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Citation: 2009 TCC 473
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Date: 20091014
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Docket: 2006-1140(GST)G
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BETWEEN:
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OLDE PARK CONSTRUCTION COMPANY LIMITED,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
AMENDED REASONS FOR JUDGMENT
Woods J.
[1] This appeal
concerns an assessment under the Excise Tax Act that was issued to Olde
Park Construction Company Ltd. (“Olde Park”) for the period from August 1, 2001 to January 31, 2004.
[2] Olde Park is a builder of new homes in the Toronto area. The issue concerns Olde Park’s obligation to collect goods and
services tax (GST) from purchasers who purchased homes under an arrangement
whereby occupancy was given approximately one year prior to the transfer of ownership.
[3] It is not in
dispute that Olde Park was
required to collect GST with respect to these sales. The issue is one of
timing. At what point was the GST payable by purchasers and collectible by Olde Park? Olde Park submits that the relevant time is
when ownership was passed. The Minister submits that it is when the purchasers took
possession.
[4] Olde Park appeals an assessment of interest and
a penalty for failure to take the GST into account in computing net tax in the
relevant reporting periods. The penalty is 6 percent of the GST, which
according to counsel for the appellant amounts to about $165,000.
[5] There were
other issues raised in the amended notice of appeal but these were abandoned by
the appellant at the commencement of the hearing.
Background
[6] In
the relevant periods, Olde Park was involved in the construction of 250
homes in a subdivision near Toronto.
[7] The
homes were marketed to potential purchasers who otherwise could not afford to
purchase a home. In its marketing material, Olde
Park advertised the arrangement as “Rent to Own, $4,900 Moves You In.” The
figure of $4,900 represented approximately two percent of the purchase price of
the home.
[8] A typical purchase and sale agreement was entered into
evidence as Exhibit AR-1, Tab 21. Under it, the purchasers agreed to purchase a residential property
either already constructed or to be constructed for a consideration of
$278,150. They were required to pay a deposit of $4,900 upon acceptance of the
agreement, regular monthly amounts from the time of occupancy until the closing
approximately one year later, and the balance was payable on closing. Occupancy
in the form of a licence was provided to purchasers a few months after entering
into the agreement.
[9] The
$4,900 deposit and the regular monthly payments during the period of occupancy
resulted in the purchasers paying approximately 10 percent of the purchase
price prior to the closing.
[10] Also under the agreement, the purchasers were required to apply for mortgage financing
for a large percentage of the purchase price with a lending institution
designated by Olde Park. Olde Park agreed to arrange the mortgage,
subject to purchaser qualification. The mortgage terms were set out in the
agreement, and Olde Park charged an arrangement fee of 3.75 percent.
[11] If the
mortgage financing was refused, Olde Park had the option to provide the
financing itself or to declare the agreement null and void.
[12] At
some point prior to closing, Olde Park decided not to
arrange third party financing but to provide the mortgages itself.
[13] Olde Park remitted the GST on the sale of the
homes after ownership had passed.
Relevant
legislative scheme
[14] Under
subsection 228(2) of the Act, a person is required to remit an amount of
“net tax” in respect of a reporting period.
[15] Net
tax includes amounts of tax that have been collected or are collectible in the
reporting period. The relevant provision, subsection 225(1), provides:
225. (1) Net tax — Subject to this Subdivision, the net tax
for a particular reporting period of a person is the positive or negative
amount determined by the formula
A – B
where
A is the total of
(a) all amounts that became collectible
and all other amounts collected by the person in the particular reporting
period as or on account of tax under Division II, and
(b) all amounts that are required under
this Part to be added in determining the net tax of the person for the
particular reporting period; and
B is the total of
(a) all amounts each of which is an input
tax credit for the particular reporting period or a preceding reporting period
of the person claimed by the person in the return under this Division filed by
the person for the particular reporting period, and
(b) all amounts each of which is an amount
that may be deducted by the person under this Part in determining the net tax
of the person for the particular reporting period and that is claimed by the
person in the return under this Division filed by the person for the particular
reporting period. [Emphasis
added.]
[16] The
sale of a new home is a taxable supply for purposes of the Act, and vendors
are required to collect GST in respect of the sale.
[17] In
general, the GST is payable at the earlier of the time that ownership is
transferred or when the buyer takes possession under the sale agreement.
[18] The
timing is different for condominiums, in which case possession is not a
relevant factor. The provisions dealing with condominiums are not relevant here.
[19] The provision
that is relevant, s. 168(5) of the Act, provides:
168(5) Sale of real property — Notwithstanding subsections (1) and (2),
tax under this Division in respect of a taxable supply of real property by way
of sale is payable
(a) in the case of a supply of a
residential condominium unit where possession of the unit is transferred, after
1990 and before the condominium complex in which the unit is situated is
registered as a condominium, to the recipient under the agreement for the
supply, on the earlier of the day ownership of the unit is transferred to the
recipient and the day that is sixty days after the day the condominium complex
is registered as a condominium; and
(b) in any other case, on the earlier of
the day ownership of the property is transferred to the recipient and the day
possession of the property is transferred to the recipient under the agreement
for the supply.
[Emphasis added.]
[20] Subsection
168(7) modifies the requirements of s. 168(5) by providing for a partial
deferral of the payment in certain circumstances.
[21] Subsection
168(7) provides:
168(7) Retention of consideration — Notwithstanding subsections (1), (2),
(3), (5) and (6), where the recipient of a taxable supply retains, pursuant
to
(a)
an Act of Parliament or
of the legislature of a province, or
(b) an agreement in writing for the
construction, renovation or alteration of, or repair to, any real property
or any ship or other marine vessel,
a part of the consideration for the supply pending
full and satisfactory performance of the supply, or any part thereof, tax under this Division, calculated on the
value of that part of the consideration, is payable on the earlier of the day
that part is paid and the day it becomes payable. [Emphasis
added.]
Positions of
parties
[22] Olde Park submits that s. 168(7)(b)
applies to the balance of the purchase price payable on closing because it has
been retained by the purchasers pending the performance of Olde Park’s obligation
to obtain mortgage financing. It is submitted that the tax on this portion of
the purchase price is not payable until closing.
[23] If
this position is correct, Olde
Park could defer collection and remittance of
approximately 90 percent of the GST until ownership was transferred.
[24] Although
no part of the tax was actually paid by Olde Park until closing, counsel for
Olde Park did not dispute during argument that ten percent of the GST should
have been remitted earlier, because it was not held back pending financing.
[25] The
Minister submits that this interpretation extends beyond what the provision was
intended to do. According to the Minister, the purpose of paragraph 168(7)(b)
is to give relief only for typical construction-type holdbacks.
Analysis
[26] In
order for s. 168(7)(b) to apply to the facts of this case, the following
elements need to be established:
(a) that Olde Park entered into agreements for the construction of
homes; and
(b) that part of the consideration
was retained pending full and satisfactory performance of the supply.
[27] As the
Minister does not dispute the first element, the only issue is whether the
second is satisfied.
[28] Olde Park submits that the second element is
satisfied because part of the consideration is retained until Olde Park
satisfies its obligation to provide financing.
[29] I am
not able to agree with this submission.
[30] It is
certainly true that Olde Park has not performed all its obligations
under the agreement until the transfer of ownership, at the earliest. One
example of an outstanding obligation is the transfer of ownership in the home
itself.
[31] Paragraph
168(7)(b) applies in fairly narrow circumstances, namely in contracts
for the construction, renovation or repair of real estate or vessels. Further,
it only applies where part of the consideration is retained pending full and
satisfactory performance of the supply, or a part thereof.
[32] In my
view it is reasonably clear based on the language used in the section that the provision
is intended to apply only in those circumstances in which a sale has taken
place and part of the consideration is withheld as a protection against
non-performance.
[33] The
use of the term “retains” and the phrase “pending full and satisfactory
performance” strongly suggests this interpretation in my view.
[34] The
language used in s. 168(7)(b) suggests that the purchase price would
otherwise be payable except for certain conditions relating to performance. In
this case, no part of the consideration has been “retained” pending Olde Park’s
obligations relating to financing because the consideration would not otherwise
be payable.
[35] For this reason, I disagree with the interpretation
of s. 168(7)(b) suggested by Olde Park.
[36] Olde Park submits that the Minister’s
interpretation is onerous in its case because it is not clear that the GST
would be refunded if the closing did not take place for some reason.
[37] Even
if I were to accept that the interpretation suggested by the Minister could
have a harsh result for Olde Park, this is not a sufficient reason to give s. 168(7) an
interpretation that the provision cannot reasonably bear. If there is
unfairness in the legislation, it is something for Parliament to consider.
Due diligence
[38] As an
alternative argument, Olde Park submits that the penalty should be
vacated on the basis that it exercised due diligence.
[39] There is not sufficient evidence of due diligence in
this case.
[40] The
only witness for Olde Park was its president,
Sheldon Libfeld. In his testimony, he suggested that he had concluded that
GST was payable only on closing because of the wording used in a statement of
adjustments prepared by his solicitor (Ex. AR-1, Tab 35).
[41] This
statement is not corroborated by the wording in the statement of adjustments. Even
if I were satisfied that Mr. Libfeld truly held this belief, it would not be a
sufficient ground to satisfy a due diligence defence.
[42] Mr.
Libfeld also testified that he was concerned about the potential for double
taxation in the event that GST was payable on occupancy and the closing never
took place. Again, this is not a sufficient reason to avoid remitting the GST
when required by the legislation.
[43] Based
on the evidence as a whole, it appears likely that Olde
Park simply decided as a business matter not to remit the GST until closing.
[44] I
would note in particular that the notice of objection does not raise any legal
basis for the failure to remit tax on occupancy. Also, Schedule R to agreement
of purchase and sale provided for an interest-free loan to purchasers in
respect of GST payable on occupancy. Purchasers also signed a direction on
occupancy to apply the proceeds of the loan towards payment of the GST due on
occupancy (Ex. AR-1, Tab 27).
[45] A due
diligence defence has not been made out.
[46] The
appeal will be dismissed, with costs to the respondent.
These Amended Reasons for Judgment are
issued in substitution for the Reasons for Judgment dated September 18, 2009.
Signed at Ottawa, Canada
this 14th day of October 2009.
Woods
J.
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