Date: 20011022
Dockets: 1999-3571-GST-I,
1999-4869-GST-I
BETWEEN:
SUN VALLEY MALL LTD. (SVM),
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasonsfor
Judgment
Beaubier, J.T.C.C.
[1]
These appeals pursuant to the Informal Procedure were heard
together on common evidence at Kelowna, British Columbia on
October 4th and 5th, 2001 by consent of the
parties. Lynn Spraggs, President of the Appellant testified for
the Appellant. George Ward an officer of Canada Customs and
Revenue Agency and a real estate appraiser testified as an expert
witness for the Respondent.
[2]
Appeal number 1999-3571(GST)I is for the periods July 1, 1994 to
June 30, 1997 on the self-supply of 18 residential
condominium units and alleges Goods and Services Tax
("GST") due of $129,947.75 and interest and penalties.
Appeal number 1999-4869(GST)I is for the periods September 1,
1997 to March 31, 1998 on the self-supply of 5 of the
aforesaid 18 residential condominium units and alleges GST due of
$18,216.66 and interest and penalties.
[3]
Paragraphs 14 to 16 inclusive and Schedule 1 of the Reply to
Amended Notice of Appeal number 1999-3571(GST)I read:
14.
In so reassessing the Appellant by Notice of Reassessment dated
May 6, 1999 to add GST in the amount of $6,039.27 and assess
interest and penalties the Minister relied on the following
assumptions:
a)
the Appellant is a GST registrant with GST Registration No. 13001
8906;
b)
the Appellant was a corporation involved in property
management;
c)
the Appellant is required by the Excise Tax Act, R.S.C.
1985, c. E-15, as amended (the "Act") to file its GST
returns on a quarterly basis;
d)
the Appellant owned and operated a building which contained 46
strata units consisting of 28 commercial units and 18 residential
units;
e)
on or about April 25, 1995, a fire destroyed the building;
f)
the Appellant reconstructed the building from insurance
proceeds;
g)
the Appellant was the builder of the building containing the 18
residential condominium units;
h)
the reconstruction of the building containing the 18 residential
condominium units was completed by October 31, 1996;
i)
in its returns for the quarter ending December 31, 1996
and March 31, 1997, the Appellant reported GST in respect of the
self-supply of the reconstructed residential condominium
units in the total amount of $26,475;
j)
Five of the 18 residential condominium units were not rented
until after June 30, 1997;
k)
the residential condominium units were occupied as set out in
Schedule 1 attached hereto;
l)
the GST reported by the Appellant was not calculated on the fair
market value of the residential condominium unit at the date of
occupancy;
m)
the fair market value of the residential condominium units at the
date of occupancy was not less than the values set out in
Schedule 1 attached hereto;
n)
the total amount of GST payable by the Appellant in respect of
the self-supply of the residential condominium units occupied
during the period from July 1, 1994 to June 30, 1997 was not less
than $31,385.
o)
the Appellant was not duly diligent in preparing its GST returns
for the quarters ending December 31, 1996 and March 31,
1997 and failed to remit or pay tax as required under Part IX of
the Excise Tax Act;
B.
ISSUES TO BE DECIDED
15.
The issues are:
a)
whether the Appellant is liable for GST as assessed;
b)
whether the Appellant is liable for penalties assessed pursuant
to subsection 280(1);
c)
whether this Honourable Court has jurisdiction to grant the
relief claimed by the Appellant in respect of its allegation that
collection action taken by the Minister in respect of the GST
assessed violate the Appellant's rights under section 8 of
the Canadian Charter of Rights and Freedoms (the
"Charter"); alternatively
d)
Whether collection action taken by the Minister against the
Appellant in respect of taxes assessed infringes upon any rights
of the Appellant guaranteed by section 8 of the Charter.
C.
STATUTORY PROVISIONS RELIED ON
16.
He relies on sections 123, subsection 191(1), 280,
300,301,301,306,307,309 313,314,315,316 and 317 of the Act,
sections 8 and 1 of the Charter, Section 12 of the Tax Court
of Canada Act, and section 18 of the Federal Court
Act.
...
SCHEDULE 1
Sun Valley Mall Ltd.
GST account # 130018906
3rd floor residential units - 3334 30th Ave, Vernon, BC
|
Lot #
|
Unit #
|
unit
size
|
Nov 1/96 FMV as appraised
|
GST @
7%
|
GST
reported
|
GST
Assessed
|
Occupancy
date
mm/dd/yr
|
|
27
|
301
|
346.60
|
31208.40
|
2184.59
|
1651.00
|
533.59
|
09/01/96
|
|
28
|
302
|
316.50
|
28498.15
|
1994.87
|
1540.00
|
454.87
|
3/15/97
|
|
29
|
303
|
316.50
|
28498.15
|
1994.87
|
1540.00
|
454.87
|
04/01/97
|
|
30
|
304
|
316.50
|
28498.15
|
1994.87
|
1540.00
|
454.87
|
11/01/96
|
|
31
|
305
|
431.60
|
38861.93
|
2720.34
|
1951.00
|
769.34
|
03/01/97
|
|
32
|
306
|
0.00
|
0.00
|
0.00
|
0.00
|
0.00
|
|
|
33
|
307
|
0.00
|
0.00
|
0.00
|
0.00
|
0.00
|
|
|
34
|
308
|
314.30
|
28300.06
|
1981.00
|
1530.00
|
451.00
|
12/01/96
|
|
35
|
309
|
314.30
|
28300.06
|
1981.00
|
1530.00
|
451.00
|
3/24/96
|
|
36
|
310
|
314.30
|
28300.06
|
1981.00
|
1528.00
|
453.00
|
08/01/97
|
|
37
|
311
|
367.10
|
33054.25
|
2313.80
|
1916.00
|
397.80
|
08/01/96
|
|
38
|
312
|
673.80
|
60670.00
|
4246.90
|
1951.00
|
2295.90
|
01/01/96
|
|
39
|
313
|
673.80
|
60670.00
|
4246.90
|
0.00
|
4246.90
|
01/01/98
|
|
40
|
314
|
623.30
|
56122.90
|
3928.60
|
0.00
|
3928.60
|
02/01/98
|
|
41
|
315
|
314.30
|
28300.06
|
1981.00
|
1528.00
|
453.00
|
09/01/96
|
|
42
|
316
|
314.30
|
28300.06
|
1981.00
|
1528.00
|
453.00
|
08/01/96
|
|
43
|
317
|
314.30
|
28300.06
|
1981.00
|
1528.00
|
453.00
|
09/01/96
|
|
44
|
318
|
639.40
|
57572.57
|
4030.08
|
1738.00
|
2292.08
|
12/17/96
|
|
45
|
319
|
639.40
|
57572.57
|
4030.08
|
1738.00
|
2292.08
|
09/01/97
|
|
46
|
320
|
639.40
|
57572.57
|
4030.08
|
1738.00
|
2292.08
|
10/01/97
|
|
|
|
----------
|
-------------
|
----------
|
-------------
|
-------------
|
|
|
|
|
7869.70
|
708600.00
|
49602.00
|
26475.00
|
23127.00
|
|
[4]
Assumption 14 b) was refuted in that the Appellant did not manage
the rental and operation of the residential units. The
residential units were strata titled on November 1, 1996 and
therefore, they were merely residential apartments until that
date. The assumptions were not refuted in any other respect
except insofar as references to the units described in appeal
number 1999-4869(GST)I may apply. The valuations in
Schedule 1 are disputed.
[5]
Paragraphs 20 to 22 inclusive of appeal number 1999-4869(GST)I
corresponds successively with the quoted paragraphs of appeal
number 1999-3571(GST)I except for assumptions 20 n) and o)
and paragraph 22 which read:
20 n) the total amount of
GST payable by the Appellant in respect of the self-supply of the
residential condominium units occupied during the period from
September 1, 1997 to March 31, 1998 was not less than
$18,216;
o) the
Appellant was not duly diligent in preparing its GST returns for
the period from September 1, 1997 to March 31,
1998 and failed to remit or pay tax as required under Part IX of
the Excise Tax Act;
C.
STATUTORY PROVISIONS RELIED ON
22.
He relies on sections 123, subsection 191(1), 280, 300, 301, 302,
306, 313, 314, 315, 316 and 317 of the Act, sections 8 and 1 of
the Charter, Section 12 of the Tax Court of Canada Act and
Section 18 of the Federal Court Act.
[6]
The Appellant was the builder in this case. Lynn Spraggs, its
chief officer, has a Ph.D in civil engineering. He is a mature
experienced man who is highly qualified and experienced in
construction engineering and costs. He supervised the
construction of the entire complex. The Appellant let separate
contracts for the various aspects of construction to a number of
contractors for, separately, the structure, the electrical
components, the plumbing, etc. It is a multi-use commercial and
residential building which was reconstructed on the old site. The
old building was destroyed by the fire and rebuilt by the
Appellant to approximately its former design from the ground up
under the Appellant's contracts and supervision pursuant to
the Appellant's plans. Thus, the Appellant is the builder of
the entire building and the residential units in question within
the meaning of Section 191 of the Excise Tax Act
("Act").
[7]
The Appellant proceeded to strata title the residential suites in
the latter half of 1996. The plan was registered on November 1,
1996. Thus, it was, as Bowman, J. stated in Stafford, Stafford
& Jakeman v. The Queen, [1995] G.S.T.C. 7, intended to be
strata titled into individual units throughout October of 1996,
and the GST should be imposed pursuant to subsection 191(1) of
the Act upon the units as the restoration of single unit
residential complexes as at the later of times of completion or
occupancy is described in the respective assumptions pursuant to
subsection 191(1) of the Act. The values of the units for
assessment purposes are to be apportioned among the units in each
appeal in accordance with the proportions respecting each of the
units as appraised and described in the assumptions contained in
the Replies to the Amended Notices of Appeal.
[8]
The substantial question of the values of the units under appeal
turned on the Appellant's valuation of the 18 units at 25% of
the cost of construction of the entire mixed use building, the
25% amounting to $524,000. The Appellant's value did not
include the cost or value of land. The Appellant's failure to
include a land value is fatal to its cost calculation.
Subsequently, the Appellant arrived at a second valuation of
$409,089 by multiplying the net income figure of $57,272 by a
capitalization factor of 14%.
[9]
In contrast, the Appellant's appraiser based his valuation as
at November 1, 1996, on a "direct sales comparison
approach" to reach a value of $708,600. In the Court's
view this direct sales approach fails because all of the
appraiser's comparables had parking, whereas the residential
units in the subject property did not. Moreover, none of the
comparables consisted of units in a mixed use building.
[10] Thus,
both the Appellant's interpretation of the cost of the units
is rejected and the Respondent's use of the comparable sales
test to value the units is rejected. The only accepted evidence
relates to the income approach to value the units.
[11] The
Appellant failed to include the income from the washers and
dryers in his calculation of the total income and on the evidence
on the record before the Court, it should be included. The
Respondent's appraiser included an estimate of that income at
$3,000 which is accepted by the Court. The appraiser also
estimated a vacancy factor of 5.5% based on Canada Mortgage and
Housing Corporation figures for the Vernon area, where the units
are situated. The Appellant did not allow for a vacancy factor
but did state that one of the units seldom rented. In these
circumstances, the appraiser's calculation of the income from
the units is accepted in its entirety since the evidence before
the Court and the appraiser's explanations confirms it. His
final estimate of the units net operating income was $56,400,
which is accepted as described on page 22 of his report (Exhibit
R-3).
[12] As a
result, they are close, but for the reasons stated, Mr.
Ward's is accepted as the more accurate. Mr. Ward applied a
9% capitalization rate to the net income figure of $56,400 in
order to arrive at a value for the units of $626,700 based upon
the income approach.
[13] The
Respondent's appraiser was of the view that the
capitalization rate should be lower for the subject property than
the rate for comparables 2 and 3 because they were not strata
titled and because the subject property was new. However, the
subject suites were either bachelor or one bedroom suites with
bedrooms on the upper floor in the case of the one bedroom
suites; these factors would limit the saleability of the subject
units and, in the Court's view, reduced their values in
comparison to the comparables. The subject units are downtown,
but they are near competitors' subsidized units which thereby
restrict both their saleability and their income potential. The
actual construction of the residential units was not given in
detailed evidence. However, any discrepancies between the parties
basis of arriving at an income of the units are eliminated by the
closeness of their final figures.
[14] The
Respondent's appraiser reported that a lower rental rate
reduces the vacancy rate and thus lowers the capitalization rate,
however, the Court discounts that view, particularly due to the
timing of sales 2 and 3. Thus, the Court does not accept the
appraiser's capitalization rate at 9%. The 9% rate derives
from his comparable sales number 1, in 1995; number 4, in 1992;
number 5, in 1992; and number 6, in 1992. By contrast, the rates
for sale number 2, in February, 1997 and number 3, in January
1996, are 12.09% and 12.66%, respectively. They average 12.375%.
The Appellant offered no comparable source from which his
capitalization rate of 14% could be verified and as a result, his
rate of 14% is rejected. The Court finds the capitalization rate
to be applied is 12.375% because sales 2 and 3 most closely
associate themselves with the date in question near the end of
1996.
[15] Using a
capitalization rate of 12.375% and Mr. Ward's income figure
of $56,400, the Court finds the value of the units to be
$455,758.
[16] The
Appellant raised a number of other issues in his Notices of
Appeal over and above value and the applicability of the GST to
the premises. They include the Canadian Charter of Rights and
Freedoms ("Charter"); errors by the auditor; and
the question of due diligence respecting penalties. They will be
dealt with in that order.
[17] The
Charter argument was based on the fact that the Appellant's
bank accounts were attached shortly after assessment when that
assessment included an auditor's error of $30,000 which
related to a completely separate corporation. The Appellant spent
about one month of staff time with little or no operating money
discovering where the error was and correcting the auditor. The
Appellant quite properly takes the position that errors such as
this can be based on prejudice or erroneous work by an auditor
and that seizure without an independent review could destroy a
taxpayer or a taxpayer's business with no recourse by the
taxpayer. The Appellant's suggestions are correct and there
is no evidence contrary to his allegations concerning the
auditor's error and the collection proceedings which
followed; they are accepted as being true and factual. However,
the Charter does not affect property rights so that, even though
such collection action could destroy a person's livelihood,
there is no remedy available to the Appellant under the Charter.
Furthermore, this Court does not have jurisdiction over the
Respondent's collection procedures according to the existing
jurisprudence. In these circumstances, the Court is unable to
provide the Appellant with an appropriate remedy respecting these
actions by the Respondent. (See Steve Tatarnic v. The
Queen, (TCC) [1997] G.S.T.C. 54 and The Queen v.
Robert Duncan et al, (F.C.C.) 91 DTC 5615.
[18] The
Appellant alleges that it exercised due diligence in its
reporting and valuation procedures respecting these assessments.
The chief officer of the Appellant is a man who appears to be in
his sixties. He has a Ph.D in Civil Engineering from Stanford
University and he was a professor of civil engineering at McGill
University where he taught construction project management and
cost engineering among other things. He testified and argued for
the Appellant and he is a very competent and a very sophisticated
man in every respect. He testified that his wife compiled some of
the Appellant's figures for accounting and taxation purposes
but he was the person who gathered them, managed them and was the
Appellant's officer who was responsible for submitting its
reports to the Respondent. In this case, the Appellant failed to
properly report the supply of the residential units pursuant to
Section 191 of the Act in its initial filing. It only did
so after it was contacted by the Respondent. There is no evidence
that the Appellant attempted to comply with the Act until
it was asked to do so by the Respondent's officers. Its
subsequent report and valuation left the land value out of its
calculations. This was a large and sophisticated project and
supply both in real terms and relative to the size and operations
of the Appellant itself. There is no evidence that the Appellant
consulted its lawyers or accountants respecting the appropriate
reports necessary under the Act or that it consulted the
Respondent's officers or advisory services. In these
circumstances, the Appellant has failed to exercise due diligence
pursuant to the provisions of the Act, and the penalties
and the interest are applicable as levied, based upon the
findings herein.
[19] These
assessments are referred to the Minister of National Revenue for
reconsideration and reassessment in accordance with these
reasons.
Signed at Ottawa, Canada, this 22nd day of October, 2001.
"D. W. Beaubier"
J.T.C.C.
COURT FILE
NO.:
1999-3571(GST)I
1999-4869(GST)I
STYLE OF
CAUSE:
Sun Valley Mall Ltd. (SVM) v. The
Queen
PLACE OF
HEARING:
Kelowna, British Columbia
DATE OF
HEARING:
October 4 & 5, 2001
REASONS FOR JUDGMENT BY: The
Honourable Judge D. W. Beaubier
DATE OF
REASONS:
October 22, 2001
APPEARANCES:
Agent for the
Appellant:
Lynn D. Spraggs
Counsel for the
Respondent:
Linda Bell
COUNSEL OF RECORD:
For the
Appellant:
Name:
Firm:
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
1999-3571(GST)I
BETWEEN:
SUN VALLEY MALL LTD. (SVM),
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on common evidence with the
appeals of Sun Valley Mall Ltd. (SVM) (1999-4869(GST)G) on
October 4, 2001 at Kelowna, British Columbia
by the Honourable Judge D. W. Beaubier
Appearances
Agent for the
Appellant:
Lynn D. Spraggs
Counsel for the
Respondent:
Linda Bell
JUDGMENT
The appeal from the assessment made under the Excise Tax
Act, notice of which is dated January 15, 1999, and bears
number 12260000131, is allowed, and the assessment is referred to
the Minister of National Revenue for reconsideration and
reassessment in accordance with the attached Reasons for
Judgment.
Signed at Ottawa, Canada, this 22nd day of October, 2001.
J.T.C.C.
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