Section 191

The appellant (“Carvest”), which was in the business of developing, owning and renting out apartment buildings in southern Ontario, had self-assessed under s. 191(3) regarding a 12-storey apartment building containing 137 units and located in London, Ontario (the “Richmond property”), which was ready for occupancy at the end of 2008. It valued the Richmond property for such purposes by applying the “cost plus 6%” method that had been agreed to with CRA regarding two other apartment buildings, i.e., adding the costs of construction to an estimate of the market value of the land, and adding 6% to reflect a notional builder’s profit margin, and then allocating the resulting global amount to the 137 units.

Although the building was always intended as a rental apartment building, Carvest registered the Richmond property as a condominium, typical of apartment landlords in London Ontario at the time, to attract the municipal tax at the residential rate which was about half that of the commercial rate that applied at the time. Given that each unit was a condominium unit, St-Hilaire J accepted the evidence to the respondent’s expert that any cost-based method (which should be based on replacement cost rather than historical costs incurred) would be inappropriate given difficulties in allocating common-area costs to the individual units, and that each condominium unit, should be valued at the triggering time referred to in s. 191(1) (generally, the passing of possession under the unit’s lease) based on comparable sales of condo units in the area. In this regard, she stated (at para. 97):

I find that the property to be evaluated in this case is a condominium unit and the relevant, ‘normal’ market is the market for the sale of condominium units. I further find that the direct comparison method is the appropriate valuation approach in the circumstances of this case. None of the evidence submitted in this appeal persuades me otherwise. I find support for this approach in 27 Cardigan [2004 TCC 448], which was not disturbed by the Federal Court of Appeal on this aspect.

However, the resulting per-unit value was to be reduced by a 6% “absorption discount” to reflect the effect on the market of absorbing the sale of 137 units over a 16-month period. Accordingly, the aggregate unit valuations under s. 191(1) were approximately 50% higher than the amount incorrectly self-assessed by Carvest under s. 191(3).

Woods J. determined that a newly-constructed home acquired by the appellants from the corporate vendor ("TRG") had already been subject to the self-supply rule in s. 191(1)(b)(i) in the hands of TRG, so that the appellants were entitled under Sched. V, Part I, s. 4 to a rebate of the GST that had been charged to them on the purchase. For a number of months prior to that purchase, the house had been occupied by TRG's individual shareholder and his family under an informal oral arrangement. Woods J stated (at para. 21) that the phrase "lease, licence or similar arrangement" "encompasses...informal arrangements that give possession of property."

Woods J. also stated that "the term 'residence' has a flexible meaning which is dependant on the context in which it is used" (para. 25), and that the context of s. 191 was very different from s. 2 of the Income Tax Act, i.e. the meaning of "residence" in Thomson (para. 26).

The appellant (“9158”), which had constructed a 14-storey apartment building, with two floors of commercial space and with underground parking, self-assessed itself under QSTA s. 225 (similar to ETA s. 191(3)) on the basis that there had been a self-supply on the residential component of the building on October 31, 2015 based on a fair market value of $11.1 million. The ARQ disputed this value, and assessed on the basis that there was a self-supply on that date based on an FMV of $15.3 million. 9158 then took the position that the time of the self-supply was on June 1, 2015, when 90% of the construction costs had been incurred, so that at that point (which was in an earlier reporting period that was now statute-barred) the building had reached substantial completion (and, presumably, the first unit had already been occupied).

In accepting a report of the ARQ valuator and before dismissing 9158’s appeal, Lareau JCQ stated (at paras. 37, 40, TaxInterpretations translation):

Mr. Vadnais' report, which contains a multitude of photographs, taken on August 5, 2015 … clearly indicates that 35 out of 88 units were not ready for rental. … The report also indicates that a significant portion of the underground parking garage was used to store materials and equipment such as, for example, bathroom vanities, kitchen countertops and equipment, etc. …

Although the rule of thumb of 90% of the costs incurred may be appropriate in the vast majority of cases, for formulating, without further effort, an equivalence between a specific percentage of costs incurred and the concept of a "substantially completed" building, this does not seem justified under these circumstances.

The appellant ("Beaudet") was a partnership engaged in the construction of four adjoining apartment building, which it then rented out, resulting in a self-supply at fair market value of each building (including land) under ETA s. 191(3) when the first tenant commenced occupancy.

Lamarre J found that in "an ideal competitive market" (para. 81), the fair market value of a building would consist only of costs, including indirect costs such as advertising and leasing costs and the builder's construction management fees (see para. 79). Here, there was no evidence of elements such as zoning restrictions which would establish a significantly higher value for the four buildings as a whole, so that there should be no upward adjustment over such costs.

In particular, Lemarre J included financing and notional project management fees costs (estimated at 1.5% and 5% of total costs), and advertising expenses. Excluded from costs were cost overruns due to substandard ground conditions and a reduction (equal to the remediation cost) was made for problems relating to a leaking roof and substandard soundproofing.

After noting (at para. 81) that it was only in the case of the fourth building that the respondent's expert had made a significant addition for the developer's estimated profit, and after having noted (at para. 79) a statement in an appraisal text that in order to make an addition for the developer's profit "it is essential that the appraiser first verify the market conditions to be sure that such a contractor's profit exists," she rejected such an addition in this case given inter alia that 35% of the units in the building still had not been rented at the time of first occupancy.

The land value was increased to reflect its appreciation over its cost to Beaudet, that had been incurred several years earlier.

The appellant built a 180-unit apartment building in in Sainte-Thérèse and did not report GST on the resulting self-supply when the first unit was rented. At trial, the Minister’s expert appraiser relied on the estimated replacement cost, as to which the actual cost of $16.03 million (before all GST, QST and rebates) was representative. The appellant’s expert preferred an income approach (i.e., applying a cap rate to normalized income) of $14.9 million. Both experts agreed that the comparison method was unreliable due to there being no close comparables.

In preferring the Minister’s cost approach, Favreau J stated (at paras. 33-35):

The difference between the two values is a significant economic depreciation. Unless there are specific circumstances, I doubt that a building contractor or any business person with the expertise and knowledge required to carry out a project of such scope would agree to sell a new construction at a lower price than the actual cost in the context of a strongly rising property market.

The evidence did not show that there were excesses in the cost of construction or any specific problems with soil contamination or with the connection infrastructure with municipal services, or any errors of development or construction.

A predecessor by amalgamation of the appellant purchased a 40-year old nine-storey commercial property in Halifax on December 1, 1997 for a purchase price of $600,000, and then carried out extensive renovations to the Property, so that four floors were converted into 19 residential units, with the first residential unit being leased effective June 1, 2000.

In determining the amount that was required to be self-assessed under ss. 190(1) and 191(3), Little J noted that both experts agreed that the cost approach was not suitable as the building was not a new building, and in arriving at a FMV based on the income approach, he preferred the approach of the Minister’s expert of using actual rents received and comparable market rents and using a capitalization rate of 10% rather than that of the appellant’s expert, who used estimated rents provided by the appellant and a capitalization rate of 12% and estimates of operating expenses that were found to be too high - but accepted the appellant’s submission that a high vacancy rate (8%) should be used given the absence of parking and the presence of a nightclub in the building.

The appellant constructed a 104-unit apartment building in Calgary. It claimed input tax credits but did not self-assess on substantial completion.

The valuators at trial for both the Crown and the appellant arrived at a value for the building under the cost approach (i.e., the cost required to produce a property with the same utility, location and condition) of around $8.3 million, but indicated that this amount delineated the upper range of value, and instead preferred lower numbers generated under the income or direct comparison approach.

C. Miller J stated (at para. 24) that “for this type of property, the income approach is indeed the most appropriate,” but noted that both valuators had assumed full completion, whereas s. 191(3) required valuation at the later of the time of first occupancy (October 2000) and substantial completion which (at para. 22) he had concluded occurred in January 2011 when roughly 10% of the construction costs remained to be incurred. In adjusting the fully-completed fair market value, he found (at para. 26) that it was preferable to deduct the costs to complete of $500,000 from the fully-completed FMV of $7,050,000, which he considered to be preferable to the “arbitrary” approach suggested by the appellant of deducting the product of the appraised value of the building and 10% (being the inverse of the 90% percentage that had been accepted by CRA and the courts as representing substantial completion) (para. 26).

Before confirming the application of the self-supply rule to three small apartment buildings constructed by the appellant based (in the case of two of the buildings) on the amounts for which they were sold a few months after the time of the deemed supply on first occupancy, Tardif J stated (at para. 14):

Computing the GST on a new building subject to this tax should normally be relatively simple—an exercise based theoretically on construction costs. This approach is all the more acceptable given that the courts have stated a number of times that construction costs are a reliable basis for computing the GST on new buildings.

The appellant constructed a six-storey building in Saint‑Georges, Beauce, Quebec. Its ground floor was occupied by a department store. The second floor had with various administrative areas, common rooms, meeting rooms, a kitchen and a dining room, all designed to meet the needs of the senior citizens who are to occupy the four other floors, each with 17 units, for a total of 68 units. Initially, the project was to have two phases; some Phase I facilities were developed in order to eventually serve Phase II. On the date of the valuation, Phase II was not completed, and what was to be valued under s. 191(3) was the residential part of Phase I (floors two to six).

In accepting the income approach to valuation of the CRA appraiser, Tardif TCJ noted (at para. 61) that “the experts indicated that this was a special case in which it was relatively difficult to use the traditional methods in setting the taxable value.”

From 1993 to 1996, the appellant built 10 complexes containing 108 units in Trois-Rivières, and was assessed for failure to have self-assessed on their fair market value when they “were completed and available for lease beginning in June 1994, for those built on rue Audet, and beginning in July 1994, for those built on rue Marion” (para. 7). Tardif J accepted the valuations of the Minister’ expert, who used the cost approach, rather than that of the taxpayer’s expert, who used poorly-corroborated evidence of a supposedly high vacancy rate and other depressing factors to arrive at lower values using the income capitalization approach. After quoting (at para. 43) from a valuation text that

In brief, the depreciated replacement cost technique can always be used. It is particularly reliable for new buildings.

Tardif J stated (at para. 45) that “since this is a new building, the cost approach should be given priority as previously shown.”

Margeson TCJ accepted that newly-constructed apratment buildings built b the registratn should be valued on the basis of the “cost approach” as being “the best method to be used in calculating the fair market value of the properties in question” rather than accepting the Minister’s reliance on the income and comparison approaches, - except that an upward adjustent should be made to reflect that no management fee was charged for the development work. Margeson TCJ stated (at paras. 54, 77):

When using the cost approach you have a real price. There is no uncertainty. Counsel asked: “Who would value something at more than you built it for?”

When one has due regard to the departmental policy on the fair market value approach … it is clear that this policy approach says that no method should be discounted. In the case at bar the cost method was indeed discounted.

Both sides’ experts relied almost exclusively on the income and comparison methods in valuing newly-constructed residential apartment buildings for purposes of application of the self-supply rule in s. 191(3). However, the values advanced by the Crown in fact were close to the actual cost incurred, whereas those advanced by the appellant were lower. Before dismissing the appellant’s appeal, Taylor TCJ stated (at p. 73-4 to 73-5):

[T]he fact is that on both of these buildings, construction was completed on the very date on which appraisal is required. Of course there would be little if any value to a restructuring of an amount to accomplish "replacement or reproduction costs", and no purpose would be served in going through that exercise. But to eliminate, ignore, or denigrate the usefulness for appraisal purposes of that very total actual cost which had been accumulated during construction and culminated on that very day (144 Maypoint, March 31, 1991, and 148 Maypoint, July 31, 1991) leaves me in serious disagreement….

[F]air market value, must first of all be fair, and amounts of $490,000 each for the buildings' stretches credibility when the actual cost is the starting point, and there is no requirement for depreciation, etc….

Over a 23-year period, an individual, who through a wholly-owned company (“TSC”) carried on a small construction business, bought and sold five homes in the Victoria, B.C. area. The fourth property (the "JDF Property") was bought as a vacant lot in October 2009, commenced to be occupied by him and his family a year after a home had been erected and was sold three years later due to financial pressure on the taxpayer resulting from a business downturn.

Sommerfeldt J accepted the individual’s testimony that the property “was… intended to be occupied as a residence, i.e., for personal enjoyment” and “as his dream home” and found that there was no adventure (or business). Accordingly, Sommerfeldt J found that the individual appellant had not constructed the JDF Property as a builder and, in particular, not as part of an adventure in the nature of trade or in the course of a business, so that the individual was not required to self-assess under s. 191(1) upon substantial completion and occupancy.

Sommerfeldt J further found that even if the individual instead had been a builder, the exception in s. 191(5) was available. He quoted (at para. 61) from Coates, including statements therein that:

[S]ubsection 191(5) … requires … a simple factual determination as to whether or not the property was used as a family home after it was substantially completed. …

[T[he exception cannot be interpreted as requiring that the property have been built only for purely personal reasons. This means that an individual can benefit from the exception even if he has the secondary intention, at the time of its construction, of reselling the property, provided he actually uses it as a place of residence after the construction is completed.

He then stated (at paras 62, 63):

[T]hey used the JDF Property primarily as a place of residence. Thus, Mr. Swift has satisfied the test enunciated in Coates.

… [E]ven under the Lacina [[1997] GSTC 69] test … the primary intention of Mr. Swift and Ms. Kirkby was to use the JDF Property as their personal residence, and not merely as a stock-in-trade.

The appellant built three houses in New Brunswick, moved into them and sold them in the years 2000 to 2006, and also built the home that he resided in. He was assessed under s.191(1) in respect of the construction of the fourth house as a self-supplying builder.

Hogan J. concluded that the appellant was a builder on applying the six tests in Happy Valley Farms of what constitutes an adventure in the nature of trade: the nature of the property sold, the length of ownership, the frequency or number of other similar transactions by the taxpayer, the work performed on or in connection with the property, the circumstances giving rise to the sale and, finally, motive, stating (at para. 10):

The evidence before me reveals a clear pattern adopted by the Appellant of building a home, living in it for a period of time and reselling it at profit.

However, Hogan J. allowed the appeal on the basis that s.191(5) operated as an exception to s.191(1), stating (at paras. 14-15):

That provision requires that the property actually be used first by the individual (who is a builder as defined) as a place of residence…A secondary intention to resell the property at a later date is irrelevant to the determination as to whether or not the exception applies.

The exception only comes into play after an individual has been found to be a builder… This means that an individual can benefit from the exception even if he has the secondary intention, at the time of its construction, of reselling the property, provided he actually uses it as a place of residence after the construction is completed.

Hogan J. recognized (at para.16) that:

[T]his may lead to an incongruous result, with tax being avoided simply because an individual actually uses a residential construction or home as a place of residence and then, for example, decides to sell it at a later date.