Date: 20020204
Docket: 2000-4613(GST)G
BETWEEN:
POLYGON SOUTHAMPTON DEVELOPMENT LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Miller, J.T.C.C.
ISSUES:
[1] The issues to be determined in
this appeal are:
1. Is Polygon Southampton
Development Ltd. ("Polygon") obliged to self assess in
respect of the supplies of real property pursuant to subparagraph
191 (1)(b)(ii) of the Act?
2. If Polygon is not
required to self assess is the Purchase Price for each strata lot
lease deemed to be Goods and Services Tax
("GST")-included pursuant to section 194 of
the Act?
3. If the Purchase Price
for each strata lot is deemed to be GST-included pursuant
to section 194 of the Act, is the New Housing Rebate
("NHR") calculated on the whole Purchase Price for each
strata lot lease pursuant to section 254 of the Act?, If Polygon
is required to self-assess, is the NHR to be calculated on
the whole Purchase Price or on only on the building value of the
units further to section 254.1(2)(h) of the Act?
4. Is Polygon entitled to
any NHRs in excess of the amounts it has already paid or credited
to Purchasers?
[2] The following represent the facts
agreed to by the Appellant and Respondent, upon which I rely:
AGREED STATEMENT OF FACTS AND DEFINITION OF
ISSUES
1. This is an
appeal in the case of the Appellant, Polygon Southampton
Development Ltd., ("Polygon") from an assessment of
Goods and Services Tax ("GST") dated July 10, 2000, in the
amount of $183,670.25 in respect of dispositions of interests in
townhouses situated
in Vancouver.
...
4. Polygon is
a corporation whose principal business at the relevant times was
the development of new residential condominium units on lands
legally described as Lot 1, District Lots 330, 2100 and 6320
Group 1, New Westminster District Plan LMP36920. The civic address
of the development is: 3038 East Kent Avenue South, Vancouver,
British Columbia, 3068, 3062, 3060, 3058, 3052, 3050, 3048, 3042
and 3040 East Kent Avenue South, 8598, 8592, 8586, 8580, 8574,
8568, 8562, 8556, 8550, 8515, 8521, 8527, 8533, 8539, 8577, 8583,
8589, 8595 and 8599 Aquitania Place, Vancouver, British Columbia.
5. Polygon is
a "builder"for GST purposes.
6. Polygon was
registered under Part IX of the Excise Tax Act (the
"Act") effective February 7, 1995 and was assigned GST registration number
895219582RT.
...
8. In the
period from January 1, 1996 to July 26, 2000 Polygon disposed of
its interest in 78 new residential condominium units (the
"Units").
9. The Units
are residential condominium units as contemplated by the Excise
Tax Act.
10. The Units were
developed by Polygon on undeveloped land it had leased from the
City of Vancouver, a public authority. The improvements made by
Polygon were subject to the restrictions of Part 3 of the
Condominium Act. Attached as Tab 1 is a copy of the original
Ground Lease as between the City of Vancouver and Polygon.
11. The Ground Lease for
the condominium development was converted by Polygon into
individual strata lot leases as a result of the deposit by
Polygon and with the consent of the City of Vancouver of a leasehold strata plan
pursuant to Part 3 of the Condominium Act.
12. The basic rent under
the Ground Lease provided is $3,705,555.00.
13. Article XXV of the Ground Lease
provides for the conversion of the Ground Lease by Polygon into
strata lots as soon as reasonably possible and for the registration of the Strata Lot Plan in accordance with
the provisions of the Condominium Act and the Land Title Act.
Each of the individual strata lot leases incorporates the terms
of a Model Strata Lot Lease which runs for a period of 99
years.
14. Polygon constructed a
residential development comprised of residential condominium
units on the land in accordance with the Strata Lot Plan. The
complete project comprised of 50 Units in one three storey apartment
complex and 28 units in four three storey townhouse complexes for a total of
78 leasehold
strata lots. Each Unit is a strata lot as defined in the Ground
Lease and Model Strata Lease. Attached as Tab 2 is a copy of the
Model Strata Lot Lease.
15. Article 2.01 of the
Model Strata Lot Lease provides for the basic rent of the strata
lot lease as follows:
"if the Basic Rent under the Ground Lease has not been
paid, the Lessee covenants and agrees to prepay to the Lessor by
the dates provided in the Ground Lease, as rent
for and during the Term the Basic Rent for each of the Strata Lots as determined by
dividing the unpaid basic rent under the Ground Lease by the
total number of Strata Lots."
16. Section 15.02 of the
Model Strata Lot Lease provides for the assignment, transfer or
conveyance of Polygon's interest in the strata lots in a form
attached thereto as "Terms of Instrument - Part 2 -
Assignment".
17. The form providing for
the assignment, transfer or conveyance of Polygon's interest
in the strata lots, entitled "Terms of Instrument - Part 2 - Assignment" provides
as follows:
a) In
paragraph C, the
land underlying the Ground Lease has been subdivided into strata
lots by the deposit of a leasehold strata plan and the Registrar has issued in
the name of the City, as registered owner in fee simple, new
certificates to title to each of the strata lots shown upon the
leasehold strata plan.
b)
in paragraph D,
the deposit of the leasehold strata plan converted the Ground Lease into
individual leases in the name of Polygon in respect of the
interest of the Polygon in each strata lot including its share in
the common property;
c) in
paragraph E,
Polygon agrees to assign to each purchaser Polygon's interest
in the particular strata in consideration of a sum to be paid by
the purchaser (the "Purchase Price"). The Purchase
Price under the contract is stated as a single amount and is not
allocated between the buildings and land components of the strata
lot.
...
19. Among others, the
contract of purchase and sale has the following terms and
conditions:
a) "The
Purchaser acknowledges that this contract is for the purchase of
an assignment of Polygon's interest in the balance of the
term remaining in a pre-paid ninety-nine year strata
lot lease of the individual leasehold stata [sic] lot containing the Home. The
individual strata lot lease to be assigned to the Purchaser will
be entered into by Polygon and the strata corporation following
deposit in the Land Title Office of the leasehold strata plan. The
form of individual strata lot lease is identified as the
'model strata lot lease' in the ground lease entered into
between Polygon and the City of Vancouver (the "City")
registered in the Land Title Office under number BL152744 (the "Ground
Lease"). Additional particulars of the Ground Lease and the
individual strata lot lease are described in paragraph 3 of
Polygon's Disclosure Statement." (clause 5)
b)
"The Home and all other items included in the Purchase and
Sale will be and remain at the risk of Polygon until 12:01 a.m.
on the Completion Date after which time they will be at the risk
of the Purchaser." (clause 11)
c) The
Purchase Price includes a refrigerator, range, dishwasher, hood
fan, garburator, gas
fireplace, blinds, washer and dryer. (clause 12)
d)
The Purchase Price includes access to a designated parking stall.
(clause 13)
e)
The Purchaser acknowledges that this transaction is an
'exempt supply' under the Excise Tax Act and that there
is no goods and services tax (GST) by the Purchaser in connection with the purchase
of the Home. Accordingly, no portion of the Purchase Price of the
Home includes any allowance whatsoever for and GST payable by the Purchaser
in respect of the Home. Polygon will account for and pay all GST payable in
connection with the development and construction of the Home.
(clause 25).
20. The
contracts of purchase and sale refer to receipt by Purchasers of
Polygon's disclosure statement. A copy of Polygon's
disclosure statement dated August 28, 1998 is at Tab
4.
21. By way of an Addendum
to each contract of purchase and sale, the Purchaser agrees that
if the Purchaser is eligible for a GST New Housing Rebate ("NHR"), then
Polygon will grant a credit to the Purchaser towards the Purchase
Price in an amount equal to the NHR. The Addendum is attached to the contract of
purchase and sale. A representative sample of the Addendum is at
Tab 5.
22. With respect to the
development described above and for the purpose of calculating
the amount of the NHR to be credited to Purchasers, in 1999 Polygon
commenced an internal practice of allocating the Purchase Price
between land and buildings. Although the contracts of purchase
and sale do not identify any allocation of consideration as
between land and buildings, Polygon has remitted GST based on an allocation
of part of the Purchase Price such that the GST NHR is claimed on
approximately 76% of the Purchase Price. Polygon calculated the
cost of the land to be approximately 24% of the projected prices
of the residential units based on the following formula:
[(price paid to City of Vancouver for long term lease) / (estimated total
selling price of all units)]
23. Attached as Tab 6 is a
representative sample of a vendor's statement of adjustments
showing, among other things, the amount of the GST NHR credited by Polygon to
the Purchaser.
24. Polygon and Purchasers
would also enter into an Assignment Agreement wherein Polygon
would assign to the Purchaser its interest in the strata lot
together with an interest in the common property in proportion to
the unit entitlement. The payment of the Purchase Price paid by
the purchaser to Polygon was the consideration for Polygon to
assign its interest in the strata lot to the purchaser" to hold unto
the purchaser for all the residue now unexpired of the term of
the lease subject to the payment to the City of the rent reserved
in the Lease, to the performance and observance of the covenants
on the part of the lessee to be performed and observed, and the
conditions contained in the lease." A representative sample
of the Form C and
Assignment Agreement are attached as Tab 7.
25. In the period from
January 1, 1996 to August 31, 1999 (the "Assessment
Period") Polygon disposed of its interests in several Units
in the development and self-assessed and reported as total GST collected or
collectible in the amount of $497,066.31 and Polygon has remitted
this GST, less the GST NHR which has been credited
to various Purchasers.
26. During the Assessment
Period, when the Appellant credited a purchaser an amount in
respect of a GST NHR pursuant to section 254.1
of the Act, it claimed the amount as an Input Tax Credit ("ITC");
27. Of the 78 units
Polygon disposed of its interest in during the Assessment Period,
only 6 of those Units give rise to the amounts in dispute in this
appeal.
28. Polygon has not
credited various purchasers more the cumulative amount of
$23,623.36 in GST NHRs with respect to
the 6 Units at issue in this appeal.
29. Attached as Tab 8 is a
copy of Polygon's completion schedule.
30. By Notice dated
January 4, 2000 the Minister of National Revenue (the
"Minister") assessed Polygon in the amount of $3,109
for the period from January 1, 1996 to
August 31, 1999 as a result of the Minister's
position that for the purposes of calculating the entitlement to
the NHR pursuant to s. 254.1(2)(h) of the Act, the proper
allocation to land was not 24% of the Purchase Price but was
32.5%. The Notice of Reassessment is at Tab 9.
31. Polygon objected to
the assessment by notice dated March 31, 2000. A copy of the
objection is attached at Tab 10.
32. The Minister reviewed
Polygon's Notice of Objection and agreed that Polygon's
original GST NHR claim based on the
allocation of approximately 24% to land and 76%
to buildings, was correct. The Minister disagreed with
Polygon's other grounds of objection which included:
a) no GST was payable as Polygon
was not obliged to self-assess (which issue represents
$64,889 of GST paid
in error);
b)
alternatively, the NHR should be calculated on 100% of the Purchase Price
pursuant to section 254.(2) of the Act (which issue represents
$6,974.48 of GST NHR); and
c) in the
further alternative, the NHR should be calculated on 100% of the Purchase Price
pursuant to section 254.1 of the Act (which issue represents
$6,974.48 of GST NHR).
33. The Minister issued
Notice of Decision number 117011304 on July 10, 2000
allowing the objection with respect to the 24% allocation to land
only. A copy of the Notice is attached at Tab 11.
APPELLANT'S POSITION:
[3] The Appellant concentrated his
argument primarily on the requirement of Polygon to self-assess,
as required by subsection 191(1) of the
Excise Tax Act ("Act") which
reads:
191(1) For the purposes of this Part, where
(a) the construction
or substantial renovation of a residential complex that is a
single unit residential complex or a residential condominium unit
is substantially completed,
(b) the builder of
the complex
(i) gives
possession of the complex to a particular person under a lease,
licence or similar arrangement (other than an arrangement, under
or arising as a consequence of an agreement of purchase and sale
of the complex, for the possession or occupancy of the complex
until ownership of the complex is transferred to the purchaser
under the agreement) entered into for the purpose of its
occupancy by an individual as a place of residence,
(ii) gives
possession of the complex to a particular person under an
agreement for
(A) the supply by way of
sale of the building or part thereof in which the residential
unit forming part of the complex is located, and
(B) the supply by way of
lease of the land forming part of the complex or the supply of
such a lease by way of assignment,
other than an agreement for the supply of a mobile home and a
site for the home in a residential trailer park, or
(iii) where the builder is
an individual, occupies the complex as a place of residence,
and
(c) the builder, the
particular person or an individual who is a tenant or licensee of
the particular person is the first individual to occupy the
complex as a place of residence after substantial completion of
the construction or renovation,
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 complex is so given to the particular person or
the complex 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.
[4] The Appellant interpreted
subparagraph 191(1)(b)(ii) as requiring, firstly, a two part
transaction or a single transaction with two components arising
from one agreement; and secondly, that the developer/builder give
possession before the time the transaction is subjected to a
specific Schedule V exemption.
[5] Addressing the first of these
conditions, the Appellant argued that in the current situation
there is one property and one transaction and therefore only one
component arising from the agreement; consequently the first
condition is not met. He relied on the Purchase and Sale
Agreement, which contains a legal description of the property
being a leasehold strata lot. Clause 5 of the Purchase and Sale
Agreement states:
5. LEASEHOLD
INTEREST: The Purchaser acknowledges that this contract is for
the purchase of an assignment of Polygon's interest in the
balance of the term remaining in a pre-paid ninety-nine
year strata lot lease of the individual leasehold strata lot
containing the Home. ...
[6] The Appellant went on to refer to
clause 3.01 in the Disclosure Statement:
...
On deposit of the leasehold strata plan in the Land Title
Office and acceptance of the leasehold strata plan for
registration, the ground lease which presently covers the whole
of the land will be converted into separate individual Strata Lot
leases with the City of Vancouver relating to the developer's
interest in each leasehold strata lot in the development. The
form of each of these separate Strata Lots leases is set out in
the model strata lot lease ...
Upon transfer by Polygon Southampton Development Ltd. of its
interest in the individual leasehold Strata Lot to the purchaser,
Polygon Southampton Development Ltd., the Purchaser, and the City
of Vancouver will enter into an assignment agreement in respect
of the Strata Lot lease for the interest in the leasehold Strata
Lot being purchased. ...
[7] The Assignment Agreement and the
British Columbia Land Titles Act, 1-C likewise refer to
the assignment of the vendor's interest in the strata lot,
describing the property as the strata lot 16 leasehold strata
plan. The Appellant's point was that there was no assignment
of the ground lease, as there was a conversion of such (as
between Polygon and the City of Vancouver) into the leasehold
strata lot, and there was only that leasehold strata lot that is
at issue between Polygon and the condo purchasers. A strata lot
and strata lot lease are defined at section 92 of the British
Columbia Condominium Act as:
"strata lot" means a lot so shown on a leasehold
strata plan;
"strata lot lease" means a lease of a strata lot
arising from the conversion of a ground lease under section
96(1), including an assignment or transmission of it, and that is
subject to
(a) the rights and
obligations, under sections 97 and 100 to 102, of the public
authority that owns the land; and
(b) the restrictions
under sections 103 and 104;
[8] Subsections 96(1) and (4) of the
British Columbia Condominium Act read as follows:
(1) The deposit of
the leasehold strata plan operates as a conversion of the
registered ground lease into individual leases in the name of the
owner developer of the interest of the Crown or other lessor in
each strata lot, including its share in the common property, at a
rent, premium or other consideration and subject to the
applicable terms contained in the ground lease and in the model
strata lot lease attached, and to the provisions of this Act and
regulations.
...
(4) Every assignee
of an owner developer's interest as a strata lot lessee in a
strata lot shall be deemed to have covenanted and agreed in
writing with the Crown or other lessor to observe and perform all
of the terms and conditions contained in the model strata lot
lease, but is not, notwithstanding an agreement to the contrary,
bound by, or required to observe and perform, the terms,
covenants and agreements contained in the ground lease that are
not also contained in the model strata lot lease.
[9] The Appellant then referred me to
certain definitions in the Act:
"residential condominium unit" means a residential
complex that is, or is intended to be, a bounded space in a
building designated or described as a separate unit on a
registered condominium or strata lot plan or description or a
similar plan or description registered under the laws of the
province, and includes any interest in land pertaining to
ownership of the unit;
"residential complex" means
(a) that part of the
building in which one or more residential units are located,
together with
(i) that part
of any common areas and other appurtenances to the building and
the land immediately contiguous to the building that is
reasonably necessary for the use and enjoyment of the building as
a place of residence for individuals, and
(ii) that the
proportion of the lands subjacent to the building that that part
of the building is of the whole building,
...
"residential unit" means
(a) a detached
house, semi-detached house, row house unit, condominium unit,
mobile home, floating home, or apartment,
...
or that part thereof that
(d) is occupied by
an individual as a place of residence or lodging,
(e) is supplied by
way of lease, licence, or similar arrangement for the occupancy
thereof as a place of residence or lodging for individuals,
...
[10] These comments and statutes, the
Appellant argued, support his position that the only property
involved is the strata lot lease and under the Act that is
an interest in a residential condominium unit: that is, only one
property, only one transaction, the sale of a leasehold
interest.
[11] The Appellant distinguished the sale of
a building from the sale of an interest in a building, the former
being the direct reference to fee simple ownership. So, in this
situation only the City of Vancouver owns the building, but the
developer has an interest in it, that interest being the
ownership of a leasehold strata lot.
[12] The Appellant's fall-back position
if I do not accept his primary argument that the transaction was
a single transaction not divisible into the two legal elements
required by subparagraph 191(1)(b)(ii), is that there is a
significant timing problem in attempting to rely on the section 4
exemption (relied on in Taylor v. Her Majesty The Queen
[1998] T.C.J. No. 617). Section 4 of Schedule V of the
Act reads:
4. A supply by
way of sale of a single unit residential complex (in this section
referred to as the "complex") or a residential
condominium unit (in this section referred to as the
"unit") or an interest in the complex or unit made by a
builder of the complex or unit where
(a) ...
(b) in any case, the
builder received an exempt supply of the complex or unit by way
of sale or was deemed under subsection 191(1) or (2) of the Act
to have received a taxable supply of the complex or unit by way
of sale, and that supply was the last supply of the complex or
unit made by way of sale to the builder,
unless ...
This stipulates that the self-supply must have occurred before
the transaction triggering the exemption. The Appellant argued
that in this case the alleged self-supply may not have
occurred prior to the sale to the ultimate purchaser. Paragraph
191(1)(d) sets the time of self-supply as the later of
substantial completion or granting possession. The section 4
exemption refers to sale after the deemed self-supply. The date
of sale in the purchase and sale agreement in this case pre-dates
the possession date. The sections, the Appellant maintained, do
not work together and point out that the self-supply rule was
simply not meant to apply in the current situation.
[13] If the self-supply rules do not apply,
then section 194 of the Act deems the purchase price to be
tax included. This appears to have been agreed to by the
Respondent.
[14] The Appellant briefly addressed the
application of the exemption found in section 5.1 of Schedule V,
though interpreted this as only arising if the transaction can be
viewed as a two-part transaction. He was adamant that this indeed
was not the case.
[15] The third issue presumed that there was
no exemption but that the agreement was a taxable sale. How is
the new housing rebate calculated? The Appellant suggested that
it should be calculated on the whole purchase price,
notwithstanding a calculation based on approximately 76 percent
at the time of the transaction. The Appellant relied on paragraph
254(4)(d) and subsection 254(6) which read:
254(4) Where
...
(d) the builder
agrees to pay or credit to or in favour of the individual any
rebate under this section that is payable to the individual in
respect of the complex, and
...
254(6) Where the builder of a single unit residential
complex or a residential condominium unit pays or credits a
rebate to or in favour of an individual under subsection (4) and
the builder knows or ought to know that the individual is not
entitled to the rebate or that the amount paid or credited
exceeds the rebate to which the individual is entitled, the
builder and the individual are jointly and severally liable to
pay the amount of the rebate or excess to the Receiver General
under section 264.
He also referred to Battista v. Her Majesty The
Queen, [2000] T.C.J. No. 365, specifically:
... If the Act imposes a duty on a person who has
collected tax to remit it in accordance with the provisions of
the legislation as agent for Her Majesty, then if the remittance
has been made in error it strikes me the person having remitted
the tax should be able to apply for a rebate. ...
Fourthly, if Polygon is required to self-assess, is the new
housing rebate calculated on the whole price or only the building
value? The Appellant commenced this argument with a reference to
section 254.1, specifically the definition of a long-term lease,
which reads:
"long-term lease", in respect of land, means a lease
under which continuous possession of the land is provided for a
period of at least twenty years or a lease that contains an
option to purchase the land;
Paragraph 254.1(2)(h) reads:
(h) where the fair
market value referred to in paragraph (c) is not more than
$374,500, an amount equal to the lesser of $8,750 and 2.34% of
the total (in this subsection referred to as the "total
consideration") of all amounts each of which is the
consideration payable by the particular individual to the builder
for the supply by way of sale to the particular individual of the
building or part of a building referred to in paragraph (a)
or of any other structure that forms part of the complex, other
than consideration that can reasonably be regarded as rent for
the supplies of the land attributable to the complex or as
consideration for the supply of an option to purchase that land,
and
...
[16] The Appellant focussed on the
expression: "other than consideration that can reasonably be
regarded as rent" and maintained there was no consideration
for rental of the land. Polygon had pre-paid all basic rent to
the City. Further, if the agreement with the purchaser involved a
single consideration for a strata lot lease, no allocation is
appropriate. There is certainly no allocation to assets such as
fridge, dishwasher, washer and dryer. They are all simply
incidental to the single supply of the strata lot lease. The
Appellant also relied on sections 136 and 138 of the
Act in support of the single supply contention along with
the case of Hidden Valley Golf Resort v. Her Majesty The
Queen, [2000] F.C.J. No. 869. Finally, the
Appellant attempted to distinguish the Taylor decision on
two fronts: first, that the definition of "home" as set
forth in the contract of purchase and sale in the case before me
has no significance vis-à-vis the legal definition of the
real property being transferred and second, the present strata
lot lease, unlike the one in Taylor, requires simply a
surrender as opposed to a buy-back at fair market value.
There are no formulas in the agreement for determining fair
market value. This appeared to play a significant role in the
wording in the Taylor case, leading to a finding these
were the requisite two elements for the application of
subsection 191(1)(b)(ii).
RESPONDENT'S POSITION:
[17] The Respondent suggested the appeal was
a full frontal challenge to the Taylor decision, as the
facts were indistinguishable. The different wording in the
current contract calling for a surrender rather than a repurchase
at fair market value was not really a difference, as the
Condominium Act required fair market value be paid on
surrender. So, even though the contract talked in terms of
surrender, the legislation required the surrender could not take
place for nothing, in effect the same result as
Taylor.
[18] Respondent's counsel relied on the
Taylor decision. She maintained that decision was
completely consistent with the rationale behind the self-supply
provisions. She cited from Taylor an excerpt from the
Finance Department's news release regarding
subparagraph 191(1)(b)(ii):
The Act will be amended to ensure that where a builder of a
new residential complex supplies by way of lease the land related
to the complex to a lessee or assigns his or her interest in a
lease of that land to a lessee, the builder is subject to the
same self-supply rules as if the builder had supplied by
way of lease both the land and the building related to the
complex to the lessee. At the time the builder transfers
possession of the complex to the lessee, the builder shall be
deemed, at that time, to have sold the land and building for
their fair market value and to have paid as a recipient and
collected as a supplier tax on the deemed sale ...
[19] The Respondent argued that Chief Judge
Garon was correct in not requiring a separate conveyance of the
land and of the residential unit. He stated in Taylor:
In conclusion, I am of the opinion that the Appellants
obtained an equity, an ownership in their respective condominium
units, in addition to their respective interests in the strata
lot leases.
[20] Further, notwithstanding provisions of
the Condominium Act prohibiting a separate conveyance of
the land from the building, Chief Judge Garon found the
following:
As mentioned above, Counsel for the Respondent argued that
subparagraph 191(1)(b)(ii) does not apply here because that
subparagraph contemplates a two-step transaction and the land and
the strata unit cannot be conveyed separately in view of
section 12 of the Condominium Act.
I do not see any clear requirement in that
subparagraph 191(1)(b)(ii) for a separate conveyance of the
land and of the residential unit. Rather, it seems to me that
what is contemplated could be done in a single transaction
consisting of two different elements, the assignment of a
leasehold interest in the land and the sale of a building. In any
event, here, we have two Contracts of Purchase and Sale
(respectively dated February 8, 1994 and June 19, 1994),
dealing with the purchase of a prepaid leasehold interest in the
proposed strata lot and the purchase of a particular
"Home" and other items and subsequently two assignments
to which UBC had consented, respectively dated July 8, 1994 and
August 3, 1994.
[21] With respect to the timing issue of the
self-supply and the application of the exemption found in section
4 of Schedule V, the Respondent raised two flaws with the
Appellant's argument. First, she maintained it results in
double taxation as the self-supply rule will apply, but no
exemption would be available to the purchaser: section 191 does
not depend on the application of the section for exemption.
Second, as possession always follows substantial completion this
effectively neuters the section 4 exemption. The self-supply only
kicks in on possession, yet the exemption is only on sale,
therefore section 4 would never be triggered. The Respondent
contended that this interpretation by the Appellant is based on a
misreading of the expression "deemed to have received"
in section 4. The Respondent submitted that this refers to
the application of the deeming section and not to the event of
substantial completion or possession.
[22] The Respondent directed me to an
alternative exempting provision should I find the timing issue
renders section 4 inapplicable. Section 5.1 of
Schedule V reads:
5.1 A supply by way of
sale of a building, or that part of a building, in which one or
more residential units are located, or an interest in such a
building or part, where
(a) both immediately
before and immediately after the earlier of the time ownership of
the building, part or interest is transferred to the recipient of
the supply (in this section referred to as the
"purchaser") and the time possession thereof is
transferred to the purchaser under the agreement for the supply,
the building or part forms part of a residential complex; and
(b) immediately
after the earlier of the time ownership of the building, part or
interest is transferred to the purchaser and the time possession
thereof is transferred to the purchaser under the agreement for
the supply, the purchaser is a recipient described in
subparagraph 7(a)(i) of an exempt supply, described by
paragraph 7(a), of the land included in the complex.
[23] Whether this exemption or the section 4
exemption applies, the Respondent contended that the tax result
is the same, and the Appellant's argument with respect to
timing does not defeat the application of
subparagraph 191(1)(b)(ii) in the situation before me.
[24] The Respondent urged me to follow the
Taylor decision, acknowledging that while not binding on
me, it would be a disservice to litigants, lawyers and inferior
courts to not follow a prior decision of another Judge of the
same Court, except in exceptional circumstances. She contended it
is for the Court of Appeal, not individual judges of equal
jurisdiction, to correct judicial error, if indeed there is
one.
[25] Regarding the new housing rebate, the
Respondent argued that section 254 simply does not apply as
it applies only to fee simple transfers, so she concentrated on
section 254.1 and specifically subsection (h).
This requires the Minister to pay a rebate to the particular
individual equal to the lesser of $8,750 and 2.34% of the total
of all amounts each of which is the consideration payable by the
particular individual for the part of the building referred to in
paragraph (a) or of any structure that forms part of the
complex, other than consideration that can reasonably be regarded
as rent for the supplies of the land attributable to the
complex.
[26] The Respondent felt that 24% of the
purchase price related to the land; this was an amount the
Appellant had in fact initially provided, and one which the
Respondent argued was reasonable.
[27] Section 254.1, according to the
Respondent, required two elements, in effect, a dual supply,
which in this case would be the assignment of a long-term
lease and sale of a residential condominium unit. As in
Taylor, a single supply comprised of two parts.
[28] Further, the Respondent indicated that
the rebate, if found to be based on something greater than 76%
would create a windfall for the Appellant to which it was not
entitled, as any rebate belonged to the purchaser. The Respondent
relied upon section 234 in support of her position, as it
stipulates builders get a deduction for the new housing rebate
only to the extent those new housing rebates have been paid or
credited to the purchaser. The purchaser may be entitled to more,
but not the builder. If I were to find the Appellant entitled to
some additional rebate, the Respondent suggests that this would
not preclude the purchasers from looking to the Minister for
their rightful additional entitlement.
ANALYSIS:
[29] The central issue in this appeal, and
what goes to the core of the Taylor decision is the
applicability of the self-supply rules to the
Appellant's situation.
The particular paragraph at issue is
subparagraph 191(1)(b)(ii), which on its ordinary meaning
requires two elements; the sale of all or part of a building and
an assignment of a lease of the land. Do the unique features of
British Columbia law, specifically the Condominium
Act, as they apply to the Appellant's circumstances fit
squarely within this ordinary wording.
Chief Judge Garon in Taylor found that indeed
they did. While recognizing British Columbia law prohibited two
transactions to transfer the property, being land and building,
Chief Judge Garon found:
In my view, the transactions between Polygon and the
Appellants involve not only the assignment by Polygon of its
interest in the strata lot leases, but also the sale by Polygon
of the condominium units in question to the Appellants.
...
In conclusion, I am of the opinion that the Appellants
obtained an equity, an ownership in their respective condominium
units, in addition to their respective interests in the strata
lot leases.
[30] The Appellant's main thrust is that
there are not two supplies occurring here, there is just the one
and that is a sale of a leasehold interest. While I do accept
that there is only one transaction, being the sale of a leasehold
interest for purposes of British Columbia real property law, I
must decide whether that sale is capable of being broken down
into two legal elements or supplies (the assignment of the lease
and a sale of a building) for purposes of the Act.
[31] It is too much to expect that federal
legislation, especially a statute as intricate as the Act,
can be tailored to reflect every nuance of provincial
legislation, thus there is no reference in the Act to the
British Columbia strata lot lease. It therefore becomes essential
to not only determine if the words of the federal legislation
capture the essence of the transaction as determined by
provincial laws, but also to ascertain if the intention of the
federal legislation is directed at this particular type of
transaction. This latter analysis is no easy task given the
dearth of material surrounding the introduction of
subparagraph 191(1)(b)(ii). I will look more closely to the
words of the section and their context before embarking on the
legislative intent journey.
[32] It is helpful to start with a review of
the definitions found in paragraph 191(1)(b):
"residential complex"
"residential condominium unit"
"residential unit"
have all been defined earlier in this judgment at paragraph
[9]. "Building" is not defined. "Builder" is
defined but needn't be reproduced as there is no argument
that the Appellant is in fact a builder.
[33] Although a residential condominium unit
includes both the building and land in its definition,
subparagraph 191(1)(b)(ii) makes it clear that those two elements
may be divided for purposes of transferring possession to a
purchaser. This subsection also does not require two separate
agreements for such transfer as the provision reads, "under
an agreement for the sale of the building and the
assignment of lease of the land". It seems to contemplate
that these two elements form part of one agreement. Yet clearly
such an agreement must have both elements. If both elements
exist, then the builder is deemed to have made and received a
taxable supply by way of sale of a complex. The provision I would
suggest has an ordinary meaning which is clear.
[34] The context of the subsection is that
it is found in the self-supply rules. Paragraph 191(1)(b)
describes three scenarios of a self-supply by a builder: first
(191(b)(i)), in the situation of a lease (other than if the lease
is for a short term occupancy pending an ultimate sale); second
(191(b)(iii)) in the situation of an individual builder occupying
a unit; and third, the combined sale and lease arrangement we are
seeking to interpret here. This third situation was not a part of
the original section but came into force on December 17, 1990 as
an amendment to this subsection. Nothing further as to its
meaning can really be gleaned from the context. This self-supply
rule captures a two-pronged agreement, the two prongs
consisting of a sale of a building and assignment of lease of
land.
[35] What, however, was the legislators
intent in adding this third scenario to the self-supply rule?
What abuse was being sought to overcome? Before exploring that
further, I will consider what was the purpose of the
self-supply rules prior to the amendment. My understanding
is that the purpose of the self-supply rules was to remove
any possible advantage by way of GST savings from a builder who
builds units to lease or personally occupy, in comparison to
someone else who buys such units for the same purpose of either
leasing or occupying. So, if I want to buy a number of newly
constructed units to rent out to others, I would be subjected to
GST on such a purchase. The rationale is that a builder with a
similar purpose cannot escape such similar liability.
[36] The same holds true if I simply want to
buy the new unit to live in it. The individual builder is
likewise subjected to GST as a result of
subparagraph 191(1)(b)(iii). The purpose seems quite
straightforward to put a builder on the same footing as a third
party with a like purpose.
[37] The amendment introducing subparagraph
191(1)(b)(ii) does not seem to read as easily from the
perspective of discerning its purpose. In either the lease or
occupancy scenario the self-supply rule works to put the builder
in the same position GST-wise as a third party who acquires
the property to lease or occupy, but in considering the
amendment, what third party is the builder being compared to.
Presumably, a third party who likewise intends to lease the land
and sell the building. I think the clue to the true purpose is
found in the Department of Finance news release. This bears
repeating:
The Act will be amended to ensure that where a builder of a
new residential complex supplies by way of lease the land related
to the complex to a lessee or assigns his or her interest in a
lease of that land to a lessee, the builder is subject to the
same self-supply rules as if the builder had supplied by way of
lease both the land and the building related to the complex to
the lessee. At the time the builder transfers possession of the
complex to the lessee, the builder shall be deemed, at that time,
to have sold the land and building for their fair market value
and to have paid as a recipient and collected as a supplier tax
on the deemed sale ...
[38] The note suggests that if any element
of a transaction is in the nature of a lease, then the whole
transaction will in effect be looked upon as a lease; and, as a
lease is caught by the self-supply provisions, so too will this
"deemed" lease. This implies that the advantage arises
by a builder being able to lease pre-GST liability compared
to the third party who would have to incur the GST before being
in a position to lease. I presume the legislators did not view
subparagraph 191(1)(b)(i) as being applicable to the lease
portion of a combined lease of land and sale of building
agreement, and without the self-supply rule in effect, the
builder could attribute a significant portion of the
consideration to the lease. This might provide some advantage
over a third party who had to pay GST on the combined lease/sale,
before turning around and entering a similar lease/sale
arrangement.
[39] I cannot find any example of a scenario
at the time of the amendment which the Department of Finance was
specifically addressing with the amendment, so I am left to
surmise that the legislators intended that anything that smacks
of a lease could potentially provide an advantage to a builder
over a third party. Given this conclusion, then in applying
subparagraph 191(1)(b)(ii) the key is not so much the form
of the two elements but whether in substance there is an element
of a lease. This would then taint the whole transaction to being
in the nature of a lease and subject to the self-supply
rules.
[40] Applying this interpretation then to
the facts before me, it matters not what form the transaction
takes, what is crucial is whether in substance an assignment of
an interest in a strata lot lease is an assignment of the lease
of the land, effectively bringing the whole transaction within
the self-supply rules. To find that it is not (and that the
self-supply rules therefore do not apply) am I providing some
advantage to the builder over a third party? If some portion of
the consideration on the sale to a purchaser related to the
lease, and such portion was not subject to GST, then yes the
builder could be seen as deriving some advantage. But here the
very essence of the Appellant's argument is that the
consideration is not divisible, as the transaction is not
divisible. In a situation such as this where the builder disposes
of all its interest to a third party purchaser for one
consideration, all of which would be subject to GST but for the
self-supply rules, there does not appear to be any
advantage attaching to the builder which would invoke any need
for applying the self-supply rule. This is not intended to be a
back-door analysis into finding there is not an assignment of a
lease, but it does assist me in coming to grips with the true
nature of the disposition as well as the true purpose of
subparagraph 191(1)(b)(ii). I find that the situation before me
does not cry out for the application of the self-supply rule
based on the purpose of the rule. It then comes down to the issue
of whether, based on the ordinary wording of the rule, a sale or
assignment of an interest in the strata lot lease is indeed an
assignment of a lease of land for purposes of the Act and
simply caught by the words. The answer to that cannot be
determined by the Act, which offers no guidance as to what
is or is not an assignment of lease, but must be found by
reference to British Columbia real property law.
[41] Looking then at the documents
constituting the transaction between the Appellant and purchaser
I note the following: in the Purchase and Sale Agreement,
paragraph 5 reads:
5. LEASEHOLD
INTEREST: The Purchaser acknowledges that this contract is for
the purchase of an assignment of Polygon's interest in the
balance of the term remaining in a pre-paid ninety-nine
year strata lot lease of the individual leasehold strata lot
containing the Home. The individual strata lot lease to be
assigned to the Purchaser will be entered into by Polygon and the
strata corporation following deposit in the Land Title
Office of the leasehold strata plan. The form of individual
strata lot lease is identified as the 'model strata lot
lease' in the ground lease entered into between Polygon and
the City of Vancouver (the "City") registered in the
Land Title Office under number BL152744 (the "Ground
Lease"). Additional particulars of the Ground Lease and the
individual strata lot lease are described in paragraph 3 of
Polygon's Disclosure Statement.
Paragraph 6 reads:
6. TITLE:
Polygon shall assign its interest in the individual strata lot
lease in respect of the Home free and clear of all financial
liens, charges or encumbrances. Title to the land on which the
development is situated is registered in the name of the City and
in addition to the Ground Lease and the documents, interests,
charges and encumbrances contemplated thereby, title to the land
and therefore the individual strata lot lease is subject to
subsisting conditions, provisions, restrictions, exceptions and
reservations, including royalties, contained in the original
grant or contained in any other grant or disposition from the
Crown; and registered, pending or proposed restrictive covenants,
rights-of-way and easements in favour of utilities,
public authorities, governments or others as required to
facilitate the development.
[42] In the Assignment Agreement, paragraphs
1 and 2 read:
1. In
consideration of the sum of $249,900.00 paid by the PURCHASER to
the VENDOR (the receipt whereof is hereby by the VENDOR
acknowledged), the VENDOR as beneficial owner hereby assigns to
the PURCHASER the VENDOR's interest in the STRATA LOT, to
hold unto the PURCHASER for all the residue now unexpired of the
term of the LEASE subject to the payment to the CITY of the rent
reserved in the LEASE, to the performance and observance of the
covenants on the part of the lessee to be performed and observed,
and the conditions contained in the LEASE.
2. The
PURCHASER covenants with the VENDOR and the CITY and each of them
that the PURCHASER shall during all the residue now unexpired of
the term of the LEASE and every renewal thereof perform and
observe the covenants on the part of the lessee to be performed
and observed and the conditions contained in the LEASE as fully
and effectually as if the LEASE contained a separate demise of
the STRATA LOT at the rent referred to in the LEASE.
[43] In the Strata Lot Lease itself,
paragraph 21.01 reads:
At the expiration or sooner determination of the TERM, the
LESSEE shall surrender the STRATA LOT (including the interest of
the LESSEE in COMMON PROPERTY or in any COMMON FACILITY) to the
LESSOR in the condition in which it was required to be kept by
the LESSEE under the provisions of this lease, except as herein
otherwise expressly provided.
and paragraph 26.01 reads:
In the event that the terms of this MODEL STRATA LOT LEASE or
the duties and obligations of the LESSOR, the LESSEE or the
STRATA CORPORATION under the terms of this MODEL STRATA LOT LEASE
conflict or are inconsistent with the provisions of the
CONDOMINIUM ACT applicable to leasehold STRATA LOTS the said
provisions of the CONDOMINIUM ACT shall prevail.
[44] And in the Disclosure Statement,
paragraph 3.01 reads:
3.01 Registered Owner
Title to the land is registered in the name of the City of
Vancouver. Polygon Southampton Development Ltd. holds a leasehold
interest in the land under terms of a prepaid ground lease in the
form required by the City of Vancouver for a term of
99 years from April 28, 1997 expiring
April 27, 2096. This ground lease is registered in the
Land Title Office under number BL152744. A copy of the
ground lease is available for inspection at any time during the
business hours Monday through Friday at the Developer's
offices, or at its sales office located on the lands.
...
Upon transfer by Polygon Southampton Development Ltd. of its
interest in the individual leasehold Strata Lot to the purchaser,
Polygon Southampton Development Ltd., the Purchaser, and the City
of Vancouver will enter into an assignment agreement in respect
of the Strata Lot lease for the interest in the leasehold Strata
Lot being purchased. ...
Pursuant to the terms of Article 3 on the model strata lot
lease, the Purchaser of the individual leasehold Strata Lot will
be responsible for payment of property taxes levied by the City
of Vancouver. If the property is exempt from taxes by reason of
ownership of the lands by the City of Vancouver, then the
Purchaser will pay an amount equal to taxes that would otherwise
have been assessed directly to the City of Vancouver as
additional rent.
[45] It is significant that in all these
instances reference is not made to an assignment of a lease, but
an assignment of Polygon's interest in the strata lot lease.
The words in the disclosure I believe best capture the legal
essence of the transaction, and that is the transfer by Polygon
of its interest in the strata lot to a purchaser requiring, in
addition to the transfer document between Polygon and the
purchaser, an assignment agreement for the interest in the
leasehold strata lot being purchased. So, rather than referring
to a lease as such, the parties referred to an interest in a
leasehold strata lot. When I consider that this interest is a
99 year interest, and assuming the life of a west-coast
condominium in most likelihood falls shy of a century I find that
the interest being disposed of by the Appellant is not an
assignment of lease within the meaning of the Act, but
more in the nature of a sale for purposes of the Act. This
is further supported by the characteristics attributed to a
strata lot lease by the Condominium Act.
[46] The strata lot leases arise as a result
of being on Crown land. They are born of a ground lease[1] by the Crown or other
public authority, in this case the City of Vancouver. The very
starting point is that this land cannot be transferred as an
ordinary fee simple, it is Crown land. So the Crown does the next
best thing and converts the ground lease into strata lot leases
for a term of 99 years. Section 94 prohibits the registration of
a leasehold strata plan unless it is with respect to Crown land.
The Crown has certain rights and obligations in connection with
its ongoing ownership of the land. Section 97 requires the Crown
to purchase the strata lot lessee's interest in the strata
lot on termination of the strata lot lease. There is something to
buy: there is no automatic reversion to a "landlord".
Section 98 also suggests that we are dealing with something other
than a standard lease. It stipulates that if a strata lot lessee
defaults under the strata lot lease, the Crown, though entitled
to re-enter and take possession of the strata lot, shall not do
so, nor shall it cause a strata lot lease to be terminated, but
may only apply to the Court for an order for sale. Again,
we see terms more in the nature of sale than lease.
[47] I compare the developer who sells a
strata lot (that is, a condominium not on Crown land) to the
developer who sells all of its interest in a strata lot lease (a
condominium on Crown land) and I see no difference justifying the
application of the self-supply rules in the latter case.
Purchasers in both cases would consider themselves owners. I
would not want to suggest to the owner of the strata lot lease
that he has a diminished interest as a tenant only of the land.
Both own condominiums with the same rights and obligations. The
technical legalities of that ownership under British Columbia law
should not trip up the developer in the application of federal
laws.
[48] The Strata Lot lease is a unique bit of
real property law in Canada. It is as close to third party
ownership of Crown land as an individual can get. I find the sale
by the Appellant of an interest in a strata lot lease is not an
assignment of lease contemplated by subparagraph 191(1)(b)(ii).
It is indeed something different; something that does not fit
within the requirements of subparagraph 191(1)(b)(ii).
[49] Given my finding on this point, I need
not address the timing difficulties in connection with the
application of the Schedule V, section 4 exemption.
[50] Counsel for the Respondent forecast
dire consequences in sending the British Columbia real estate
industry into a top-spin if I decide differently from the
Taylor decision. She went so far as to suggest it would be
a disservice to litigants and lawyers who are entitled to see the
law as reasonably settled and certain. While this sentiment
strikes me as putting some serious handcuffs on judicial
independence, I do appreciate the concern. This is a court of
first instance. Every matter before us will have its own unique
ebb and flow; different appellants, different counsel, different
arguments, different facts however slight, all contributing to
different decisions. Certainly there must be consistency in the
application of our complex tax laws, and certainly I should not
depart lightly from a decision which appears to be on all fours,
but these principles should not relieve me of my responsibility
to judiciously consider the facts and arguments presented to me
in this particular case and apply the law accordingly.
[51] The Appellant before Chief Judge Garon
was a purchaser of the condominium. The Appellant before me was a
developer of the condominium complex. The condominiums in issue
before me are not the same as the ones before
Chief Judge Garon; the contracts are slightly
different, although admittedly the basic substance of the
transaction is similar. Chief Judge Garon had no
opportunity to hear the developer argue his position, and it
appears from a review of his decision that the Appellant before
him had little to say regarding the self-supply rule. This
issue was clearly carried by the Crown.
Chief Judge Garon supported his conclusion that there
was a separate assignment of lease and sale of building by
relying on paragraph 26.01 of the strata lot lease before him.
That provision provided for the determination of price on
termination on the basis that only the building comprising the
strata lot and the interest in common property constituted the
interest to be valued. No such provision is in the strata lot
lease before me. I find this is a significant difference given
the reliance placed on this provision by Chief Judge Garon.
[52] I am left to deal with the new housing
rebate. Given my finding that subparagraph 191(1)(b)(ii) does not
apply, then I am not dealing with section 254.1, but
section 254, in addressing this issue. The Appellant feels
entitled to claim a rebate greater than already claimed, as it
was previously claimed on only 76% of the total purchase price.
The Respondent's argument is that only the purchaser of the
condominium is entitled to claim anything further. I am satisfied
that the rebate should have been based on 100% of the purchase
price, as the sale of the interest in the strata lot was a
taxable supply.
[53] A condition for section 254 to apply is
that the GST payable on the sale has actually been paid. Applying
section 194, as indicated earlier, there has been a deemed
payment, so this condition has been met. The deemed payment would
be based on the total consideration, not on a percentage. The
actual rebate credited at closing was only based on consideration
of 76% of the total purchase price. The issue is who is entitled
to the excess rebate not yet claimed.
[54] Generally the rebate belongs to the
purchaser, unless there is an agreement to pay it over to the
builder. The Appellant in an addendum to the Purchase and Sale
Agreement stipulated:
If the purchaser is eligible for a GST new housing rebate
... and completes such forms as may be reasonably required
to assign the benefit of such rebate to Polygon, then Polygon
agrees to grant a credit to the purchaser towards the purchase
price ...
[55] The closing statement of adjustments
indicates that such a credit was granted, as permitted by
subsection 254(4), based on the lower consideration. In
effect, the Appellant over-calculated the GST by
under-calculating the rebate, and consequently the
purchaser paid too much cash on closing to the Appellant by the
amount of the unclaimed rebate. Is the purchaser entitled to look
to Polygon or look to the Minister for the shortfall? The
purchaser relied on Polygon to determine the tax involved and
consequently paid too much. The purchaser can look to Polygon for
relief.
[56] Section 234 permits a builder who has
credited the rebate on closing to a purchaser (pursuant to
subsection 254(4)) to deduct that amount from the net tax the
builder is to remit for the particular reporting period. If the
builder over-remits because of a mistaken
under-calculation, it follows the builder is entitled to
recover that amount from the Minister. The position of the
Appellant is as the Crown's agent to collect tax. In this
case the Appellant has collected too much (by
short-changing the rebate), is responsible to pay back the
difference to the purchaser, and seeks to recover that overpaid
difference from the Minister. I do not believe the purchaser has
limited its right to the mistaken amount of the rebate, as the
Respondent argued.
[57] In summary, I find the Appellant is not
obliged to self-assess pursuant to
subparagraph 191(1)(b)(ii) in the particular case before me.
I do find that section 194 applies to this situation and
that the purchase price for a strata lot lease is deemed to be
GST included. With respect to the new housing rebate,
subsection 254(5) applies such that the new housing rebate
is to be calculated on the whole purchase price for each strata
lot lease. Further, the Appellant is entitled to the unclaimed
rebate from the Minister.
[58] I find further that it is not
appropriate in this matter to award costs.
Signed at Ottawa, Canada this 4th day of February, 2002.
J.T.C.C.
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