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Citation: 2004TCC666
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Date: 20041116
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Docket: 2003-234(GST)G
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BETWEEN:
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SAMSON BÉLAIR DELOITTE & TOUCHE INC.,
IN ITS CAPACITY AS TRUSTEE TO THE BANKRUPTCY
OF MOTEL NORMANDIE DE RIMOUSKI INC.,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Angers J.
[1] On
October 18, 2002, the Minister of National Revenue (“the Minister”) sent a
notice of assessment to the trustee in the bankruptcy, Samson Bélair Deloitte
& Touche Inc. (“Samson Bélair”), regarding Motel Normandie de Rimouski Inc.
(Motel Normandie). This assessment, made under the Excise Tax Act (“ETA”)
regarding the period of December 31, 1998, to
October 31, 1999 (“the period”), was a decision on the Appellant’s
objection and adjusted the amount of net tax that was previously determined by
reducing it to $42,790 with $512.65 in interest and a penalty of $640.79. The
new assessment was varied because the Minister reduced the fair market value of
the building. The Appellant is thus appealing this new assessment and requests
that it be vacated because it was not required to do a self‑assessment in
1999 since the conversion of its commercial building into a residential
building was done prior to the period at issue.
[2] Motel
Normandie operated a commercial building in the Municipality of Rimouski
consisting of a hotel complex with 83 rooms, a restaurant and a bar. In
July 1997, Motel Normandie hired Gestion hôtelière M.B. Ass. Inc.
(“Gestion M.B.”) to conduct an analysis of this company. Gestion M.B. was
an administrator in the tourism, hotel and restaurant industries.
Michel Bélanger, the company’s representative, therefore prepared a
business plan and transformational analysis that he presented to Motel Normandie
on November 17, 1997. His main recommendation and the recommendation
accepted by Motel Normandie was that the motel be converted into a residence
for independent retirees. The recommendation was adopted at a shareholders’
meeting in January 1998.
[3] In
the winter of 1998, some model apartments were converted, and in
March 1998, the public was invited to see them. A press conference
followed, and in April 1998, 11 leases were signed, with occupancy
planned for July 1, and negotiations were underway regarding 22 other
leases, with occupancy beginning on the same date. A renovation permit was
requested in May and the conversion contracts were granted. In May and
June 1998, all reservations for marriage receptions, banquets, conferences
and others were cancelled. The restaurant remained open for business until
May 31 and then no longer served meals except to the residents. This was
necessary because, according to Mr. Bélanger, such activities were not
appropriate for the establishment’s new clientele. The employees working in the
hotel industry were gradually dismissed beginning in September, and at the
beginning of October, nurses were hired.
[4] The
financial statements filed into evidence indeed reflect this conversion. It is also apparent that the rent
coming from the apartments in the residence became the main source of income in
the fall of 1998, and the revenue from the motel rooms dropped. The same
applied in terms of food. An internal document showed the occupancy of the
building in December 1998 by residents in apartments, and also included
information on rooms rented by guests or by others, as well as the names of the
residents at that time. No part of the building was used as a motel.
[5] On
October 22, 1998, most of the conversion work was completed. This conversion
required putting in place a security system including cameras, a television,
motion detectors and medical alert necklaces or bracelets for emergency
situations, installing an elevator, renovating the kitchen, creating a public
space and installing a big screen television. At the end of December 1998,
according to Mr. Bélanger, there was only about $40,000 of the $725,000 in
renovations left to be done. The renovations consisted of converting from 16 to
27 rooms into apartments. Mr. Bélanger had been unable to specify the
exact number of rooms that had to be converted by the end of
December 1998, but said that 27 was the maximum.
[6] According
to Michel Landry, the representative of Samson Bélair, the conversion was
nearly completed by December 31, 1998, and approximately
38 apartments were rented. As for the work to be done after this date, it
was minimal and involved installing a fire door, doing the work and the
painting, according to the tenants’ preference.
[7] Strong
competition and environmental problems essentially caused the Motel Normandie
to go bankrupt. Samson Bélair was appointed trustee to the bankruptcy on
December 30, 1998. The environmental problems surfaced in the summer
of 1998. A study was done on their impact and the costs to deal with them were
too high for the company to afford. However, some remedial work was done,
beginning in 1998, and continued by the manager appointed by the trustee after
the bankruptcy. The costs associated with these environmental problems were approximately
$200,000.
[8] After
being appointed trustee, Michel Landry, from Samson Bélair, called a
creditors’ meeting and reviewed the situation with them. That is how the
decision to continue with the operations was made and a management contract was
granted to Gestion M.B. with the agreement of the main creditors.
According to Mr. Landry, since the conversion was done, there was no
discussion of this point at the meeting. According to Mr. Landry, the
trustee did not have any rooms converted, except for some work done in response
to notice of defective construction.
[9] However,
Mr. Landry acknowledged that $57,166 in revenue from renting the rooms is
included in the 1999 financial statements. The rental of rooms to friends or
parents of the residents made up 90% of this. In December 1999, $752 in
revenue was generated from the rental of about 15 rooms. The Goods and
Services Tax (GST) for the rental of these rooms was collected and refunded.
[10] Jacques Cimon is the auditor appointed to the Appellant’s file. At the
beginning of 1999, he went to the premises to determine the Appellant’s activities
among other things. He was given a copy of 38 long‑term leases for
apartments occupied as residences by seniors. He later made, under
subsection 190(1) of the ETA, an assessment for Motel Normandie for
the GST on the market value of the 38 units, because the motel had failed
to meet its obligation to conduct a self‑assessment after supplying,
through leases, a residential complex for the period ending on December 30, 1998.
During the same visit, he even noted that 56 units were completed, with
the major work having been done, leaving only the painting of the rooms, the
flooring and the repairing of some defects.
[11] On February 28, 2000, after seniors moved into the new apartments, the
GST was reassessed on the market value of 30 new units that were converted
out of 83 possible ones during the period of December 31, 1998, to
October 31, 1999. The auditor allegedly noted during his visit in
January 2000 that certain rooms still had not been converted. One thing
that is certain is that 68 of the total 83 rooms were rented. He therefore
assessed 30 additional units, basing this assessment on a market value.
The assessment was later modified after being objected to, and a re‑assessment
dated October 18, 2002, was made based on a value representing 30/83
of $1,875,000. Motel Normandie obviously did not conduct a self‑assessment
at all. This re‑assessment was conducted by Annick Martineau, Trustee, Samson Bélair, for Motel Normandie.
[12] The Respondent’s counsel argued that the Appellant having converted its
commercial building into a residential complex, is deemed to have engaged in
the construction of a residential complex and to have made substantial
renovations to the building. The Appellant failed to conduct a self‑assessment,
in accordance with subsection 191(3) of the ETA, after supplying,
through leases, a residential complex in 1999. The counsel also argued that
under subsections 206(4) and 206(5) of the ETA, the Appellant, who
had ceased use of the building for its commercial activities, was deemed to
have made a taxable supply of its building or a part of it and to have
collected the tax in respect of the supply.
[13] The Appellant’s counsel pointed out that paragraph 190(1)(b)
of the ETA applies in this case. In his opinion, this provision triggers a
self‑assessment on the date that the first resident’s lease became
effective, that is, on July 1, 1998, in this case, and, consequently,
the Appellant did not have to conduct a self‑assessment for the time
period at issue. He added that the provisions of subsections 206(4) and
(5) of the ETA regarding a change in use do not apply in this case due to
subsection 195.1(1) of the ETA. This subsection provides that the
self‑supply rules listed in section 191 of the ETA take
precedence over those regarding a change in use.
[14] In light of the parties’ respective positions, what needs to be
determined is when the self‑supply rules became applicable in this case.
The relevant legislative provisions are as follows:
123(1) "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.
"residential unit" means
(a)
a detached house, semi‑detached house, rowhouse unit, condominium unit,
mobile home, floating home or apartment,
(b)
a suite or room in a hotel, a motel, an inn, a boarding house or a lodging
house or in a residence for students, seniors, individuals with a disability or
other individuals, or
(c) any other similar premises,
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,
(f)
is vacant, but was last occupied or supplied as a place of residence or lodging
for individuals, or
(g)
has never been used or occupied for any purpose, but is intended to be used as
a place of residence or lodging for individuals.
"residential complex" means
(a) that part of a 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 proportion
of the land subjacent to the building that that part of the building is of the
whole building,
(b) that part of a building that
is the whole or part of a semi‑detached house, rowhouse unit, residential
condominium unit or other similar premises that is, or is intended to be:
(i) a separate
parcel or other division of real property owned, or intended to be owned, apart
from any other unit in the building,
(ii) a residential unit,
together with that proportion of any
common areas and other appurtenances to the building and the land subjacent or
immediately contiguous to the building that is attributable to the unit and
that is reasonably necessary for its use and enjoyment as a place of residence
for individuals,
(c) the whole of a building
described in paragraph (a), or the whole of a premises described in
subparagraph (b)(i), that is owned by or has been supplied by way
of sale to an individual and that is used primarily as a place of residence of
the individual, an individual related to the individual or a former spouse or
common‑law partner of the individual, together with
(i) in the case of a building described in paragraph (a),
any appurtenances to the building, the land subjacent to the building and that
part of the land immediately contiguous to the building, that are reasonably
necessary for the use and enjoyment of the building, and
(ii) in the case of a premises described in
subparagraph (b)(i), that part of any common areas and other
appurtenances to the building and the land subjacent or immediately contiguous
to the building that is attributable to the unit and that is reasonably
necessary for the use and enjoyment of the unit,
(d) a mobile home, together with
any appurtenances to the home and, where the home is affixed to land (other
than a site in a residential trailer park) for the purpose of its use and
enjoyment as a place of residence for individuals, the land subjacent or
immediately contiguous to the home that is attributable to the home and is
reasonably necessary for that purpose, and
(e) a floating home,
but does not include a building, or that part of a
building, that is a hotel, a motel, an inn, a boarding house, a lodging house
or other similar premises, or the land and appurtenances attributable to the
building or part, where the building is not described in paragraph (c)
and all or substantially all of the leases, licences or similar arrangements,
under which residential units in the building or part are supplied, provide, or
are expected to provide, for periods of continuous possession or use of less
than sixty days.
"multiple unit residential complex" means a
residential complex that contains more than one residential unit, but does not
include a condominium complex.
"single unit residential complex" means a
residential complex that does not contain more than one residential unit, but
does not include a residential condominium unit.
190(1) Where
at any time a person begins to hold or use real property as a residential
complex and
(a) the property was
(i) last acquired by the person to hold or use as a
residential complex, or
(ii)
immediately before that time, held for supply, or used or held for use as
capital property, in a business or commercial activity of the person,
(b) immediately before that time,
the property was not a residential complex, and
(c)
the person did not engage in the construction or substantial renovation of, and
is not, but for this section, a builder of, the complex, for the purposes of
this Part,
(d) the person shall be deemed to have
substantially renovated the complex,
(e)
the renovation shall be deemed to have begun at that time and to have been
substantially completed at the earlier of the time the complex is occupied by
any individual as a place of residence or lodging and the time the person
transfers ownership of the complex to another person, and
(f) except where the person is
(i)
a particular individual who acquires the property at that time to hold or use
exclusively as a place of residence of the particular individual or another
individual who is related to the particular individual or who is a former
spouse or common‑law partner of the particular individual, or
(ii)
a personal trust that acquires the property at that time to hold or use
exclusively as a place of residence of an individual who is a beneficiary of
the trust.
191(1) Self‑supply
of single unit residential complex or residential condominium unit - 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,
. . .
(3) Self‑supply
of single unit residential complex or residential condominium unit - 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,
(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.
[15] In this case, the description of the work done to convert Motel
Normandie into a residential complex does not appear to satisfy the
requirements of the definition for substantial renovations. In McLean v.
Canada, [1998] T.C.J. No. 435 (Q.L.), this definition was
described as restrictive and severe. Beaubier J. in Hole v. Canada,
[1998] T.C.J. No. 332 (Q.L.), said that the
question is whether, other than the foundation, exterior walls, interior
supporting walls, floors, roof and stair cases, “all” or “substantially all” of
the residential complex had been replaced and that, according to the
definition, it is rather a question of whether substantially all of the
interior had been replaced. In this case, it was a conversion for security and
esthetic purposes to meet the seniors’ needs. It was not a case where the
interior was completely renovated.
[16] That being said, the fact that a person who has begun using a
residential complex that was previously used for his or her commercial
activities will lead to the presumptions set out in subsection 190(1) of
the ETA. This person shall be deemed to have
substantially renovated the residential complex, the renovation shall be deemed
to have begun at that time and to have been substantially completed at the
earlier of the time the complex is occupied by any individual as a place of
residence or lodging and the time the person transfers ownership of the complex
to another person and finally, the person shall be deemed to be a builder of
the complex.
[17] In this case, the Appellant is in this very situation and is deemed to
have substantially completed the renovations by the end of
June 1998, or, more specifically, July 1, when the residential
complex was occupied as a residence under paragraph 190(1)(b).
Subsection 190(1) triggers the self‑supply rules set out in
subsection 191(3) because “residential complex” in this case is a multiple
unit residential complex. As I said in Immeubles Le Séjour Inc. v. Canada,
[2002] T.C.J. No. 424 (Q.L.), [2003] G.S.T.C. 180, the
purpose of the provisions in the ETA on self‑assessment
is to avoid giving a person who is the builder of that person’s own
construction project any advantage over a person who purchases a residential
complex from a builder and who is required to pay the GST on that purchase.
[18] In this case, the self‑supply rules became applicable under
paragraph 191(3)(d) of the ETA on the later of the following
two events: at the time the construction or substantial renovation is
substantially completed and the time possession of the unit is so given to the
person or the unit is so occupied by the builder. In both cases, and based on
the evidence put forward, the rules became applicable on
July 1, 1998. Even if the date to retain is later than that, it is
certain, based on the evidence put forward, that the work was substantially
completed before the end of 1998; thus, before the period in question.
[19] At that time, the Appellant should have been assessed or should have
conducted a self‑assessment, both based on the fair market value of the
entire residential complex based on paragraph 191(3)(e) of
the ETA. In 398722 Alberta Ltd v. Canada, [2000]
F.C.J. No. 644 (Q.L.), the Federal Court of Appeal applied
subsection 191(3) of the ETA as follows at paragraph 17:
Subsection 191(3) of the Excise Tax Act, the
"self‑supply rule", was triggered in February of 1993 when the
first tenant of one of the apartments took possession.
[20] In this case, the Respondent completed the assessment of the conversion
of each hotel room at the seniors’ residence for the period in question so that
each of these rooms had to be a residential complex within the meaning of
the ETA. Moreover, this approach is clear upon reading paragraph 16(o)
of the amended Reply to the Notice of Appeal, which reads as follows:
[Translation]
the new residential buildings were rented in 1999.
[21] However, the Respondent completed the assessment under
subsection 191(3) of the ETA, which sets out the self‑supply
rules of a “multiple unit residential complex.” It should have perhaps done
this under subsection 191(1) for it to be consistent with its position.
[22] In my opinion, the definition of residential complex provides that, in
some cases, a “residence” can be a residential complex. However, such a
residence with one room in a seniors’ residence must, to be considered a
“residential complex”, correspond to a semi‑detached house, rowhouse unit, residential condominium unit or other similar
premises that is, or is intended to be, a separate parcel or other division of
real property owned, or intended to be owned, apart from any other unit in the
building (see definition
above).
[23] Not all “residences” can be considered “residential complexes.”
Subparagraphs (i) and (ii) of paragraph (b) in the definition
of “residential complex” are cumulative, that is, the conditions listed in (i)
and (ii) must be combined so that paragraph (b) can apply and so
that part of the building can be considered a “residential complex.” The
legislator’s use of the words “d’une part” at sub‑paragraph (i)
of paragraph (b) of the same definition and of the words “d’autre
part” at sub‑paragraph (ii) of paragraph (b) of the
definition support my opinion (see the English version of the definition). A
room in a seniors’ residence cannot, in my opinion, constitute a “residential
complex” within the meaning of the definition of this expression at
subsection 123(1) of the ETA.
[24] The Respondent’s
alternative argument regarding the application of subsections 206(4) and
206(5) of the ETA are irrelevant in this case. Suffice it to quote the
example in the GST/HST Memoranda Series, Chapter 19.4.2 “Commercial Real Property‑Deemed Supplies,” at paragraph 60.
Example 2
A
person converts a hotel that is not a residential complex into a rooming house.
As a result of this conversion, the property becomes a residential complex. The
residential units in the rooming house are leased for periods of continuous
possession or use of more than one month. The renovations undertaken for the
conversion are not extensive enough to be classed as a substantial renovation
of the building. When leasing the first unit of the rooming house, the person
is uncertain whether he/she is required to self‑assess tax under
subsection 191(3) (self supply of a multiple unit residential complex) or
under the change‑in‑use provisions (ceasing use in commercial
activities).
Because
the rooming house is neither newly constructed nor substantially renovated, an
analysis of this situation might first suggest that the person is not required
to self‑supply under subsection 191(3). It could also suggest that
the change‑in‑use provisions governing ceasing use in commercial
activities apply.
However,
subsection 190(1) (conversion to residential complex) applies in this case
and under paragraph 190(1)(d) deems the person to have substantially
renovated the residential complex. The person is also deemed to be the builder
of the complex under paragraph 190(1)(f). Consequently,
subsection 191(3) applies. Since the provisions of section 195.1 deem
the property not to be capital property of the builder from the time of the
conversion until after the deemed builder either receives a taxable supply
under 191 or receives an exempt supply of the complex, the change‑in‑use
provisions governing ceasing use in commercial activities do not apply.
[25] On these grounds, I find that the self‑supply rules became
applicable in the period prior to the one in question and that it was at that
time that the Respondent should have made an assessment for the Appellant based
on the fair market value of the entire residential complex. The appeal is
allowed and the assessment is therefore vacated. The Appellant is entitled to
costs.
Signed at Ottawa, Canada, this 16th day of
November 2004.
Angers
J.
on this 9th day of February 2005.
Julie Oliveira,
Translator
Partially revised in 2012
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