Khun Khun v. The Queen, docket 2001-3597(GST)I (Informal Procedure)

Date: 20020828

Docket: 2001-3597-GST-I

BETWEEN:

KULWINDER SINGH KHUN KHUN and

KULWINDER KAUR KHUN KHUN,

Appellants,

and

HER MAJESTY THE QUEEN,

Respondent.

REASONS FOR JUDGMENT

McArthur J.

[1]      The Appellants were assessed under the deemed supply subsection 191(1) of the Excise Tax Act for goods and services tax (GST). These appeals were heard on common evidence.

[2]      The Appellants, husband and wife, built a residential dwelling in Vernon, B.C. (the Vernon home) while they were living in Surrey B.C. It is their position that they intended moving into the Vernon home but because of difficulty in obtaining work, they had to lease and/or sell it.

[3]      The Respondent's position is that the Appellants are builders involved in a commercial activity and were required to remit GST on the self-supply of the Vernon home.

[4]      The Appellants both testified and were represented by Mr. Grewal, a certified general accountant. He submitted a carefully prepared Notice of Appeal. Several facts set out in the Notice of Appeal were inconsistent with the Appellants' oral evidence. The facts as I find them included the following: Mr. Khun Khun is a roofer whose work is seasonal. His approximate earnings during the relevant years were:

1993             $13,000        from employment

                   $ 4,500        from unemployment insurance

1994             $10,300        from employment

                   $ 4,700        from unemployment insurance

1995             $13,000        from employment

                   $ 5,500        from unemployment insurance

Mrs. Khun Khun was a kitchen's helper. Her income, I believe, was approximately:

                   1992             $11,500        from employment

                                      $ 4,000         from unemployment insurance

                   1993             $7,000          from employment

                                      $3,000          from unemployment insurance

                   1994             $1,900          from employment

                                      $7,500          from unemployment insurance

                   1995             $15,300        from employment

By 1995, the Appellants had four young children.

[5]      In 1992, the Appellants were living in Surrey. Mrs. Khun Khun had a brother Jas Aujla, a general contractor in Vernon. She moved there for eight months in 1993. On September 30, 1993 the Appellants purchased a vacant building lot for $60,000 cash. Jas Aujla purchased a lot on the same street about the same time. The Appellants obtained a $110,000 construction mortgage and through Jas Aujla's assistance, they constructed a single family home. It was registered in the Appellants' name. Aujla assisted in the financing and was in complete control. Jas Aujla listed the home for sale, before completion, for the period July 5, 1994 to April 30, 1995 for $209,000 and relisted it from May 3, 1995 to August 3, 1995. It did not sell. In August 1995, Jas Aujla rented the Vernon home for $700 monthly. Throughout 1994, the Appellants lived in Surrey.

[6]      In August 1995, they purchased a house in Surrey for $220,000 (assuming a $140,000 mortgage) and moved in. They never moved into the Vernon home although Mr. Khun Khun stayed in the basement for six months in 1995 and several months in 1996 while he worked in Vernon. The tenants had possession of the house.

[7]      The evidence clearly leads me to conclude that the Appellants never intended to use the Vernon home as their principal place of residence and intended selling or renting it. The parties agree that the fair market value was $145,900 and the net GST if applicable, would be $4,690. No representations were made by the Appellants with respect to the penalty and interest set out in paragraph 7 of the Reply to the Notice of Appeal.

[8]      The only period that Mrs. Khun Khun lived in Vernon with her children was in 1993. As stated, Mr. Khun Khun spent time in Vernon in 1995 and 1996 but he used the Surrey address as his principal place of residence.

[9]      Jas Aujla was a builder and constructed a home down the street from the Appellants' Vernon home. Both houses were built at the same time. For the reasons ably given by the Minister's counsel, I find that the Appellants were required to pay GST on the basis that they made and received a taxable supply pursuant to subsection 191(1). The Appellants were builders within the definition contained in subsection 123(1) of the Act which reads in part as follows:

123(1) In section 121, this Part and Schedules V to X,

"builder" of a residential complex or of an addition to a multiple unit residential complex means a person who

(a)         at a time when the person has an interest in the real property on which the complex is situated, carries on or engages another person to carry on for the person

            ...

(iii)        ... the construction or substantial renovation of the complex,

but does not include

(f)         ...

                        (i)          ... construction ...

The Appellants were the registered owners of the Vernon lot and engaged Jas Aujla to construct a residence. They do not qualify for an exemption under subsection 191(5) because they never used the Vernon home as their principal place of residence. That subsection reads:

191(5) Subsections (1) to (4) do not apply to a builder of a residencial complex or an addition to a residential complex where

(a)         the builder is an individual;

(b)         at any time after the construction or renovation of the complex or addition is substantially completed, the complex is used primarily as a place of residence for the individual, an individual related to the individual or a former spouse or common-law partner of the individual;

(c)         the complex is not used primarily for any other purpose between the time the construction or renovation is substantially completed and that time; and

(d)         the individual has not claimed an input tax credit in respect of the acquisition of or an improvement to the complex.

[10]     Mr. Khun Khun resided in the basement part of the time while the Vernon home was rented in 1995. During this period, he and Mrs. Khun Khun purchased their principal place of residence in Surrey where they moved in July 1995. By no stretch of the imagination can one consider the Vernon home as the Appellants' principal place of residence because Mr. Khun Khun stayed six months in the basement while the remainder of the residence was rented.

[11]     Respondent's counsel referred to the case of Happy Valley Farms Ltd. v. M.N.R.,[1] and the often-used tests. I have no difficulty in concluding that the Appellants' actions were a venture in the nature of trade. These tests are set out on pages 6423-24 of Happy Valley. Briefly applying the tests to the present facts, I find:

1.        The nature of the property sold - The Appellants purchased a vacant lot and had a builder (Aujla) construct a home which they tried to sell while still under construction and leased it when the could not sell it for a substantial profit. This favours the conclusion that it was a venture in the nature of trade.

2.        The length of period of ownership - They tried to sell prior to completion and never moved in and after listing it for sale for one year, they rented it. This favours a venture in the nature of trade.

3.        The frequency or number of other similar transactions by the taxpayer - This test favours the Appellants' position although the venture was taken with Jas Aujla who was a builder. This tends to paint them with the same brush.

4.        Circumstances that were responsible for the sale (lease) - There was no sudden emergency to cause the Appellants to list it for sale and then lease it. This was their original intention. They could not afford two houses. Aujla assisted them with the Vernon home and he tried t sell it then arranged to lease it.

[12]     All the circumstances taken as a whole, lead to the conclusion that it was a venture in the nature of trade. Clearly, the Appellants fall within the meaning of paragraphs 191(1)(a) and (b). They constructed a residence and gave possession of it under a lease and are deemed under paragraph 191(1)(d) to have made and received a taxable supply by way of sale of the house.

[13]     For these reasons, the appeal is dismissed.

Signed at Ottawa, Canada, this 28th day of August, 2002.

"C.H. McArthur"

J.T.C.C.

COURT FILE NO.:                             Kulwinder Singh Khun Khun and

                                                          Kulwinder Kaur Khun Khun

STYLE OF CAUSE:                           2001-3597(GST)I

PLACE OF HEARING:                      Vancouver, British Columbia

DATE OF HEARING:                        August 22, 2002

REASONS FOR JUDGMENT BY:     The Honourable Judge C.H. McArthur

DATE OF JUDGMENT:                     August 28, 2002

APPEARANCES:

Agent for the Appellant:             Harinder Grewal

Counsel for the Respondent:      Johanna Russell

COUNSEL OF RECORD:

For the Appellant:

Name:                 N/A

Firm:                 

For the Respondent:                  Morris Rosenberg

                                                Deputy Attorney General of Canada

                                                          Ottawa, Canada

2001-3597(GST)I

BETWEEN:

KULWINDER SINGH KHUN KHUN and

KULWINDER KAUR KHUN KHUN,

Appellants,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeal heard on August 22, 2002, at Vancouver, British Columbia, by

the Honourable Judge C.H. McArthur

Appearances

Agent for the Appellants:            Harinder Grewal

Counsel for the Respondent:      Johanna Russell

JUDGMENT

          The appeal from the reassessment of goods and services tax made under the Excise Tax Act, notice of which is dated June 28, 2001, and bears number 11GU117370403 is dismissed.

Signed at Ottawa, Canada, this 28th day of August, 2002.

"C.H. McArthur"

J.T.C.C.