Citation: 2008TCC206
Date: 20080411
Docket: 2007-4067(GST)I
BETWEEN:
JOHN W. HARRISON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Webb J.
[1] The issue in this case is whether the Appellant is
entitled to a new housing rebate under section 256 of the Excise Tax Act
("Act") as a result of the construction of a major
addition to his home.
[2] Section 256 of the Act contemplates a new housing rebate in one
of two situations -- either a new residential complex is constructed or an
existing residential complex is substantially renovated. However, the rebate
form printed by the Canada Revenue Agency ("CRA") contemplates a
third possibility -- a major addition. While the Act itself does not
contemplate a rebate for a major addition, the concept of a major addition
qualifying for a new housing rebate is based on the decision of Justice
Hershfield in Erickson v. The Queen, [2001] G.S.T.C. 19, 2001 G.T.C.
309.
[3] The Appellant's house was constructed in three phases. When the Appellant
acquired the property in 2001, phase 1 and phase 2 had been completed. Although
the exact dimensions of phase 1 and phase 2 were not provided, it would appear
from the plans that were submitted that phase 1 is a little larger than phase
2. Both phases 1 and 2 consist of a main floor area and a finished lower floor.
The issue in this case relates to phase 3.
[4] There is no dispute in this case that a significant amount of work was
done to the property and that the addition is significant. With respect to the
kitchen area of the existing property some of the walls were removed, the
windows were replaced, the kitchen cabinetry and countertops were replaced, the
floor was replaced, the stairs were relocated, and a coat closet was removed.
Most of the renovations completed on the existing property were done in the
kitchen area. With respect to the remaining parts of the existing structure,
the foundation wall was cut to allow passage from the older part to the new
addition, duct work was installed throughout, baseboard and wood heat was
replaced by a heat pump, the wood stove was removed, the bathroom fixtures were
replaced (which included the toilet, faucet, tub and shower), the floor in the
bedroom located in the basement of phase 2 was replaced, a new laundry
area was created, and the electrical entrance and panel were relocated to the
new section. The flooring in the hallway of the lower level of phase 1 was also
replaced.
[5] When the new part was added to the house the main entrance to the house
was relocated to the new part. In the new part a master bedroom, with a walk-in
closet, a second bedroom, a bathroom, and a living room were added on one
floor, and a garage, workshop, storage area and utility room were added at the lower
level.
[6] The total area added by the new addition is 1,724 square feet
(excluding the garage). The area of the pre-existing structure was 1,250 square
feet. The total cost of the renovations to the existing part and the new
addition was $123,722. The Appellant paid $80,000 for the house, land and a pottery
studio when the property was acquired in 2001.
[7] It is acknowledged by the Appellant that the work completed on the
existing house would not qualify as a substantial renovation of the existing
structure. Substantial renovation is defined in section 123 of the Act
as follows:
“substantial renovation” of a residential complex means the renovation or
alteration of a building to such an extent that all or substantially all of the
building that existed immediately before the renovation or alteration was
begun, other than the foundation, external walls, interior supporting walls,
floors, roof and staircases, has been removed or replaced where, after
completion of the renovation or alteration, the building is, or forms part of,
a residential complex;
[8] It is clear that the renovations completed in relation to the existing
part (phases 1 and 2) do not meet the definition of substantial renovations as
the only work done on the recreation room in phase 2 (which is approximately
285 square feet) was the removal of the wood stove and no work was done on one
of the two bedrooms located below the recreation room in phase 2. Also the only
work done in relation to the bedroom that is below the kitchen in phase 1 is
that duct work was installed. The Appellant’s estimate was that approximately
40% of the existing structure (phases 1 and 2) had been renovated.
[9] Therefore the argument in this case is related to whether or not the
addition has resulted in a new residential complex. In Erickson Justice
Hershfield made the following comments:
14 In supporting its submission that the
Appellant did not construct a residential complex (a new residential complex),
the Respondent argues that an addition can only be a newly constructed
residential complex if the pre-existing unit is incorporated into an addition
that is of such size and proportion that negates its being seen as merely an
addition to the existing house. The addition should be of such proportion that
would make the pre-existing unit, in effect, the “add on”. I agree with this
position. The test then, as I would put it, is whether the pre-existing
residence has been incorporated into a new residence or whether an addition has
been incorporated into a pre-existing residence. The former (but not the
latter) may qualify as the construction of a (new) residential complex. I
believe this expression of the test, of when a housing construction project can
properly be viewed as one that constructs a new complex versus one that
renovates an existing complex by adding to it, is in line with the requirements
of the Act in respect of identifying construction that is eligible for the new
housing rebate. To this point there is no difference between the Respondent's
argument and her client's stated administrative practise. That is, where the
original residence is incorporated into the addition as an “annex”, a wing or
relatively minor part of the newly constructed residence, the Respondent would
treat the addition and renovations to the original residence together as a construction
of a new residential complex. However, the Policy Paper also suggests by
specific example that by adding a second floor to a bungalow where the second
floor at least doubles the square footage of the original residence, the
character of the residence may have sufficiently changed to regard the
construction as the construction of a new residential complex. The Appellant
argues that his lateral addition has similarly changed the character of his
original residence, and I would agree. I do not agree, however, that an
addition, whether one constructs upward or sideways, that simply doubles the
square footage of a home, constitutes construction that is sufficient to create
a new residential complex even if the character of the home is thereby changed.
Changing the character of a home is not only an imprecise and subjective
criterion, it is one that the Act does not invite as a factor in permitting a
rebate. To say that changing a bungalow to a two-storey home may change the
character of the former residence is not sufficient. The character of a home
can be easily changed by a variety of renovations. Changing roof lines,
enlarging and adding windows or redoing the exterior finishing of a home from,
say, stucco to brick and stone could well change the character of a home.
However, such changes would not justify a finding that a new residential
complex has come into being. Similarly living space modifications can change
the character of a home in terms of the way it functions but again such change
in character may not be sufficient to support a finding that such modifications
have transformed a pre-existing structure into a new residential complex.
15 Consider that paragraph 256(2)(a) makes
no reference to additions. From this it has been found that “additions” per se
do not qualify for rebates.* Consider also that the Federal Court of Appeal in
Sneyd has said that the GST rebate provisions for new housing are a limited and
carefully tailored exception to the application of GST to taxable services in
relation to house building and house renovations. Since additions are not
mentioned in the rebate provisions and since we are to regard the rebate
provisions as being carefully crafted exceptions in the application of GST, I
must conclude that an addition will not give rise to rebates unless it
incorporates (consumes) a pre-existing premises to the point where the addition
is essentially the new residential premises and the pre-existing premises,
having ceased to exist as a residential unit is essentially reduced to a
relatively minor aspect of that new premises. If renovations which are
expressly provided for under the Act must be so substantial as to require
virtually gutting all of a pre-existing premises to qualify for a rebate,
additions, for which there are no express provisions in the Act, should (if
they are to be considered at all) presumably be more substantial yet. An
addition that doubles square footage by adding a few rooms in any direction
will not qualify for a rebate applying these criterion, even if the character
of the residence has been modified in the process*.
16 The Appellant I think rightfully feels
that his addition is indistinguishable from the bungalow being converted to a
two-story home example given in the Policy Paper and asks me to enforce the
Policy Paper or the spirit of it so as to allow his appeal. This I cannot do.
Adding a double garage and doubling your living space in a home does not
constitute anything more than a significant renovation. The Act does not permit
a rebate on a renovation, significant or otherwise, unless virtually all of the
existing premises is gutted. Making a home bigger, even significantly bigger,
is simply not contemplated by the legislation as qualifying for a refund, in my
view. As stated above there might be cases where an addition is of such
proportion in relation to the existing premises that it can fairly be said that
the existing premises has been incorporated into the addition in a manner that
makes it appropriate to regard the original premises as effectively having
ceased to exist as a residential unit. In such case, a new premises has been
constructed and the rebate provision will apply. That is not the case here. The
original premises is largely intact and constitutes a significant part of the post
construction premises. It continues to have all the components of a residential
unit. The addition just enhances that unit.
(emphasis added)
[10] As noted by Justice Hershfield in order for the new addition to qualify
the resulting structure would have to become a new residential complex. As he
noted:
I must conclude that an addition will not give rise to rebates unless it
incorporates (consumes) a pre-existing premises to the point where the addition
is essentially the new residential premises and the pre-existing premises,
having ceased to exist as a residential unit is essentially reduced to a
relatively minor aspect of that new premises.
[11] In this particular case, the pre-existing part of the property (phases
1 and 2) still plays an important role in the use of the property as a
residential complex. The kitchen area is still in the old part, as well as one
bathroom and three bedrooms. The recreation room is also still in the old part.
Changing the use of this room from one used to watch television to one used to
play table tennis is not, in my opinion, a significant change since both uses
are for recreational purposes. Therefore it cannot be said that the old
premises have ceased to exist as a residential unit.
[12] The Appellant in his submission noted that this case is very similar to
Erickson. I agree with this conclusion. Unfortunately for the Appellant,
the individual in Erickson was not successful in substantiating that he
was entitled to the rebate. The Appellant however also noted that the decision
of Justice Hershfield predates the GST publication B-092 dated January 2005
and speculates whether the outcome in Erickson would have been different
if this publication would have been available when Erickson was decided.
However CRA's GST publication is not law. CRA's publication should be based on
the Act and the case law. Clearly Justice Hershfield reviewed the policy
paper that was available in 2000 and notes where he disagrees with the position
as set out in that policy paper in relation to the conversion of a bungalow
into a two story house. It is the Act and case law that will determine
whether the rebate is available not the CRA publication.
[13] If the rebate is to be extended
to include a major addition as a separate category (i.e. to include a major
addition that will qualify for the rebate even though the major addition does
not result in the addition being essentially the new residential complex), then
Parliament, and not the CRA or the Court, must extend the rebate and define the
criteria that must be met for such a major addition to qualify for the rebate.
Otherwise the major addition will have to satisfy the existing requirements of
new construction of a residential complex or substantial renovation of an
existing residential complex.
[14] The appeal is dismissed, without costs.
Signed at Halifax, Nova Scotia, this 11th day of April 2008.
“Wyman W. Webb”
Email this Content