as:

Plan 7524GC

Block 22

Lot 4A

Excepting thereout all mines and minerals

(the "Beaver Street Property")

for a purchase price of $225,000.00. Under Tab 8 of the Exhibit Book is a true copy of the Certificate of Title relating to the Beaver Street Property.

4. Land in the Town of Banff is Crown land and is leased. The Appellant therefore purchased a leasehold interest by way of an Assignment of Land. Under Tab 9 of the Exhibit Book is a true copy of the Assignment of Lease in respect of the Beaver Street Property.

5. At the time the Land was purchased, a house was located on the Land. The house had been used as a residence. No GST was paid by the Appellant in respect of the purchase of the Beaver Street Property.

6. The Appellant applied for and obtained a development permit (the "Beaver Street Development Permit") to construct a residential 4-plex on the Beaver Street Property. The Beaver Street Development Permit was obtained by the Appellant on July 22, 1992. A true copy of the Beaver Street Development Permit covering letter is found under Tab 10 of the Exhibit Binder.

7. Prior to obtaining the Beaver Street Development Permit, the Appellant requested of the Town of Banff that housing in the 4-plex be credited toward future commercial expansion of 208 Bear Street.

8. The request was granted in accordance with the then current policy of the Town Council.

9. Construction of the 4-plex occurred over the period August, 1992 to March 31, 1993. Construction costs totalled $223,974.00. Under Tab 18 are true copies of accountant working papers showing the construction costs associated with the Beaver Street Property.

10. The Appellant purchased and developed the Land to meet housing requirements in connection with the Appellant's existing and intended commercial activities in the Town of Banff. At the time the Land was purchased and the 4-plex was developed, the Appellant was not involved in residential housing but owned a number of commercial properties in the Town of Banff.

11. The Appellant claimed input tax credits ("ITCs") in respect of construction costs totalling $14,650.00. These ITCs were claimed in GST Returns filed between August, 1992 to June 1993. The Appellant filed GST Returns on a quarterly basis.

12. In February of 1993 the construction of the 4-plex was substantially completed and the Appellant gave possession of a residential unit in the 4-plex to a particular person under a lease for the purpose of the unit's occupancy by an individual as a place of residence and the particular person was not a purchaser under an agreement of purchase and sale of the complex.

13. The fair market value of the 4-plex as at the Possession Date was $455,000.00. Under Tab 13 is a copy of an appraisal of the Beaver Street Property.

14. The Town of Banff Land Use Bylaw, at all relevant times, provided as follows:

8.18.0 REQUIRED HOUSING

8.18.1 When any development is proposed, including a change of use of existing development, or when any existing development is, in the opinion of a development approving authority, substantially enlarged or increased in capacity, then provision shall be made for additional new housing in accordance with the regulations and standards contained in this section, as follows:

...

(b) Hotels

...

(ii) for hotels with between 60 and 100 commercial accommodation units: - 1 bedroom per 8 commercial accommodation units;

Copies of the relevant sections of the Land Use Bylaw are found under Tab 15 of the Exhibit Binder.

15. In November, 1994, the Appellant applied for a development permit to develop a 63-unit hotel located on property legally described as:

Plan 6719 BC

Block 6

Lot 27

Plan 6395FP

Block 6

Lots 28, 29 & 30

Plan 8810133

Block 6

Lot 31

and municipally described as 208 Bear Street (also 208 Caribou Street), in Banff, Alberta (the "Bear Street Property").

16. A development permit (the "Bear Street Development Permit") was granted based in part on the fact that the Appellant met the housing requirements of the Land Use Bylaw due to the construction of the 4-plex and related housing credit. A true copy of the Bear Street Development Agreement and Permit is found under Tab 14 of the Exhibit Binder.

17. The Hotel was constructed between September, 1995 and June, 1996. Under Tab 17 of the Exhibit Binder is the Occupancy Permit in respect of the Hotel.

18. The Hotel is owned and operated by the Appellant. Under Tab 16 are true copies of Business Licences for 1997 and 1998 in respect of the Hotel.

19. The Appellant did not remit or record as payable GST on the fair market value of the 4-plex in any GST return.

20. By Notice of Assessment dated May 15, 1996 the Appellant was reassessed and found to owe $61,677.95 in GST plus $17,313.74 in interest and penalties for a total of $78,991.69. Of the GST amount, $29,766.36 is related to GST payable due to the self-supply of the 4-plex. The amount of penalties and interest charged in respect of GST attributable to the self-supply is approximately $8,355.78.

21. The Appellant paid the GST and the penalties and interest shown to be payable in the Notice of Assessment by way of a set-off applied by the Respondent against amounts otherwise refundable to the Appellant.

22. The Appellant filed a Notice of Objection #114536824 (Tab 6 of the Exhibit Binder).

23. On February 18, 1997 the Appellant received a Notice of Decision dated February 10, 1997 in respect of its objection (Tab 7 of the Exhibit Binder). The objection was disallowed.

24. The Appellant was a GST registrant.

25. The Appellant acted as its own contractor in respect of the construction of the 4-plex.

26. The Appellant has retained full ownership of the 4-plex throughout the relevant period and has made no sale of the 4-plex, in whole or in part.

Supplemental Agreed Statement of Facts

1. The commercial development and intended commercial activities referred to in paragraphs 7 and 10 of the Agreed Statement of Facts was specifically the development and operation of a Hotel on the Bear Street Property.

2. Prior to the development of the Hotel on the Bear Street Property, the Appellant leased retail and office space to commercial subtenants on the Property.

3. At all material times the Appellant had retained an accounting firm to advise the Appellant regarding its GST obligations and to assist the Appellant with the filing of its GST returns.

4. The Appellant was not advised regarding the self-supply rules and only learned of the self-supply of the 4-plex when reassessed in 1996.

5. The first individuals to occupy the 4-plex premises did so on the basis of month to month tenancies.

6. At all material times leases between the Appellant and residents of the 4-plex were on the basis of month to month tenancies.

[4] Paragraph 9 of the Development Agreement between the Appellant and the Town of Banff (Tab 14 of Exhibit A-3) reads:

9 ACCOMODATION UNITS

9.1 The Developer acknowledges and agrees that an Occupancy Permit for the Development will not be issued by the Town unless and until the Developer has constructed and caused to be constructed at a location acceptable to the town the Accommodation Units and an occupancy permit in respect of the Accommodation Units as been issued by the Town.

9.2 The Developer agrees that the Accommodation Units will be dedicated exclusively to accommodating staff employed in operation of the Development.

9.3 The Developer acknowledges and agrees that if it fails to maintain the Accommodation Units called for under this Agreement for the purpose set forth in Section 9.2, the Town may in its sole and unfettered discretion:

9.3.1 refuse to issue the Occupancy Permit in respect of the Development; and

9.3.2 if the Occupancy Permit has already been issued, revoke or terminate the Development Permit issued for the Development.

Analysis

[5] The Respondent's position is that the 4-plex must be considered as a separate residential complex, pursuant to subsection 141(5) and as such, there was a deemed disposition on occupancy pursuant to section 191 and when applying subsection 169(1) concerning input tax credits. The "B" in the formula is zero and therefore, there are no tax credits available to the Appellant.

[6] If the Respondent's position is accurate then under these circumstances, there is double taxation. The Appellant would have paid GST on all supplies while building the 4-plex, then again have to pay a further seven percent on the market value of the 4-plex on occupancy.

[7] This would be contrary to the whole scheme and intent of the Act. The Act provides that each entity shall charge GST on all supply and service. As an item is progressing, each supplier, besides charging the GST on the supply, receives input tax credits for GST paid. Thus, the GST goes up the line to the end consumer, who pays seven percent on the final value with each supplier down the line getting credit for GST paid against GST collected.

[8] The Appellant who was "not" in the residential development business decided to build a 63-unit hotel in the Town of Banff. The building of the 4-plex in question was a condition precedent to obtaining the necessary approvals to build the Hotel. Thus the 4-plex cannot be considered in isolation as a residential development but must be considered as part and parcel of the commercial development in the 63-unit hotel.

[9] Subsection 141(1) of the Act reads:

For the purposes of this Part, where substantially all of the consumption or use of property or a service by a person, other than a financial institution, is in the course of the person's commercial activities, all of the consumption or use of the property or service by the person shall be deemed to be in the course of those activities.

[10] The 4-plex was an integral part of the Appellant's commercial development, without resort to this provision. Subsection 141(5) separates the 4-plex, for the purposes of interpreting various sections of the Act. This subsection 141(5) reads:

For the purposes of subsections (1) to (4), where real property includes a residential complex and another part that is not part of the residential complex,

(a) the residential complex and the other part shall each be deemed to be a separate property; and ...

[11] Section 191 deals with self-supply of residential properties and subsection (3) deals with multiple unit residential complexes. Paraphrased, it reads:

Where

(a) the construction of a multiple unit residential complex is substantially completed;

(b) the builder gives possession to a particular person under a lease who is not a purchaser, and

(c) the particular person is the first to occupy a residential unit in the complex as a place of residence;

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 unit is so given to the particular person or the unit 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.

[12] Thus, the 4-plex herein falls within this provision and there was a deemed disposition when occupancy was given.

[13] Subsection 169(1) is the provision concerning input tax credits, which reads:

Subject to this Part, where a person acquires or imports property or a service or brings it into a participating province and, during a reporting period of the person during which the person is a registrant, tax in respect of the supply, importation or bringing in becomes payable by the person or is paid by the person without having become payable, the amount determined by the following formula is an input tax credit of the person in respect of the property or service for the period:

A x B

where

A is the tax in respect of the supply, importation or bringing in, as the case may be, that becomes payable by the person during the reporting period or that is paid by the person during the period without having become payable; and

B is

(a) .... (does not apply)

(b) .... (does not apply)

(c) in any other case, the extent (expressed as a percentage) to which the person acquired or imported the property or service or brought it into the participating province, as the case may be, for consumption, use or supply in the course of commercial activities of the person.

[14] Paragraph (c) can be paraphrased as follows: "in any other case, the extent (expressed as a percentage) to which the Appellant acquired the property, for use in the course of its commercial activities".

[15] Thus, for the purposes of section 191, the 4-plex is separated from the hotel as a separate property, which it was in any event. However, subsection 145(5) does not and cannot change the fact that the 4-plex used by the Appellant is in the course of its commercial activity of owning and operating a 63-units hotel. Thus, "B" in the formula is 100 percent.

[16] The appeal is therefore allowed, with costs, and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that a disposition of the 4-plex, pursuant to section 191, has taken place and the Appellant is entitled to its input tax credits as provided by subsection 169(1) of the Act. Any penalty and interest to be only levied against any net difference.

Signed at Ottawa, Canada, this 28th day of October, 1998.

"Gordon Teskey"

J.T.C.C.