REASONS
FOR JUDGMENT
Bocock J.
I. Issues
[1]
Robin Whittall appeals the decision of the
Minister of National Revenue (the “Minister”) to reject his claim for a GST new
housing rebate. The denied GST rebate concerns “substantial renovation” to a
residential property. The sole issue is whether Mr. Whittall, as an owner, made
sufficient works to the property to constitute “substantial renovation” of “all
or substantially all of the building” that existed prior to the renovation.
II. Mr.
Whittall’s Works to the Property
[2]
At the hearing, Mr. Whittall and his spouse
outlined the renovations they made to the residential property located at 960
Woodpecker Place in Parksville, British Columbia.
[3]
There is no doubt considerable renovations were
made to the property. No room was left untouched. There is little dispute
factually as to what renovations were carried out. Sketched diagrams of the “before”
and “after” were produced at the hearing. The house was originally built in
1991. The renovations were made over four and one-half years culminating with
completion in 2014. The building is a one-level ranch style house with no
basement. Its liveable area is approximately 1800 square feet (or 167.23 square
meters).
[4]
The renovations were mostly internal, but did
include new external windows and doors. The walls between the kitchen, dining
area and living room were removed in their entirety. These three rooms
effectively became one contiguous, combined “great room”. This required new
drywall, flooring, electrical, cabinetry and the like. Excluding the garage,
which was not changed, such completely renovated space comprised just under
one-half of the liveable floor space within the house.
[5]
The balance of the renovations concerned the three
bedrooms (one with ensuite), a bathroom and an internal garage entry-way (which
functions as a mud room and laundry room). Aside from extensive repairs and
partial lower area replacement of drywall, the drywall in these rooms was not
altered, removed or replaced. Nonetheless, full repairs, remodeling, repainting
and re-fixturing was undertaken in all of these rooms. Overall, all windows,
floors or coverings, plumbing fixtures and electrical switch and outlet covers
were replaced.
III. What
the Statute, Regulations and Bulletins Say
a) Definition of “substantial renovation”
[6]
In subsection 123(1) of the Excise Tax Act,
RSC 1985, c. E-15, as amended (the “ETA”) provides :
substantial
renovation of a residential complex means
the renovation or alteration of the whole or that part of a building, […] to
such an extent that all or substantially all of the building […] other than the
foundation, external walls, interior supporting walls, floors, roof, staircases
…, that existed immediately before the renovation or alteration was begun has
been removed or replaced …,
b) Rebate For Owner-Built Homes
256(1) Definitions – In this section,
(2) where
(a)
a particular individual…substantially renovates, … a single unit residential
complex …,
(b)
the fair market value … is less than $450,000,
(c)
the … individual has paid tax …,
… and
(i)
the first individual to occupy the complex after … renovation … is the …
individual …
The
Minister shall … pay a rebate to the … individual … .
c) Technical
Information Bulletin B-092
[7]
The Minister through the Canada Revenue Agency
(the “CRA”) has not been silent regarding the words renovation to “all or
substantially all”. Within Technical Information Bulletin B-092 (“Bulletin
B-092”), three methods are enumerated as non-exhaustive examples of fair and
reasonable determinative approaches to a calculation of such a degree of
renovation. These typical methods are listed as:
(1)
square footage of floor
space of the areas renovated compared to the total floor space of the building;
(2)
square footage of floor
and wall space of the areas renovated compared to the total floor and wall
space of the building; and/or
(3)
number of rooms renovated
compared to the total number of rooms in the building.
[8]
Similarly, in terms of what “must be removed or
replaced” the Minister through Bulletin B-092 extensively (of much length, but
considerable relevance) has published the following:
In a major
renovation project, the interior of a building is essentially gutted. For
example, the interior walls (other than supporting walls) are completely
removed and the ceilings and floors are replaced; the heating, electrical and
plumbing systems are replaced, including the ductwork; and the wiring and
plumbing connections and all fixtures (e.g., plumbing and lighting fixtures and
fixed appliances) are replaced as are the kitchen counters and cabinets. This
type of renovation project constitutes a substantial renovation.
The following
addresses what, at a minimum, must be removed or replaced to meet the
requirements of the definition of substantial renovation. Generally, all
interior walls (e.g., drywall) throughout the subject area (at least 90% of the
building) would have to be removed or replaced (i.e., the walls stripped to the
studs and refinished and replaced with drywall). In the case of older homes
with plaster walls, covering the walls with new drywall would suffice. However,
it would not be sufficient to remove or replace only the walls. The removal or
replacement of the walls together with the removal or replacement of either the
ceiling or floors throughout the subject area would be sufficient to meet the minimum
requirement. It would not be necessary to replace the entire heating,
electrical or plumbing systems to meet the minimum requirements for a
substantial renovation.
“Removing or
replacing” does not include repairing. For instance, patching drywall, painting
surface areas, sanding a hardwood floor, or adding varnish or a plastic coating
would not qualify as removing or replacing. Repairs are not taken into
consideration in determining whether a substantial renovation has taken place
and may not be included in a new housing rebate claim.
The renovations
required to meet the minimum requirements of the definition of substantial
renovation may vary depending on the type of room being renovated. As noted
above, removing or replacing the walls together with either the ceilings or
floors would qualify, regardless of the room being considered. For particular
rooms, however, other possibilities may lead to a determination that a room has
been substantially renovated. For example:
•
In a typical kitchen, a large part of the wall
area may be covered by cupboards and cabinets (i.e. cabinetry). The removal or
replacement of the cabinetry (without removing the walls behind it) as well as
the ceiling or floor and remaining wall area would generally be sufficient.
•
In a typical bathroom, removing or replacing the
walls and the fixtures (the toilet, tub, vanity) would be sufficient. Since the
requirement is to remove or replace, it may be sufficient to remove and then
reinstall the same fixtures in the bathroom in addition to removing or
replacing the walls.
•
In a typical bedroom or hallway, removing or
replacing the drywall (or covering the plaster with drywall) and either the
floor or the ceiling would usually be sufficient.
IV. What
the Authorities Say
[9]
The degree of renovation has been set at the
high threshold. Justice Hershfield in Erickson v. HMQ, at
paragraph 16 stated:
… The Act does
not permit a rebate on a renovation, significant or otherwise, unless virtually
all of the existing premises is gutted. …
[10]
Similarly, the Tax Court has held that while an
absolute numeric threshold does not exist (Cousineau v. HMQ,
[2001] GSTC 135 at paragraph 2), “90 per cent” is, unless circumstances warrant
otherwise, the minimum quantum of renovation necessary to achieve the level of
“substantially all” and thereby fall within the definition: Cousineau at
paragraph 3. This coincides with Bulletin B-092 reproduced above.
[11]
Frequently upheld as a contrary view is a
statement in Lair v. HMQ, 2003 TCC 929 at paragraph 14 where,
Justice Rip, as he then was, said:
On the facts then
before me if a reasonable and neutral observer of the building, before and
after construction of the interior and exterior of the building, can conclude
that the degree of renovation and alternation was substantial, the definition
of "substantial renovation" is satisfied.
[12]
Subsequent authorities have grappled with
reconciling these two apparently divergent schools. The necessity and degree of
renovation is relevant, if refraining from doing so would fail to remedy
collapse: Colosimo v. HMQ, 2005 TCC 584 at paragraph 9. The
question has been posed as to whether renovations are largely cosmetic designed
primarily to freshen or modernize the appearance: King v. HMQ,
2006 TCC 374 at paragraph 11 and Blades v. HMQ, 2012 TCC 227 at paragraph
14. Moreover, the review must look at all of the evidence in the context of the
whole building that existed before the work: Baby v. HMQ, 2013
TCC 39.
[13]
In short, a common theme throughout the case utilizes
the connotative, old English word “gutted”: Erickson at paragraph 15, King
at paragraph 11 and Goulet v. HMQ, 2013 TCC 225 at paragraph 15.
V. The
Appellant’s Arguments
a)
Renovations were substantial
enough to render building “like new”
[14]
The Appellant’s agent submitted that the
building was renovated to such a degree that it rendered it a new house.
Nothing within it appeared similar to its previous form. The concept of the 90%
measurable quantum of renovation should be discarded. Instead, as in Lair,
use should be made of whether a reasonable and neutral observer would conclude,
before and after, that a substantial renovation had occurred.
b)
The CRA’s methodology
and analyses were flawed
[15]
The Appellant’s agent asserts that, through
cross-examination, it was revealed that at both audit and appeal, the CRA failed
to give credit for various renovations or included irrelevant, excluded
improvements on a room by room basis because of a slavish adherence to the mathematical
analysis rejected in Shotlander v. HMQ, 2005 TCC 502 at paragraph
14.
c)
Drywall should be excluded
as a component considered in the calculation of renovation
[16]
The Appellant’s agent took much time to argue
before the Court that the non-removal and/or non-replacement of entire walls of
drywall in the building were irrelevant; drywall is critical to the safety,
integrity and strength of a building. In short, drywall is inextricably
connected to interior supporting walls and possibly the exterior walls of a
building. Within Bulletin B-092, such walls are to be excluded from calculation
for the determination of substantial renovation. Therefore, the issue of
removal and replacement of drywall anywhere in the building is not to be
considered.
[17]
In support of this argument, the Appellant’s
agent offered text diagrams of exterior wall descriptions, recent building code
specification requirements for drywall in British Columbia and materials citing
the difference between partition and load-bearing walls.
VI.
Analysis and Decision
a) The Building “looked like new”
[18]
The test is not the appearance of the building
after renovation. The test is whether based upon the totality of the
renovations, after a careful listing of those elements to be included, but
excluding those not to be considered, substantial renovation to the building
has occurred. In short, may one say that the building was renovated
sufficiently enough that all or substantially all of the building has been
removed or replaced: Camiré v. HMQ, 2008 TCC 82 at paragraph 11.
[19]
The appearance of the buildings to the naked
eye, given what is to be included or excluded, is not necessarily relevant.
This is also confirmed by Justice Rip in Lair, frequently held up as a lesser
test, when he references the works completed by the owner: raised the dwelling several
feet, constructed a basement, constructed entirely new useable rooms in the
basement, “gutted” the first floor, installed a new septic system, enlarged the
footprint of the building, replaced the entire roof and radically altered the
exterior. In short, Justice Rip, stated the house, before renovation, was
“ready to collapse”. Further, the substantially renovated residence “bore no
resemblance to the residence before the construction started”. Admittedly, a
number of the elements listed are to be otherwise excluded: roofs, floors and
additions. Quite consistently, three concepts utilized by Justice Rip are
common to the jurisprudence: gutting the old building, necessity of renovation
and renewed functionality versus appearance. In testimony in this appeal, none
of Mr. Whittall, Mrs. Whittall nor their daughter suggested the house was
“gutted”.
[20]
Even when applying the test in Lair,
widely viewed as the most favourable to the granting of rebates, the
renovations carried out by Mr. and Mrs. Whittall do not match up. At best, only
half the rooms were substantially renovated. Most walls, unless torn down
permanently or newly constructed, were “re-smoothed” and not removed, largely
due to disposal costs, but nonetheless suggesting replacement was not a
necessity.
[21]
Moreover, within the authorities, the case of Blades
is strikingly similar: a new island in the kitchen, upgraded electrical, new
floors and ceilings in the public rooms, removed partitions, reconstructed
walls, walls refinished, but not necessarily removed to the studs. Factually,
that residence also looked like new, but the building was not transformed
beyond resemblance from its original state. That appeal failed on that basis.
Regrettably, so must this one.
b) CRA’s analysis flawed
[22]
While it is not necessary for the Court to
comment on this point since the Court has made its own assessment above, the
methodologies followed by the CRA were sound. They were also quite generous and
fair. Ms. Wharram of the CRA testified she used both the room by room and
square area analysis, whereas the initial examiner on the file used the
surfaces analyses. On that basis, all three methodologies outlined in Bulletin
B-092 were deployed by the CRA at one time or another in the process concerning
the Whittall rebate application. The examiner concluded that 52.5% of the
surfaces had been renovated. Ms. Wharram concluded on a room by room basis the
figure was approximately 60% and by square area 63%. She gave the Appellants
the benefit of the most favourable calculation. She also used her discretion to
include certain surfaces otherwise excluded by definition within the definition
and Bulletin B-092. Still, she felt the building had not been substantially
renovated. So does this Court.
c) Drywall to be excluded from
consideration/calculation
[23]
Despite the valiant effort, the Court cannot
abide the assertion that drywall should be excluded from the “renovation
calculation” because, as asserted, drywall is integral to “interior supporting
walls” or “external walls”. Drywall is a wall covering or cladding for the
supporting studs connected to the trusses of a roof. Drywall is the modern
equivalent of plaster and lath. It is simply less expensive, more efficient and
easily constructed and applied. No doubt modern building codes prescribe among
methods for production, construction and installation to afford greater safety,
strength and integrity. Common sense dictates that such enhanced and more
recent characteristics are ancillary to its initial and primary function: the
cladding placed upon vertical studs to be painted, papered or cover
decoratively. From any of the perspectives of intuition, logic or common sense,
emerges a simple conclusion: the primary purpose of gypsum wallboard is to
provide a flat, stable and smooth surface for decoration. Panelling, ceiling
tile and tile board are not different. Whatever load bearing strength or fire
retardation qualities they contain are collateral to their main purpose. No jurisprudence,
CRA legislation or bulletin directly suggests otherwise.
[24]
Further, the case of Cowan and Talbot v. HMQ,
an unreported oral decision of Justice Sommerfeldt was identified by the
Appellant’s agent as authority for the exclusion of drywall from the “renovation
calculation”. Specifically within the transcript, Justice Sommerfeldt said of
“drywall” the following:
It still becomes necessary to go through and conduct an analysis of
whether there was a substantial renovation or there wasn’t. One of the issues
that came up in the hearing is this question of dry walling. It is my
understanding that the Canada Revenue Agency has some policies which seem to
consider or require that drywall, original drywall, be completely removed from
a wall and then replaced with new gyprock, or sheetrock.
I didn’t find any reference to such a requirement in the case law
that was brought to my attention. I have read some cases apart from the ones
that were referred to me during the hearing. I haven’t seen any case law
authority for that requirement that there be new drywall installed. I do take
the point made by Mr. Leitenberg that in a typical situation drywall is screwed
into the studs. In other words, it’s affixed on a fairly permanent basis. In
earlier days, that drywall was sometimes affixed by nailing, special drywall
nails, maybe not quite so permanent as the screwing. Even there, screws can be
easily removed. So, it’s not absolutely permanent, but I would consider once
the drywall is affixed to the wall it becomes part of the wall.
The definition of “substantial renovation” in subsection 123(1) of
the Excise Tax Act does indicate that external walls and interior
supporting walls are excluded from the requirement for removal and replacement,
and therefore I would think that for the most part the question of whether
drywall is removed or not is not one that I see as being an essential element of
the analysis of whether there’s a substantial renovation or not.
[25]
This Court’s finding is fully reconcilable with
Justice Sommerfeldt’s. Firstly, Justice Sommerfeldt states that an analysis of
whether substantial renovation occurred is necessary. Secondly, it was recognized
by the judge that CRA and certain authorities suggest it is a good indication,
but not one he sees as mandatory in all cases in the calculation. Further, this
conclusion of the judge is obiter to his decision in Cowan and Talbot. Justice
Sommerfeldt decided the pre-existing condition of the residence was pernicious
to its very survival. The presence of rampant insects, bio-hazardous mould and
resident wildlife (beyond garden variety vermin) prompted and necessitated
substantial renovation to such a degree that it was described by Mr. Talbot as
“gutted”.
[26]
No directly, conclusive finding was made by the
Court regarding drywall being “part” of interior supporting walls or exterior
walls, but merely not necessarily an “essential element” in the calculation. Therefore,
whatever finding was made concerning drywall’s mandatory inclusion in the calculation
was obiter to the ultimate decision of the Court made by Justice Sommerfeldt
who embraced, as the basis for his decision, the three concepts outlined above of
“gutting” the old building, the necessity of the renovation and the renewed or
revived functionality versus appearance of the renovated building.
VII.
Conclusion
[27]
For these reasons, the appeal is dismissed
without costs.
Signed at Ottawa,
Canada, this 24th day of October 2017.
“R.S. Bocock”
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