REASONS
FOR JUDGMENT
Sommerfeldt J.
I. Introduction
[1]
These Reasons pertain to an appeal by Otte &
Associates Contractors Inc. (“OAC”) in respect of a series of reassessments
(collectively, the “Reassessments”) which were issued under Part IX of the
Excise Tax Act (the “ETA”)[1]
on September 10, 2014, which related to twelve quarterly reporting periods,
extending over a three-year period from December 1, 2009 to November 30,
2012, and which imposed goods and services tax (“GST”) in the amount of
$30,800.07, pursuant to the formula set out in paragraph 173(1)(d) of the ETA.
II. BACKGROUND
A. Corporation
and Shareholders
[2]
The Appellant, OAC, was incorporated under the
laws of Saskatchewan in 2008. Patrick Otte and his wife, Jane, are shareholders
(but not necessarily the only shareholders) of OAC.
[3]
In subparagraph 18(b) of the Crown’s Reply (the
“Reply”), the Minister of National Revenue (the “Minister”) assumed that the
shareholders of OAC are Mr. and Mrs. Otte. Perhaps it is implicit in the
wording of subparagraph 18(b) that Mr. and Mrs. Otte were assumed by the
Minister to be the only shareholders of OAC, but this was not stated explicitly
in the Reply, in the Crown’s evidence or in argument.
[4]
In his opening statement, counsel for OAC
admitted that a number of the Minister’s assumptions, as set out in paragraph
18 of the Reply, are true. However, in the context of subparagraph 18(b) of the
Reply, counsel for OAC admitted only that Mr. and Mrs. Otte are two of the
shareholders of OAC. He went on to say that there are two other shareholders of
OAC, as well. However, the names and shareholdings of the other two
shareholders of OAC were not provided to me, either in the opening statement or
in evidence.
[5]
The only witness called on behalf of OAC was Mr.
Otte, whom I found to be credible. Mr. Otte, who is a journeyman carpenter, has
worked in the construction industry for 41 years. As a sole proprietor, he
began building custom homes for customers in the 1990s. For many years, he has
also done home renovations and additions. In 2008 he arranged for OAC to be
incorporated, after which the home-construction business has been carried on by
OAC.
B. Purchase
of Land
[6]
In or about 2007, Mr. and Mrs. Otte decided to
build a new home for themselves. To that end, they found a 4.90-acre
(1.983-hectare) parcel of vacant land (the “Land”),whose parcel description is
Surface Parcel No. #########, whose reference land description is Lot #, Block #,
Plan No. ######### Extension #, and whose municipal address is ## XXXX
Crescent,
in a relatively new development known as “Stone Pointe Estates,” which is
located in or near White City in the Rural Municipality of Edenwold No.
158 (the “Municipality”) in Saskatchewan. Effective as of December 27, 2007,
Mr. Otte and Stone Pointe Estates Ltd. (“SPE”) entered into an Option to
Purchase Agreement (the “Agreement,” which was entered as Exhibit A-2),
pursuant to which Mr. Otte obtained an option to purchase the Land from SPE for
a price of $124,900.00 plus GST in the amount of $6,245.00, resulting in a
total payment of $131,145.00. On December 27, 2007 (according to the Agreement)
or on January 8, 2008 (according to Mr. Otte’s handwritten tally sheet, which
was entered as Exhibit A-7), Mr. Otte paid a deposit of $16,237.00 to SPE. Mr.
(and perhaps Mrs.) Otte subsequently paid the remainder of the price of the
Land, in two additional payments in the amounts of $60,000.00 and
$59,000.00 on December 1, 2008 and August 1, 2009 respectively. The total of
the three payments for the Land, as set out in Mr. Otte’s handwritten
tally sheet, is $135,237.00, which is slightly more than the total payment of
$131,145.00 stipulated in the Agreement. No explanation for the discrepancy was
given at the hearing.
[7]
On September 21, 2009 (about seven weeks after
the final payment for the Land had been made), the Saskatchewan Land Titles
Registry issued Title #138137867 (the “Title,” which was entered as
Exhibit A-1), showing that Mr. and Mrs. Otte were the registered owners,
as joint tenants, of the Land. Exhibit A-1 indicates that the stated value of
the Land on September 21, 2009 was $124,900.00.
[8]
During his testimony, Mr. Otte was adamant that
it was he and his wife, and not OAC, who paid the price of the Land to SPE.
However, OAC’s financial statements for the fiscal year ended November 30, 2010
(which were entered as Exhibit R-5) raise an issue in this regard. The balance
sheet dated November 30, 2010 shows that OAC had inventories with a cost of
$1,081,850.00 at the end of the 2010 fiscal year. A schedule attached to those
financial statements shows that the inventories consisted of four lots in Stone
Pointe Estates, one of which was the lot described above as the “Land.” The
schedule also shows three payments in respect of the Land, namely $16,237.00 on
January 11, 2008, $60,000.00 on December 3, 2008 and $59,000.00 on August 13,
2009. These three amounts correspond with the amounts set out in paragraph 6
above; however, the dates do not correspond.
[9]
No explanation was provided during the hearing
as to why the 2010 financial statements were prepared in the above-described
manner. Exhibit A‑1 (i.e., the above-mentioned Title) clearly shows that
Mr. and Mrs. Otte became the registered owners of the Land on September 21,
2009 and continued to be the registered owners of the Land on December 2, 2015
(which was the date on which that particular copy of the Title was issued by
the Saskatchewan Land Titles Registry). During the hearing, there was no
evidence or suggestion (even during cross-examination) that Mr. and Mrs. Otte
had transferred either legal title or beneficial ownership of the Land to OAC.
While the Reassessments were based on the premise that OAC had sold the Land
(as well as a house (the “House”)) to Mr. and Mrs. Otte, the Minister, as
represented by the Canada Revenue Agency (the “CRA”), did not provide any
evidence or explanation as to how OAC came to be the owner of the Land before
the alleged sale of the Land by OAC to Mr. and Mrs. Otte. As
will be discussed more fully below, I am not convinced that OAC’s financial
statements for the fiscal periods in question correctly reflected the
transactions between OAC and Mr. and Mrs. Otte. Accordingly, I
am of the view that, from September 21, 2009 to the date of the hearing,
Mr. and Mrs. Otte were the registered, legal and beneficial owners of the
Land (in using the term “Land,” I am referring only to the surface beneath and
around the House, and not to the House itself; I will use the term “Property”
to refer to the Land and the House together).
C. Construction
of House
[10]
On June 12, 2009 the Municipality issued
Building Permit and Development Permit No. 2009-28 (which was entered as
Exhibit A-3) to Mr. Otte, permitting him to construct a residence on the
Land. Construction began in August 2009.
[11]
Mr. Otte and OAC had a unique, customized
arrangement for the construction of the House, with each party providing
different things. Mr. Otte explained that he, and on occasion his sons,
performed (or arranged for) most of the construction work in respect of the
House. In particular, Mr. Otte arranged for a friend to dig the hole for the
foundation. Mr. Otte, sometimes (but not often) with the help of his sons,
poured the concrete for the foundation and did other concrete work, framed the
House, installed the windows and doors (including the garage doors), built the
soffits and fascia, insulated the House, installed the hardwood floors, did the
finishing work, installed the cabinets and painted the House. Mr. Otte arranged
for a friend to install the carpets. Mr. and Mrs. Otte personally purchased and
paid for the doors, some of the drywall (labor and materials), and some of the
sound equipment and wiring. I will refer to the items described in this
paragraph as the “Owners’ Items.”
[12]
Mr. Otte also explained that OAC procured and
supplied most of the materials for the House (other than those mentioned in the
preceding paragraph) and arranged for OAC’s employees or subcontractors to do
the electrical work, the plumbing, the shingling, the stuccoing, the exterior
stonework, and the installation of the tile and countertops. As well, OAC built
the cabinets (which, as mentioned above, Mr. Otte installed). I will refer to
the items provided by OAC, as described in this paragraph, as the “OAC Items.”
[13]
Mr. and Mrs. Otte moved into the House on
December 23, 2010, before the construction of the House had been completed. The
items that had not yet been completed included the installation of the
handrails on the stairs and balconies, the finishing work, the tiling, the
installation of the back splashes, the cabinetry, the exterior stonework, and
the construction of the front step, veranda, deck and
driveway.
[14]
Mr. Otte testified that the construction of the
House took about a year and a half, as he spent his normal work week managing
and working on projects for OAC’s other customers. With the exception of the
pouring of the foundation and the installation of the roof trusses, Mr. Otte
confined his work on the House to his spare time in evenings and on weekends.
Mr. Otte and his sons poured the foundation during a regular work day, as that
was the only time that the concrete could be delivered. They installed the trusses
on a regular work day because they needed to use one of OAC’s cranes.
[15]
From the time that construction of the House began
in August 2009 until November 2009, when the House was closed in, and then from
January 2010 to May 2010, Mr. Otte worked only weekends on the House. He typically worked
from 9:00 a.m. to 6:00 p.m. on Saturdays and Sundays. From May 2010 to December
2010, in addition to working weekends on the House, Mr. Otte also worked three
or four hours each evening on the House. Although Mr. Otte’s sons helped him
occasionally with the House, Mr. Otte personally did most of the work
constituting the Owners’ Items. Mr. Otte estimated that the aggregate value of
the labor provided by him and his sons in constructing the House was
approximately $140,000. OAC did not pay Mr. Otte or his sons for any of the
work that they did on the House.
D. Financing
[16]
To finance the construction of the House, in
October 2009 Mr. and Mrs. Otte, pursuant to a builder’s loan,
personally borrowed $500,000 from HSBC Bank Canada (“HSBC”). The loan was
secured by a mortgage of the Property, granted by Mr. and Mrs. Otte to HSBC on
or about October 6, 2009.
The loan was to be repaid when the construction of the House was substantially
completed.
[17]
When the construction of the House neared
substantial completion, Mr. and Mrs. Otte negotiated a loan from Manulife
Bank of Canada (“Manulife”), apparently in the amount of $1,052,000.00. However, during his testimony, Mr. Otte stated that Manulife
appraised the Property at $1,052,000.00, and that 80% of that amount was
“lendable.” The proceeds of the Manulife mortgage were used, in part, to pay
out the HSBC mortgage.
[18]
While the evidence was not conclusive on this
point, it seems that, as the OAC Items were provided by OAC in the course of the
construction of the House and as HSBC made loan advances to
Mr. and Mrs. Otte, they paid those advances from time to time to
OAC to cover the cost of the OAC Items (i.e., the materials, subcontracting and
other items described above).
E. Invoice
[19]
As OAC approached its 2011 year-end, OAC’s
accountant advised Mr. Otte that, on or before November 30, 2011 (i.e.,
the last day of OAC’s fiscal period and taxation year), she wanted to clear out
the expenses incurred by OAC in respect of the House. Accordingly,
effective as of November 30, 2011, OAC issued invoice no. 326242 (the
“Invoice,” which was entered as Exhibit A‑6) to Mr. and Mrs. Otte.
The Invoice contains the following handwritten statement under the heading “Details”:
For THE SALE
of ## XXXX Cres Stonepointe Estates
5400 sft Home Comple*
to owner’s specs
Split Level on owner Lot
Start Date Aug 2009.
Finish Date Sept 11.
For the sum of. 45,5,437
61
Interest on Builder M –18,105.95
GST 21866.88
Paided [sic] in Full
TOTAL $459,19.8.24
It is apparent
that there were several clerical errors in the monetary amounts set out in the
Invoice, pertaining primarily to misplaced or omitted commas or decimal points.
The hearing of this appeal was conducted on the understanding that the four
monetary amounts set out in the Invoice were as follows:
For the sum of. 455,437.61
Interest on Builder M –18,105.95
GST 21,866.88
TOTAL $459,198.24
[20]
The Invoice attracted the attention of the CRA,
and later became one of the focal points of the hearing.
III. Issues
[21]
In reassessing OAC, the CRA took the position
that it was OAC, and not Mr. and Mrs. Otte and their sons, which constructed
the House. The CRA also took the position that OAC transferred the Property in
its entirety (i.e., the Land and the substantially completed House, including all
labor and materials) to Mr. and Mrs. Otte. Accordingly, the CRA reassessed
OAC pursuant to subsection 173(1) of the ETA. In this regard, the CRA
took the position that the fair market value of the Property as of December 20,
2011 was $1,200,000.00, with the result that there was a benefit amount (as
defined in paragraph 173(1)(a) of the ETA) in the amount of $762,668.34
(i.e., $1,200,000.00 − $437,331.66), in respect of which OAC had an
obligation to collect GST in the amount of $38,133.42 (i.e., $762,668.34 ×
0.05).
[22]
In challenging the Reassessments, OAC took the
position that Mr. and Mrs. Otte personally constructed the House. OAC
acknowledged that some aspects of the construction were arranged by it, but it
submitted that, in so doing, it acted only as agent for Mr. and Mrs. Otte. OAC
also took the position that it did not transfer or supply anything to Mr. and
Mrs. Otte in circumstances that would trigger the application of section 173 of
the ETA. Alternatively, if GST is exigible pursuant to section 173 of
the ETA, OAC took the position that the fair market value of the
Property at the relevant time was less than the value used by the CRA.
[23]
This case illustrates the difficulties and
challenges that may arise when there are dealings between a closely held corporation
and its shareholder concerning the construction of a house for the shareholder
and the respective roles of the corporation and the shareholder are not expressly
delineated. Previous situations where these difficulties and challenges arose
were considered in S.E.R. Contracting Ltd. v The Queen and Best for Less Painting
& Decorating Ltd. v The Queen.
The facts in those cases are slightly different from the facts in this
Appeal. I have mentioned those cases simply for illustrative purposes, and not
because those cases are determinative of the issues in this Appeal. As well, during
oral argument counsel for the Crown referred me to the Best for Less
case, although he submitted that the facts of that case were sufficiently
different from those of this Appeal as to distinguish that case from this
Appeal.
IV. Analysis
A. Agency
[24]
As indicated above, OAC took the position that,
although some aspects of the construction of the House were arranged through
OAC, in so doing, OAC acted only as agent for Mr. and Mrs. Otte. For its part,
the Crown denied that OAC purchased construction materials as agent for Mr. and
Mrs. Otte, and instead alleged that Mr. and Mrs. Otte made certain purchases
for OAC as OAC’s agent.
[25]
There was no written agency agreement or other
document to substantiate that OAC acted as the agent of Mr. and Mrs. Otte or
that Mr. and Mrs. Otte acted as the agents of OAC. However, as an agency
relationship may be express or implied, it is also necessary to determine
whether there was an implied agency relationship between OAC on the one hand
and Mr. and Mrs. Otte on the other.
(1) Legal Principles
[26]
The views of the CRA in respect of implied agency
are set out in a Policy Statement as follows:
Agency exists where one person (the
principal) authorizes another person (the agent) to represent it and take
certain actions on its behalf. The authority granted by the principal may be
express or implied. In other words, an agency relationship may be created where
one person explicitly consents to having another act on its behalf or behaves
in such a way that consent is implied….
While two parties may agree that one party
is to act as agent with respect to transactions undertaken on behalf of the
other party, the absence of such an agreement is not sufficient to conclude
that an agency relationship does not exist.
Although the
intention of the parties is an important determinant of the nature of the
relationship between the parties, case law supports the possibility that two
parties may be engaged in an agency relationship without even being aware of
it, provided their actions indicate that one party is acting as agent on behalf
of another. In other words, agency is generally evident from the conduct of the
parties.
[27]
A leading textbook, Canadian Agency Law,
discusses the creation of an agency relationship by implied contract in these
terms:
As with other
contracts, the agency relationship may be impliedly created by the conduct of
the parties, without anything having been expressly agreed as to terms of
employment, remuneration, etc…. The assent of the agent may be implied
from the fact that he has acted intentionally on another’s behalf. In general,
however, it will be the assent of the principal which is more likely to be
implied…. Such assent may be implied where the circumstances clearly indicate
that the principal has given authority to another to act on his behalf. This
may be so even if the principal did not know the true state of affairs. Mere
silence will be insufficient. There must be some course of conduct to indicate
the acceptance of the agency relationship. The effect of such an implication is
to put the parties in the same position as if the agency had been expressly
created.
[Footnote numbers omitted.]
[28]
In Fourney et al v The Queen, Hogan J quoted portions of
the above statement, as set out in an earlier edition of Professor Fridman’s
text on agency law, and stated several principles pertaining to implied agency.
Three of those principles are paraphrased as follows:
a)
In the absence of a written agency agreement, a
court must closely examine the conduct of the parties to determine whether
there was an implied intention to create an agency relationship.
b)
In reviewing the conduct of the alleged principal
and the alleged agent, a key consideration is to determine the level of control
which the former exerted over the latter.
c)
Where it is alleged that a corporation is acting
as the agent of its shareholders, a high threshold of evidence is needed.
(2) Application to Facts
[29]
Having examined the conduct of Mr. and Mrs. Otte
and OAC, as explained in the paragraphs which follow, I have come to the
conclusion that, for certain purposes, Mr. Otte acted as the agent of OAC in
procuring certain materials, some of which were used in constructing the House
and others of which were used in constructing buildings for other customers.
[30]
For approximately ten or fifteen years before
the incorporation of OAC, Mr. Otte, in his capacity as a sole proprietor,
carried on a construction business. He established relationships with numerous
suppliers, which provided materials to him and billed him in his own name.
After OAC was incorporated in 2008, Mr. Otte, now on behalf of OAC, continued
to use the same suppliers, which, in many cases, continued to issue their
invoices in the name of Mr. Otte, rather than billing OAC. Understandably, this
situation lead to difficulty when the CRA undertook a GST audit and found that
OAC had claimed certain input tax credits (defined above as the “ITCs”)
totalling $37,302.87 (and relating to various materials, only some of which pertained
to the House), notwithstanding that the supporting invoices had been addressed by
the particular suppliers to Mr. Otte, rather than to OAC.
[31]
One of the suppliers used by Mr. Otte, when he
was carrying on his construction business as a sole proprietor, was Sherwood
Co-operative Association Limited (the “Co-op”). As a sole proprietor, Mr. Otte
had an account with the Co-op. When OAC was incorporated, OAC took over that
account, but did not change the name of the account. In 2012, when the CRA was
challenging OAC’s claim for the ITCs in respect of purchases made by OAC from
suppliers used by Mr. Otte before OAC was incorporated, Mr. Otte arranged for
Joanne Zummack, the credit manager of the Co-op, to send a letter, dated
November 5, 2012, addressed “To Whom it may concern.”
The substantive portion of the letter, which was entered as Exhibit A-8, reads
as follows:
Otte & Associates
Contractors Inc has been operating their account with the Sherwood Co-operative
Assoc Limited under the name Patrick (Pat) Otte since their incorporation in
2008.
The above letter
is consistent with the proposition that Mr. Otte was the agent of OAC.
[32]
Although there was not any extensive evidence in
respect of the disallowance of the ITCs (as that disallowance was not the
subject of this Appeal), it appears that the initial reassessments, which were
dated September 17, 2013 (and which predated the Reassessments that are
the subject of this Appeal), disallowed the ITCs, and also imposed the GST which
ultimately became the subject of this Appeal. It appears that the Notice of
Objection filed by OAC with the CRA on October 25, 2013 (which was not entered
into evidence) submitted that OAC should be allowed to claim the ITCs that were
supported by supplier invoices issued to the agent or representative of OAC. In
acceding to OAC’s submission, the CRA’s Appeals Division referred to subparagraph
3(c)(ii) of the Input Tax Credit Information Regulations, which sets out
certain information that must be obtained by a registrant in order to claim an
ITC, and which reads as follows:
(ii) the
recipient’s name, the name under which the recipient does business or the name
of the recipient’s duly authorized agent or representative….
The Appeals
Division indicated that it was prepared to accept the supplier invoices issued
to the shareholders of OAC for the purpose of calculating eligible ITC claims
by OAC. Thus, it appears that Mr. Otte, OAC and the CRA all considered Mr. Otte
to be the agent or representative of OAC for the purpose of acquiring the
properties or services that gave rise to the ITCs.
[33]
As OAC has taken the position that Mr. Otte was
its agent or representative for the purpose of claiming the ITCs pursuant to subsection
169(1) of the ETA, it would appear to be inconsistent, or at least
circular, for OAC to argue that it was the agent of Mr. and Mrs. Otte in
constructing the House and procuring some of the materials that were used
in building the House. While I acknowledge that it is possible for two parties
each to be the agent of the other, such a situation is unusual, and in
this case, was not supported by the evidence. Furthermore, I did not find any
conduct on the part of OAC or Mr. and Mrs. Otte to substantiate the proposition
that OAC acted as the agent of Mr. and Mrs. Otte in respect of the construction
of the House.
[34]
During cross-examination, Mr. Otte stated that
various expenses pertaining to the House “were run through the company.” The
CRA auditor testified that, when she met with Mr. Otte during the initial audit
interview on September 25, 2012, he told her that he “built the house through
the company” and that “the company built it at cost so there was no profit on
it.” The precise meaning and the legal implications of those statements are
unclear. In my view, those statements could, depending on one’s perspective, be
construed as supporting the proposition that OAC built the House as principal
or the proposition that OAC built the House as the agent of Mr. and Mrs. Otte.
In any event, the statements are not sufficiently clear as to persuade me that
OAC was the agent of Mr. and Mrs. Otte.
B. OAC
Items
[35]
As I have found that OAC was not acting as the
agent of Mr. and Mrs. Otte, it follows that the goods and services that
were supplied by OAC to Mr. and Mrs. Otte were supplied by OAC in its
capacity as principal. In particular, I find that the OAC Items were, for the
purposes of the ETA, supplied by OAC to Mr. and Mrs. Otte. However, this
finding does not mean that OAC supplied other goods or services to Mr. and Mrs.
Otte.
C. Input
Tax Credits
[36]
As noted above (under the subheading “IV.A.
Agency”), OAC claimed ITCs in respect of certain materials that had been acquired
in the name of Mr. Otte or that had been billed by the various suppliers
to accounts that were in the name of Mr. Otte. Also as noted above, the CRA
acknowledged that Mr. Otte was the agent or representative of OAC, with
the result that the CRA allowed OAC’s claim for the ITCs.
[37]
At the conclusion of the hearing, counsel for
the Crown pointed out that, if I were to find that OAC, in supplying goods and
services to Mr. and Mrs. Otte, had been acting as their agent, it would
not be appropriate for OAC to retain the ITCs in respect of those goods and
services. As I have found that OAC was not acting as the agent for Mr. and Mrs.
Otte, and as I have further found that OAC, in supplying the OAC Items to Mr.
and Mrs. Otte, was acting as principal, and not as agent, it is not necessary
for me to consider this issue.
D. Financial
Statements
[38]
As indicated above, OAC’s financial statements
for the fiscal year ended November 30, 2010 (Exhibit R-5) included the Land in
OAC’s inventories and recorded three payments corresponding somewhat to the
three instalments paid by Mr. Otte (and perhaps Mrs. Otte) to SPE as the
purchase price for the Land. However, those entries in the financial statements
do not correspond with the facts as I have found them. As noted above, SPE sold
the Land to Mr. and Mrs. Otte and there is no evidence or suggestion that
the Land was ever sold, transferred or otherwise conveyed to OAC. As well, Mr.
Otte testified that the price of the Land was paid to SPE by Mrs. Otte and him,
and not by OAC.
[39]
It is well accepted that accounting documents or
entries only reflect reality, and do not create it. In this regard, the Supreme
Court of Canada has stated:
The law is well
established that accounting documents or accounting entries serve only to
reflect transactions and that it is the reality of the facts that determines
the true nature and substance of transactions….
[40]
Useful guidance in the context of property
ownership is provided by Finch v The Queen, which dealt with a situation
where a house was registered in the name of an individual, but there was an
allegation that the beneficial owner of the property was a corporation of which
the individual’s parents were the shareholders. The legal documentation showed
that the property had been purchased in the name of the individual. As well,
there was further documentation in respect of a mortgage given by the
individual to his parents’ corporation. Nevertheless, the accountants for the
corporation had sent a letter of instructions to the corporation’s lawyers instructing
them to prepare a trust document showing that the individual held the property
in trust for the corporation. However, the lawyers ignored that request and did
not prepare the trust document. When the question of ownership arose in the
proceeding before the Tax Court of Canada, Bowman ACJTC (as he then was)
stated:
The legal form
of the documents points to beneficial ownership in the appellant [i.e., the
individual] but the accounting treatment is inconsistent with that position.
The legal form prevails in my view.
[41]
In my view, a similar principle applies in the
present situation. The legal documentation supports, and is consistent with,
the view that at all material times the Land has been continuously owned by Mr.
and Mrs. Otte.
While there are entries in the financial statements which suggest that OAC, for
a short period of time, may have accounted for the Land as part of its
inventory, in my view the legal documents prevail.
[42]
I am reinforced in this view by a comment made
at the hearing by the CRA auditor who audited this matter. During the testimony
of the auditor, she stated that she reviewed the Transactions by Account Report
which related to the period December 1, 2010 to November 30, 2011 and which was
one of the documents on which the 2011 financial statements were based. She
indicated that journal entry J785, which was dated November 30, 2011, was
perplexing and did not add up. It appears that this journal entry may have had
some connection to the Invoice; however, the amounts set out in the entry do
not correspond with the amounts set out in the Invoice. The auditor stated that
she did not know why OAC’s accountant had prepared the entry the way she did.
The auditor also stated that, although there were references to the Land and
the House in OAC’s financial statements and other accounting records, she did
not see any documents to show that title to the Land was ever in the name of
OAC or that the House was ever the property of OAC.
E. Invoice
[43]
The Respondent took the position that the
Invoice (Exhibit A-6), which was dated November 30, 2011, established that OAC
sold the entire Property to Mr. and Mrs. Otte. However, an invoice is an
accounting document, and not a transactional document, with the result that an
invoice merely reflects transactions, and does not create them. This principle
was established in Mountwest Steel Ltd. v The Queen, in which the Court considered
an invoice which had been issued in error, which had never been paid, and in
respect of which no goods or services had ever been supplied. Nevertheless, it
was argued by the appellant in that case that the invoice had created a
liability, which had become a bad debt. In dealing with this argument, Kempo J
stated:
For a debt to be
a bad debt there must be a debt extant in the first place. The issuance of an
invoice does not induce or create a debt or liability. This kind of document is
merely a means of recording a liability; it is not itself evidence of the
passing of goods or services or consideration which created or gave rise to the
liability. Accounting documents or entries serve to merely reflect
transactions, they do not create them;… Either there was a substantive
debtor/creditor relationship underlying the subject invoice or there was not.
Here, there was not.
[44]
Accordingly, it is my view that, to determine
the applicable GST treatment in this Appeal, this Court must consider the
actual transactions between OAC and Mr. and Mrs. Otte, and not confine
itself merely to a reading of the Invoice.
F. Land
[45]
As indicated above, the evidence is clear that
it was Mr. and Mrs. Otte (and not OAC) who purchased the Land from SPE. In
particular, it was Mr. Otte (in his personal capacity) who signed the Agreement
(Exhibit A-2), pursuant to which he obtained an option to purchase the Land
from SPE.
[46]
In his testimony, Mr. Otte indicated that he (or
perhaps he and his wife) paid the three instalments (i.e., $16,237.00,
$60,000.00 and $59,000.00 respectively) in respect of the price of the Land.
However, the cancelled cheques were not put in evidence; therefore, I have not
been able to ascertain on which account or accounts those cheques were drawn.
As noted above, OAC’s financial statements for the fiscal year ended November
30, 2010 seem to suggest that the three payments may have been made by OAC,
although the dates in the financial statements do not match with the dates set
out in Exhibits A-2 and A-7. As I am not convinced of the reliability of the
financial statements, I accept Mr. Otte’s testimony, rather than the financial
statements, in respect of this discrepancy.
[47]
As stated above, legal title to the Land was
registered in the names of Mr. and Mrs. Otte on September 21, 2009. There
was no evidence and no suggestion that they transferred the Land to OAC or that
OAC somehow acquired the Land and later transferred it back to them.
Furthermore, as indicated above, the CRA auditor acknowledged that title to the
Land was never in the name of OAC.
[48]
During argument, I raised the Land-ownership issue
with counsel for the Crown, who admitted that he could not explain how, if the
Land was part of the property supplied by OAC to Mr. and Mrs. Otte, the Land
would have been acquired by OAC prior to that supply. He acknowledged that he
did not have any submissions to overcome that hurdle.
[49]
Hence, I find that, at all material times (i.e.,
from September 21, 2009 to the date of the hearing), Mr. and Mrs. Otte were the
registered, legal and beneficial owners of the Land. Accordingly, as OAC did
not at any time become the registered, legal or beneficial owner of the Land, the
transaction which is the subject of the Invoice (Exhibit A-6) did not include a
supply of the Land by OAC to Mr. and Mrs. Otte.
G. Labor
[50]
As explained above, Mr. Otte clearly delineated
the labor that he provided in constructing the House from the labor that he
provided to OAC in his capacity as an employee of OAC. In particular, with only
two exceptions (which arose by reason of the limited availability of the cement
when pouring the foundation and the limited availability of a crane when
installing the roof trusses), Mr. Otte worked on the House only on evenings and
weekends. During normal working hours, he worked for OAC in fulfilling OAC’s
obligations to its regular customers.
[51]
OAC did not pay any salary, wages or other
remuneration to Mr. Otte (who was the major provider of labor) or to his sons (who
only worked occasionally on the House) in respect of any of the labor that they
provided in constructing the House. As noted above, Mr. Otte testified that the
value of the labor provided by him and his sons was $140,000.00. I accept that
amount as reasonable and accurate.
[52]
During oral argument, the labor component in the
House was referred to by counsel for the Crown as “sweat equity.” He acknowledged
that he did not have any submission that would be persuasive in showing that
OAC supplied (as that word is used in the ETA) the sweat equity to Mr.
and Mrs. Otte. He argued that it is not the CRA’s job to get to the bottom of
what the supply was (a position with which I disagree).
[53]
Counsel for the Crown also acknowledged that it
would create a hardship if Mr. Otte were to be viewed as having gratuitously
contributed his sweat equity to OAC in such a manner that OAC could later supply
that sweat equity back to him and his wife in circumstances that would require OAC
to collect GST in respect of the supply of the sweat equity.
[54]
Thus, I find that the labor component (or sweat
equity) in the House that pertains to the work done by Mr. Otte and his sons
was not supplied by OAC to Mr. and Mrs. Otte.
H. Owners’
Items
[55]
Consistent with my finding that OAC did not
supply the labor component (or sweat equity) to Mr. and Mrs. Otte, I find that
OAC did not supply the Owners’ Items to Mr. and Mrs. Otte. More specifically,
OAC did not supply the digging of the hole for the foundation, the pouring of
the concrete for the foundation, the other concrete work, the framing of the
House, the procurement of the doors, drywall materials and sound equipment and
wiring, the installation of the windows and doors, the building of the soffits
and fascia, the insulating of the House, the installation of the hardwood
floors and carpets, the finishing work, the installation of the cabinets, the
painting of the House, the installation of the drywall, and the installation of
the sound equipment and wiring (see paragraph 11 above).
[56]
The Owners’ Items (as described in paragraphs 11
and 55 above) were a blend of labor and materials. I have discussed above the
value of the labor provided by Mr. Otte and his sons. I will now consider the cost
of the materials acquired by Mr. and Mrs. Otte from various suppliers and the cost
of the labor provided by the drywalling contractor.
[57]
I was not provided with a specific delineation
of the cost of the materials (in particular, the doors, drywall materials,
sound equipment and wiring) that were paid for directly by Mr. and Mrs. Otte,
rather than being supplied to them by OAC. Exhibit A-10 is an invoice issued by
Audio Warehouse to Mr. Otte, which appears to relate to the sound
equipment and wiring that was paid for by Mr. Otte himself. However, due to the
handwritten alterations made to the document, I am not able to determine the
amount actually paid by Mr. Otte for the sound equipment and related
materials. The difficulty in respect of the sound equipment is compounded by
the fact that part of the cost was paid by Mr. Otte personally and part of the
cost was paid by OAC and then reimbursed to OAC by Mr. and Mrs. Otte.
[58]
Exhibit A-13, an invoice from Premier Doors
& Millworks LLC, of Thompson Falls, Montana, relates to the doors that Mr.
Otte purchased personally and then installed in the House. Those doors formed
part of the Owners’ Items and were not supplied by OAC to Mr. and Mrs. Otte.
The amount of the invoice is US$25,591.18. I was not provided with the
Canadian-currency equivalent of this amount.
[59]
If the parties are unable to determine the cost
of the sound equipment and wiring paid for by Mr. and Mrs. Otte and the
Canadian-currency equivalent of the cost of the doors, they may refer the
determination of those amounts back to me, although it may be necessary for me
to obtain additional evidence and receive additional submissions before making
such a determination.
[60]
The drywalling materials and labor were provided
by Superior Drywall Services. Exhibit A-16 is an invoice from Superior Drywall
Services, in the amount of $28,193.55 (which amount includes GST in the amount
of $1,342.55). OAC paid $9,877.87 in respect of the drywall materials and labor
(which, to the extent of that payment, form part of the OAC Items) and Mr. Otte
paid $18,315.68 in respect of the drywall materials and labor (which, to the
extent of that payment, form part of the Owners’ Items).
I. Valuation
[61]
The Crown provided a valuation of the Property
that was given by Edward Klymchuk, who is employed by the CRA as a Real
Estate Appraiser. Mr. Klymchuk prepared an Appraisal Report, which was
dated January 21, 2013 and which was an exhibit to an affidavit that he swore
and that was filed with the Court at the time of the hearing. As well, Mr.
Klymchuk testified at the hearing as an expert witness. Mr. Klymchuk opined
that, as of December 20, 2011, the fair market value of the Property (i.e., the
Land and the House) was $1,200,000.00.
[62]
At the hearing, I was given to understand that
OAC had obtained a valuation in respect of the Property; however, no evidence
of that valuation was put before me. Therefore, the only expert evidence
available to me is that which was provided by Mr. Klymchuk.
[63]
In performing his valuation, Mr. Klymchuk used
the direct-comparison approach, because he viewed that approach as being preferable
to the cost approach. Mr. Klymchuk found three comparable properties, that
he labelled as “Comparable No. 1,” “Comparable No. 2,” and “Comparable No. 3.”
He made various adjustments to the sales prices of those comparable properties,
so as to adjust for various factors, including the time of sale, the size and
value of the lot, the extent to which the basement was developed, the size of
the garage, the number of fireplaces, and the status of the deck. After arriving
at an adjusted value for each of the comparable properties, Mr. Klymchuk
calculated the value per square foot of each comparable property and then determined
the value per square foot that was midway between the highest and lowest of
those values for the comparable properties. By so doing, he arrived at a value
per square foot of $340.00, which he multiplied by the livable floor area of
the House (i.e., 3,512 square feet), so as to arrive at a House value of
$1,194,080.00, which he rounded to $1,200,000.00.
[64]
During Mr. Klymchuk’s testimony, I questioned
the appropriateness of making upward adjustments to the values of Comparable
No. 1 and Comparable No. 2 in respect of the land values, as it seemed to me that this
would have the tendency to skew upward the value per square foot of each of
those comparable properties. I suggested to Mr. Klymchuk that it might be
preferable to exclude the value of the land from the sale price of each
comparable property, so as to compute the value per square foot of each house
in a manner that did not include any value for the land, then to determine the
value per square foot to be used in valuing the House, and then, once the value
of the House had been calculated, to add the value of the Land. Mr. Klymchuk
thought that my suggested approach would result in the same value as the value
that he had obtained. As explained below, I disagree with that view.
[65]
Mr. Klymchuk testified that, as of December 20,
2011 (which was the effective date of his valuation), the fair market value of
the Land was $170,000.00. Accordingly, I subtracted $170,000.00 (so as to
remove the land value) from the adjusted value that Mr. Klymchuk had calculated
in respect of each of the three comparable properties, and then used the resultant
values (which represented only the values of the respective houses, and not the
values of the land) to calculate a value per square foot of each of the three
comparable houses. The high and low values per square foot were $310.00 and
$260.00, respectively. I then took the mid-point, i.e., $285.00. When I
multiplied that amount (i.e., $285.00 per square foot) by the livable floor
area of the House (i.e., 3,512 square feet), I arrived at a value of
$1,000,920.00 which I have rounded to $1,000,000.00.
[66]
If one were to add the value of the Land (i.e.,
$170,000.00) to the House value that I calculated (i.e., $1,000,000.00), the
result would be $1,170,000.00, which is $30,000.00 less than the value
determined by Mr. Klymchuk.
[67]
I prefer the approach that I have taken,
particularly because I have found that OAC did not supply the Land to Mr. and
Mrs. Otte. Therefore, in my view, it makes sense to determine the value of the
House without considering the value of the Land or the value of the land in the
three comparable properties.
[68]
Accordingly, I find that as of December 20,
2011, the value of the House was $1,000,000.00.
J. Application
[69]
As set out above, I have found that OAC, as
principal, supplied the OAC Items to Mr. and Mrs. Otte. I have also found that
OAC did not supply the Land or the Owners’ Items (including the labor component
or sweat equity) to Mr. and Mrs. Otte. Accordingly, it is my view that the
application of subsection 173(1) of the ETA to this situation should be
resolved by calculating the benefit amount in the manner set out below:
|
Fair market value of the House
|
$1,000,000.00
|
|
Less value of labor by Mr. Otte
and his sons
|
(140,000.00)
|
|
Less cost of sound equipment and
wiring paid by
Mr. & Mrs. Otte
Less Canadian-currency equivalent
of cost of
doors (US$25,591.18)
paid by Mr.
& Mrs. Otte
Less cost of drywall materials and
labor paid by
Mr. & Mrs. Otte
|
(To be determined)
(To be determined)
(18,315.68)
|
|
Less consideration paid by Mr. &
Mrs. Otte in
respect of the OAC Items
|
(437,331.66)
|
|
Benefit amount for the purposes of
subsection
173(1) of the ETA
|
To be determined
|
V. Conclusion
[70]
For the reasons set out above, this Appeal is
allowed and the Reassessments are referred back to the Minister for
reconsideration and reassessment on the basis that:
a)
OAC supplied only the OAC Items to Mr. and Mrs.
Otte;
b)
OAC did not supply the Land or the Owners’ Items
(including the labor component or sweat equity) to Mr. and Mrs. Otte;
c)
the fair market value of the House as of
December 20, 2011 was $1,000,000.00; and
d)
for the purposes of subsection 173(1) of the ETA,
the benefit amount is to be calculated in the manner set out in the table above,
after the cost of the sound equipment and wiring and the Canadian-currency
equivalent of the cost of the doors have been determined.
[71]
As indicated under subheading “IV.H. Owners’ Items” above, it is my expectation that
the Parties will be able to determine the cost of the sound equipment and
wiring and the Canadian-currency equivalent of the cost of the doors. If the
Parties cannot reach a consensus in this regard, they may refer the matter back
to me.
[72]
As success in this Appeal has been divided,
subject to any submissions that counsel may desire to make, each party is to
bear its own costs.
Signed at Ottawa, Canada, this 24th day of June 2016.
“Don R. Sommerfeldt”
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